In March Allianz Investment Management made a $150 million commitment to Kotak Investment Advisors’s 11th real estate debt fund. The allocation followed on from a $200 million investment in Edelweiss Asset Management’s private debt platform two years earlier.
Allianz IM, which has €40 billion ($47.64 billion) in assets under management in Asia, now has $650 million in private credit investments in India. It evidently sees plenty of potential in the asset class.
AsianInvestor spoke with Ritu Arora, Asia CEO and CIO of Allianz IM and India adviser to the Allianz group board on the appeal of the alternative asset class for foreign asset owners and the government’s efforts to crowd in foreign investment into infrastructure and insurance.
The following responses have been edited for brevity and clarity.
Q Can you tell us about the opportunity you’re seeing in the real estate debt space in India?
As one of the largest private debt markets in Asia, India fits well into our portfolio as a high-quality diversifier. Its real state sector is large and critical and we see significant opportunity in it. Sector reforms like RERA (the Real Estate Regulatory Act, introduced in 2017) have introduced more transparency, enhanced ease of doing business, strengthening our belief in the structural opportunity for private credit for an institutional investor.
However, the sector is currently grappling to get access to traditional lending. Private debt fills in that gap and also provides a certain level of flexibility with bespoke loans that are custom designed accordingly to the borrower’s requirements. The first step to success in emerging markets is working with the right partners. We believe the Kotak Group is a natural fit given how deeply it is ingrained into the Indian credit market with a franchise that they have built across alternate assets over the last 15 years.
With wholesale NBFCs (non-banking financial companies) stepping back after over the last couple of years, there is a strong opportunity pool that has presented itself in performing credit. Also, the Government’s strong backing for the IBC has made the distressed market quite interesting for investors.
Q Allianz IM’s total private credit investments in India stand at $650 million. How do you plan to reach your target of $1 billion by the end of 2021?
Opportunities play a pivotal role in our investment decisions across markets globally and therefore, our approach to committing capital is bottom-up. India is ripe with avenues of investment and as a long-term investor, we would like to benefit from the continuous growth potential of its economy, and finance attractive companies as we see opportunities presenting.
We have a strong pipeline of investments that we are currently evaluating across the capital spectrum. The risk reward in some areas is particularly interesting with very low levels of competition. With the government’s resolve and will towards maintaining creditor friendly and fair practices, the market in India is just starting to develop.
Q Investors have welcomed the increase in the foreign direct investment limit in India’s insurance sector to 74%. How will allowing for majority foreign ownership shape India’s insurance industry and domestic capital markets?
The hike in FDI in India’s insurance sector is a welcome step forward. Besides attracting more foreign capital, it will enable a more active role for foreign institutional players in India’s growth story. The sector will benefit from global players’ knowledge, technology capabilities and digital solutions. It will lead to more competitive products and better distribution channels.
The industry stakeholders value transparency and strong governance. And global partners can help further strengthen best practices and introduce more sophisticated processes. It will strengthen the overall foundation for the financial ecosystem in the long run. Higher FDI participation will facilitate increased, healthy competition and I would not be surprised to see consolidation in the market through increased M&A activity which will bolster the industry.
We believe it will be a win-win for the economy, foreign institutional investors and policyholders.
Q The budget also announced the issuance of government-sponsored highway and power infrastructure investment trusts (Invits). As an anchor investor in existing Invits, what is the appeal of this type of asset and will you keep investing more into them?
Firstly, one must appreciate that the investment vehicular structures introduced over the last few years, such as real estate investment trusts (Reits), Invits, and alternative investment funds (Aifs) are all world class. To get most things right from the word go is no mean achievement.
The recent announcement in the budget is welcome. It will not only open up opportunities for fresh deployment for foreign investors, but more importantly will help the developers and agencies such as the National Highways Authority of India (NHAI) deleverage. This will provide them fresh capital for a further round of nation building.
One has to appreciate the smart governance of the government. Most institutional investors, be it domestic or foreign, are shy of taking greenfield risks in the Indian infrastructure sector due to the experiences of the last capex cycle. However, this build-and-sell model works really well. Through this model the greenfield risk and higher returns are taken by those who can manage those risks really well, and the steady state lower yield risks are taken by those who want steady income but lower risks. In the end it all starts to fit perfectly.
We are excited and open to interesting opportunities. The actual investments will depend on what our evaluation of the various opportunities leads us to.
Q What else can the government of India do to crowd in foreign capital for critical infrastructure, in line with its goal of becoming a $5 trillion economy by 2025?
We believe Covid-19 has only delayed and not derailed India’s plans to become a $5 trillion economy. Given the size of the economy, demographics and the pace at which India has grown in last few years, we’re confident reaching $5 trillion target is a matter of ‘when’ and not ‘if’.
Akin to other Asian economies like China that have taken similar growth paths, we can expect India to see an exponential growth trajectory in the coming years. If the country can come out of the health crisis soon and strong, the economy will be back on track soon to achieve this ambition.