Sovereign investment flows into Indian private markets have risen each year since 2015, while those into China have been more volatile – and both countries have much to learn from each other when it comes to luring such capital.

So says research house Global SWF's inaugural annual report, which assesses the post-pandemic landscape for state-owned investors (SOIs) and was released on January 1.

Sovereign wealth and pension funds – notably from Asia, Canada and the Middle East – have, in 2020, poured $15.8 billion into Indian private assets, said the study. This trebles the $5 billion that went into equivalent Chinese investments and represented a further widening of the gap between the countries’ inflows since the previous year (see graph below).

New York-based Global SWF expects those figures to continue rising at a strong clip. Between 2008 and 2020 SOIs' assets doubled from $13.8 trillion to $27.5 trillion and their allocations to alternatives – incorporating infrastructure, private credit and equity, and real estate – also doubled from 12% to 24%. Moreover, state funds' total assets are likely to hit $50 trillion by 2030.

“Asia’s two behemoths ... have been vying for the attention of SOIs in recent years, attracting billions of dollars in fresh inward investment,” the report said. “Yet, both countries have seen a different pattern of investment that correlates with the shape of their economic development and their place on the development curve.”

PRIVATE INVESTMENTS INTO CHINA AND INDIA, 2008 TO 2020
(Source: Global SWF; Click for expanded view)

In recent years SOIs have been more cautious in their exposure to Chinese private markets, with China falling behind India in sovereign investor inflows in 2019, noted Global SWF. Singapore’s GIC and Temasek have held firm, though, representing three-quarters of SOI direct investment into China in 2020.

The heightened geopolitical tensions between Beijing and several other nations, most notably the US, seem likely to have played a part. "If the flows out of China – e.g. to the US – continue to be highly monitored and restrained, so will the flows into China," Diego Lopez, managing director of Global SWF, told AsianInvestor

Nonetheless, he said: "We would expect even larger flows [into China and India] in the years to come. [The size of this investment] will depend on geopolitics and on both countries putting effort into it. India has been much more aggressive than China in attracting FDI so far."

India has lured $59.6 billion in steadily rising investment from SOIs since 2015 with the help of a proactive approach to sovereign capital, according to the Global SWF report. A fifth of those inflows has gone into infrastructure thanks to Delhi's aggressive efforts to lure foreign direct investment into the sector. 

The country’s renewable energy sector is accounting for a growing amount of this investment. Independent solar and wind power generators have received around $4 billion from Abu Dhabi Investment Authority, GIC, Canada Pension Plan Investment Board (CPPIB) and Caisse de depot et placement du Quebec (CDPQ). Moreover, India’s emerging green economy will require additional investment of $330 billion between 2020 and 2030, according to the government.

INDIA'S COVID HIT

But the pandemic has taken a toll, with CDPQ and CPPIB – among the most active investors in Indian infrastructure – among those pausing deals from May, noted Global SWF. CPPIB suspended its $190 million investment in an infrastructure arm of Mumbai-based logistics firm JM Baxi and CDPQ halted the purchase of the $325 million Highway Concessions One portfolio from GIP, its first acquisition of roads in India.

“Land acquisition challenges, cost overruns and the deteriorating outlook have eroded investor confidence in new highways,” the study said. “Although the challenges have eased over the past two years, around a sixth of major road projects are still behind schedule with an average cost overrun of 28%. This situation has been exacerbated by the pandemic and has hit revenue ratios, leading to a slowdown in construction and waned SOI interest.”

Certainly, CPPIB and its peers faced a greater challenge investing into real assets post-Covid, as the Canadian fund's head of international Alain Carrier and Asia Pacific head Suyi Kim have pointed out.

Accordingly, perhaps, SOIs are looking to diversify their Indian exposure. In 2020 they pivoted away from roads and renewables towards the telecom and consumer sectors, said Global SWF: in the past year more than two-thirds ($11 billion) of the total allocation to Indian private assets was accounted for by investments into telecoms infrastructure owned by Reliance Industries.

The country's demographics make this a logical focus. "India’s rapid population growth will likely ensure that the country surpasses China as the world’s most populous country in 2027 with the government targeting GDP of $5.0 trillion," said the Global SWF report.

TARGET ASSETS IN CHINA

LG Twin Towers, Beijing:
GIC deal

The biggest recent focus of SOIs’ attention in China, meanwhile, has been real estate, accounting for 46% and 48% of private market allocations in 2019 and 2020, respectively – despite renewed fears that the bubble is about to burst in the sector, the report noted.

However, the volume of acquisitions is small and comprised of big-ticket assets, such as GIC’s $1.3 billion purchase of LG Twin Towers in Beijing early in the year, by Global SWF data. The $488 billion Singapore fund was, in fact, the sole SOI in the sector in 2020.

While property in China and elsewhere faces Covid-related uncertainty, the country's technology industry remains appealing. It represented almost a third of transaction volumes and a quarter of the value of those investments in 2020, according to Global SWF. This is despite Ant Financial's halted listing and moves by Beijing to restrict internet giants' growth. 

In most sectors, however, SOI investment was heavily down from $18.4 billion in 2018, said the report. That was “potentially because SOIs were keener to invest in public equities with relatively low price/earnings ratios in Shanghai, robust stock price growth and the appreciation of the renminbi pointing to opportunity for growth”.

Despite their rivalry, India and China “have much to teach each other” in respect of luring capital, said Global SWF. “India’s strength has been to aggressively fund-raise for investment in infrastructure, while SOIs have been lacking in China’s PPP [public-private partnership] pipeline.”

India, meanwhile, will need to emulate China in encouraging SOIs to establish a more permanent presence, added the report. As India becomes an ever more important destination for investment, Global SWF expects more SOIs to set up new offices, with tech capital Bangalore potentially becoming a target for venture capital as India’s Silicon Valley.

“With a high skills base," the study said, "India will be positioning itself as a Western ally amid rivalries with China, creating a regulatory environment that provides better protection for tech companies than China’s opaque system.”