Why are Canadian pension funds India bound?

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Canadian funds have been placing significant India bets in the backdrop of the National Democratic Alliance (NDA) government setting an ambitious task of becoming a $5 trillion economy by 2025. There have been major investments made by the pension funds such as Canada Pension Plan Investment Board (CPPIB), Caisse de dépôt et placement du Québec (CDPQ), Public Sector Pension Investment Board (PSP Investments) and also Brookfield Asset Management in the Indian infrastructure space, particularly in the country’s emerging green economy.

Why are the Canadian pension funds India bound? Experts believe that the Canadian pension funds are uniquely positioned to invest directly into the infrastructure space given the expertise build by them over a period of time by investing in North America and the Organisation for Economic Co-operation and Development (OECD) countries. In comparison, the US based pension funds invest in private equity who then invest into the targeted companies.

Patient capital

These pension funds also represent the so-called patient capital, which seeks modest yields over time. India fits the risk profile given that the markets here have matured from the early risk stage. Also, India’s green energy tariffs have hit a record low, making access to cheap funds a key criterion for success.

“These pension funds come when the markets mature. They don’t need an IPO story and are willing to put half a billion dollars and wait for the next 10-20 years. They are happy to come last but to a stable and long term asset story. That’s the evolution they have gone through,” said Mahesh Kolli, founder at Greenko Group backed by sovereign wealth funds GIC Holdings Pte Ltd and Abu Dhabi Investment Authority.

“India offers scale opportunity. Canadians like to put large sums of money to work and India is one of the very few markets where the opportunity to do this exists. India also offers yield. Canadians like operating assets which can give a INR yield of 12-14% ( USd 8-9) on a long term basis,” added Actis partner Sanjiv Aggarwal, responsible for its Asia energy business.

Canadian pension fund Ontario Municipal Employees’ Retirement System (OMERS) is also scouting for acquisition opportunities in India, in an affirmation of the country’s position as a green energy hot-spot Mint reported on 22 July. Also, there have been reports about Brookfield Asset Management Inc. planning to acquire a majority stake in debt-laden Suzlon Energy Ltd.

“The Canadian pension funds have found the Indian risk profile attractive,” added Greenko Group president and joint managing director Mahesh Kolli.

This comes at a time when India’s emerging green economy is expected to require investments of around $80 billion till 2022, growing more than three-fold to $250 billion during 2023-30.

“Yes, OMERS Infrastructure is indeed focused on direct investing, and has been for its 20+ year history. OMERS Infrastructure’s deep in-house direct investing experience is active in creating value across the portfolio, with a focus on sectors including energy, transportation, water, telecom, and more,” said an OMERS spokesperson in an emailed response.

Growing green economy

India has become one of the top renewable producers globally with ambitious capacity expansion plans. The country has an installed renewable energy capacity of about 80 gigawatts (GW) and is running the world’s largest renewable energy programme with plans to achieve 175GW by 2022 and 500GW by 2030, as part of its climate commitments.

“They are hungry for assets with low risk and stable returns to meet their pension obligations and hence, the interest in assets like roads, airports, power projects etc,” said Vinay Rustagi, managing director at consulting firm Bridge to India.

The global energy landscape has also been rapidly evolving. From the London Stock Exchange (LSE) classifying oil and gas stocks as non-renewable energy to the decision of Norway’s Government Pension Fund Global (GPFG), the world’s largest sovereign wealth fund, to stop investing in oil and gas explorers globally, there has been a fundamental change in the global investment culture against the backdrop of growing climate concerns.

For some, India is also the centre piece of globalizing their company, and increasing the share of emerging markets in their investment portfolio.

“We will always be an important investor in Canada, that’s for sure because that’s where our liabilities are, but the world’s a big interesting place and we need to go and invest in the places where we can find growth. India is essentially at the head of that list. I have said that before here and I will say it again. It’s a very, very high priority for us…This is the centrepiece of our strategy of globalizing the company,” Michael Sabia, president and chief executive officer of Quebec-headquartered CDPQ told Mint in an earlier interview.

The focus continues with CDPQ’s investments in India including renewable energy producers such as Azure Power and CLP India

Good partnerships

These investments also come at a time when India has witnessed a record low solar tariffs of ₹2.44 per unit. India’s wind power tariff also fell to a record low of ₹2.64 per unit.

“India is one of our priority countries. Our model is to invest locally with a like-minded partner, who shares the same values and who is looking to build their business over the long-term. And, so far, we believe that we have found the right partners for our investments in India,” said Anita M. George, CDPQ’s executive vice-president and head of strategic partnerships, growth markets in an emailed response.

“India is an important investment market for CPPIB. We are interested in pursuing direct investments in real estate, infrastructure, and public and private equities, funds and co-investments, and credit in India, and we will also continue to invest with our fund partners. The energy mix in India is broad and includes an evolution from thermal to renewables. We are committed to wind and solar investments in India,” added Bruce Hogg, managing director, head of power and renewables at CPPIB in an emailed response.

CPPIB has C$8.6 billion invested in real estate, infrastructure, public, and private equities, funds and co-investments and credit in India and has invested almost US$400 million in ReNew Power, one of India’s leading clean energy companies. These investments represent 2.2% of the CPP Fund’s total assets at March 31, 2019.

“CDPQ has been studying the opportunity to invest in India since 2013. We opened an office in India in 2016.. The fundamental characteristics of the country – democracy, demographics, digitization and entrepreneurial spirit all contribute to India’s attractiveness as an investment destination,” added Anita George, who also heads CDPQ’s India operations.

According to a joint study by Paris-based International Energy Agency (IEA) and Council on Energy, Environment and Water (CEEW), reduced risk perception of financiers funding renewable energy projects in India resulted in investments in the sector doubling over the last five years.

“The Government has undertaken reforms such as introducing the bankruptcy laws and GST (Goods and Services Tax). Executing these laws without too much flip-flopping will be key to India’s continued growth and ability to attract greater private sector investment in the country. This holds true for both domestic and foreign capital. CDPQ’s approach has been to find the right partner in the right sectors that are resilient and demonstrate consistent growth and opportunity. We are interested in working with our partners, over the long term, to build businesses that last,” added Anita George.

Investments in India’s renewable energy sector doubled over the last five years to around $20 billion in 2018, surpassing the capital expenditure in the thermal power sector, according to the IEA-CEEW joint study.

“In markets like India where there will likely be volatility, our long-term is advantageous. One of the key tenets of our investment strategy is to adopt a “smart partnership” approach, which means we look for local partners we can work with for the long-term, whom we can scale up with over multiple cycles, and are among the very best in class at what they do. This also means identifying and backing strong local management teams,” said CPPIB’s Bruce Hogg.

CPPIB has also partnered with Piramal Enterprises Ltd to co-sponsor India’s first renewable energy-focused infrastructure investment trust (InvIT).

“The scale of opportunity in Indian renewable energy sector has attracted large investments from Canadian pension funds. This allows them deployment of large amount of capital. Also with the exception of the recent events in Andhra Pradesh, competitive bidding in sector has reduced regulatory risks,” added Debasish Mishra, partner at Deloitte India.

Some concerns have recently emerged about India’s green energy space, with YS Jagan Mohan Reddy-led Andhra Pradesh government’s controversial plan to reopen power purchase agreements (PPAs) inked under the previous N. Chandrababu Naidu administration.

This article was first published on livemint.com.