Mark Machin, who worked as CPP Investment Board’s (CPPIB) first president for Asia, was recently named president and chief executive of Canada’s largest pension fund and is responsible for leading its investment activities. As of 30 September, the CPP Fund had net assets of Canadian $300.5 billion. CPPIB opened its India office in 2015 and has committed about $3.7 billion in the country so far. In an interview, Machin talks about India as an investment destination, increasing allocation to emerging markets and the fund’s plans. Edited excerpts:
You were earlier heading Asia and obviously have looked at the markets closely. With you at the helm now, do we expect more focus on Asia also reflecting in your investment philosophy?
It’s got nothing to do with that. It is basically intelligent portfolio construction so we will have a globally diversified portfolio and emerging markets are a growing piece of global economy and global markets. Today, we have an objective of 15% of the portfolio being in emerging markets over the next 3-5 years. We are about 10% today and we have an objective to move towards 15%. We will also look at increasing it to 20% over a period of time.
How does a big institutional investor like you look at India in terms of the good, bad and the ugly?
India, in the long term, is fantastic, it’s got the best profile in the world. It has got demographic growth, increase in productivity, so there’s long-term economic growth. If you look at returns on equity across markets, it’s mid to high teens over a 20-year period, so all its long term trends are fantastic.
The issue is not to get too caught up in the euphoria or in the depression that happens from time to time. So, we like all that. There are three things that are discussed from time to time: the stability and the effectiveness of the government to effect change, the second thing is the oil price spike is a real challenge for India and third thing is high interest rates. But right now, we are in a good place and that is why a lot of money is looking at India.
You mentioned that you want to allocate about 15% to emerging markets. How will that translate into a number for India?
I am reluctant to give you a headline number as that could be over-interpreted as an immediate objective. We’re going to keep growing as a fund over time. We are C$300 billion today. The chief actuary has a projection that we will be C$600 billion by 2030. If the reforms of the Canada pension system comes through, then we could be C$800 billion by 2030. So it’s going to grow from to $600 or 800 billion by 2030 and so that emerging market allocation, over time, will go up from 15% to around 20%. Twenty percent of C$800 billion is a big number.
You mentioned that the problem you are facing in this country is that you don’t find opportunities which can absorb large ticket sizes. Does it mean that can we perhaps see CPPIB doing stuff like investing in a Flipkart on consumer internet companies which have an appetite to absorb large amounts of capital. Will you tweak your investment thesis for India?
We tweaked it for Asia for a couple of years back that we will do smaller private equity kind of investments. So, we also look at $50-100 million kind of investments in Asia.
With regards to e-commerce, we have made substantial investments in e-commerce in China. We have invested in Alibaba, in JD.com and a number of other e-commerce players. We’ll look here as well. We haven’t found the right one at the right valuation.
When we looked at it before, we found the valuations very high, so we didn’t invest then. But we continue to evaluate.
How does the investment thesis of pension fund manager differ from that of a private equity fund manager…there’s a perception that pension fund is free money. Can you address that perception?
I will speak for CPPIB so I can’t speak for other pension funds. One of the things which is different from private equity fund is that private equity fund has to give the money back to investors, it has to be invested and has to give back, so generally they’re restricted on the length of the investments. They have 1, 2, 3 years to be invested and then getting out of the investments. Even though they have a 10 year fund life, they don’t want to be hanging on to investments for 10 years. So that’s a challenge.
For us we never have to sell anything. So we buy something we like and if we continue to like it, we keep holding it. We can hold it forever if it has value. We can also sell in a shorter time frame.
You have a huge focus in real estate and infra, will it continue in India or you’ll look at other sectors also?
We’ll look at lot of different things, I think consumer facing, financial services —our biggest investment here is in Kotak Bank. So financial services, consumer retail, tech and IT will be our focus areas.
Then there is a whole bunch of other structural things that we are doing. The aim is to scale and deploy more capital over time, for example, on platforms. We have done nothing of that in India, but in the US we bought a mid-market lending unit from GE. We think that platform is something definitely worth looking at in India.
Within Asia Pacific, China is of big importance to you, given the sheer size of the economy and that it’s much bigger than India.
Yes, China is the second biggest economy in the world. We would be failing in our duty to our pensioners if we don’t focus on China. We have to look at it and we have to assess opportunities. Not investing in the second biggest economy in the world would be a huge market call. So yes we are invested in China, and we have found interesting things. But likewise India is going to catch up over time.
Talking about investments, you have partnered with groups such as Kotak, and Larsen and Toubro which are really considered blue-chip and are fairly large. Do you think that there is a big opportunity set in the country to attract large cheque sizes?
Yes that is a limiting factor, to find the size opportunity. It is not the availability of capital or willingness from our side. That’s a challenge for us.
There are so many Canadian funds investing here in India now—Brookfield, Fairfax and CPDQ. Is there a Canada-India corridor building out and is that also because a lot of our ministers visit Canada frequently. Why is there a sudden influx of capital from Canada to India?
We have been investing in India for six years and we have an office here. We have only seven offices outside of Canada. So that’s an indication that we will have significant investments here over time.
The interest in India is a function of two things—the development of the Indian economy and the size of the opportunity but it’s also the development and maturing of the funds in Canada that they feel confident enough to go out and look at these opportunities.
This is a trend so more and more direct investors are going to come here, some of which will be Canadian.
We have a lot of other institutional investors here such as KKR and everyone is chasing the same few large deals. There is too much capital chasing few deals. How do you plan to play that out?
Be patient. If the opportunity is not there then we don’t have to invest. That’s the beauty.
If you are a fund managing someone else’s money and if you don’t invest then their LPs are likely to be upset. So they have more pressure to invest. We don’t have that pressure. If there is no opportunity that fits our criteria then we invest our money elsewhere. So we can be very patient.
You have done a lot of stuff in China real estate. What is your gameplan for India?
In China, what we have done is we partnered with international developers. We have got joint ventures for shopping malls, office, mixed-use commercial. We have started some joint ventures with domestic developers as well. We want to do the same thing here.
So we have partnered with the Shapoorji Group, which is a joint venture for office and we have one asset. We anticipate that we will do the other things here too, over time. We will partner with more private developers. We typically partner with a very experience blue chip developer. And we start off with buying existing buildings, we don’t take development risk. Although, over time we might take some development risk.
You have tied-up with Shapoorji. Does Tata-Mistry fiasco concern you?
It has created a lot of noise around the stock and the group. It’s not great for valuation of group overall. We’ve been watching. But our tie-up with Shapoorji is focused on commercial real estate. It’s separate. We don’t deal with them in that capacity.
In India, a lot of focus on stressed assets. You have an alliance with Kotak, but will you be looking at something else also in that space in India?
We hope that partnership holds good and we find some good things to do together. That’s our number one vehicle for looking at that space. We’ll look at other situations as well but that’s our main vehicle.
We haven’t deployed any capital yet though. We are optimistic, things will come up over time.
What has the India experience been like?
So far, so good. Lots of lessons learnt. We have really been careful whom we are teaming up with and so far our relationships have been great. No big problems.
Lessons learnt in India: Be very selective who you team up with, second one is keep your eye on the long term, don’t get caught up in short term depression or euphoria.
Do you see competing yourself with somebody like CPDQ?
Not really. Can’t recall any situation where we have bumped into each other here in India. W have bumped into each other around the world. Though we try not to. We’re trying to achieve similar objectives but for different group of pensioners.They look after Quebec, we look out to rest of Canada. We don’t intentionally bump into them.
How does a veteran like you would sense that coming from CPPIB and how do you look at this entire demonetisation things happening in this country, how are you watching it…?
It’s the first time we’ve seen, it’s the biggest fast move policy implementation we’ve ever seen. Its incredible speed of implementation.You never hear in India people talking about policies being implemented so quickly. First time ever. So it’s amazing.
For long-term investors like us it’s probably a good thing. With digitization of economy, bringing efficiency in the economy, more financial assets moving into the banking system, and more transparency. From our point of view it’s a good thing but we’re sympathetic to the stress that people are gonna going through in the short term.