CPPIB says India valuations turning attractive, finds JV partner for private debt
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Canada Pension Plan Investment Board believes valuations in India are starting to look more attractive, especially in sectors that have been hit by regulatory uncertainties recently, top executives said on Wednesday.

The firm has also identified a joint venture partner for its private debt platform which it will launch this month, the executives said, but declined to identify the local firm.

“Valuations are not blindingly cheap; that never seems to happen in India. But they are certainly more attractive now than they have been,” Mark Machin, CPPIB’s president and CEO, told reporters.

Senior India adviser Vikram Gandhi said that there is a ‘flight to quality’ in India as many sectors deal with uncertainties, but pockets of value are opening up in some segments of the market,

Machin also said that the short-term “dislocation” in the credit market in India was a great opportunity. 

India’s banks have been grappling with bad loans while non-bank lenders have been facing a liquidity crunch over the past year. This has opened up opportunities for private debt investors such as CPPIB.

CPPIB is forging a joint venture in the private debt segment, which it hopes to announce over the next month. The private debt segment will also include CPPIB’s stressed assets business on the credit side and not as an equity investor.

“Where we see value are in companies which are good on the asset side but have a liability problem,” Gandhi said. These challenges could be because of short-term funding problems or a poor liabilities base.

CPPIB’s debt platform will bring to fruition its plan to add credit as a vertical in India, something it has been planning for at least two years. Earlier, it had found asset prices to be expensive.

“We’ve been thinking about it for a long time… we have made the decision that we will be allocating capital for the private debt markets. That analysis is over,” Gandhi said, about its new private debt platform.

Infrastructure is another segment where CPPIB feels valuations are attractive. The state governments of Maharashtra and Andhra Pradesh have called for a review of contracts in infrastructure projects in recent times.  

Machin admitted that the pension fund had been debating internally whether the recent changes by state governments in previously agreed upon contracts was changing the risk calculus for investments in India.    

However, the firm felt that these bumps on the road might make infrastructure investments more attractive for long-term funds like CPPIB, because the perceived risk levels have gone up.

Machin emphasised the sanctity of contracts and noted that as governments introduce more changes, the risk goes up. This gets priced into investments as lower valuations.

“If anything, I am more cautiously excited about the opportunities due to the market situation here,” said Suyi Kim, a senior managing director at CPPIB.

Globally, CPPIB primarily looks at direct investments in real estate, infrastructure and credit. On the private equity side, it has invested in two Indian general partners—True North and Multiples PE. 

But CPPIB has been largely making co-investments in India because it prefers to make investments alongside its partners. For instance, its investment in Bharti Infratel was alongside its global fund manager KKR while it made a co-investment in Hexaware alongside its Asian fund manager Barings Private Equity Asia.

About 20% of its investments in India are via private equity. CPPIB’s private equity returns from India have been “very solid”, Kim said.

India’s share in CPPIB’s global portfolio increased to 1.66% in the year through March 2019, according to its latest annual report. That’s higher than the share of Brazil but half that of China’s, where CPPIB’s allocation nearly doubled last year.

The pension fund’s exposure to the Indian rupee climbed about 31% in 2018-19 to 6.5 billion Canadian dollars from C$4.9 billion the year before, its annual report shows.

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