India next logical step for Canada Pension Plan Investment Board
Mumbai: The Canada Pension Plan Investment Board (CPPIB) and the Shapoorji Pallonji Group on Thursday announced the formation of an alliance to invest in commercial real estate in India. CPPIB will own 80% of the venture with an initial equity commitment of $200 million.
CPPIB works like an investment manager with a singular mandate to provide risk-adjusted returns for the 18 million beneficiaries of the Canadian Pension Plan. It manages funds independently from the Canada Pension Plan and at arm’s length from governments. As on 30 September, the fund had C$192.8 billion in total assets under management across countries.
Mark Wiseman, president and chief executive officer, CPPIB, spoke in an interview on their India investment strategy, the impact of taxation on the business, and their outlook on India. Edited excerpts:
Why have you chosen to invest in India now? What’s the pull factor?
We haven’t been in existence for that long. We were formed in the late 1990s and invested our first dollar in 2000. In 2000, we started with around C$12 million and now have around C$200 billion. We started our active investing in 2006 and had to start by building expertise in various asset classes sector by sector. The next phase is expanding the organization geographically. As we expand geographically, we are at a stage where we need to attach to a greater degree to growth markets. These are the markets which will produce growth over the next few decades in excess of what we see in North America and Europe. This is a strategic shift to diversify geographically with a greater emphasis on growth markets. We think and invest beyond a single economic cycle. As a result of that, we have systematically and deliberately grown our global exposure.
Our first office outside Canada was Hong Kong. The next logical progression is India. If you take the world and measure it in 25-year quarters, the reality is in the next several quarters, the importance and strength of India in its influence and size in the global economy are going to be far greater than today. We want to be ahead of that curve and ride that growth. We will look at systematically increasing our exposure in this market over time by finding the right partners. What we announced today is the first of those kinds of partnerships.
Given the state of the economy and the political scenario, are you concerned? You announced an alliance in the commercial real estate space with the Shapoorji Pallonji Group. There are issues of oversupply in that segment. Are you concerned about the timing of the investment?
It’s too hard for us to be market timers. In a long-term trend, we know there is going to be short periods of volatility. If you think about it, those cycles are very small and the overall trend is very clear. So we are not concerned. Our economic style is to consistently invest through economic cycles no matter where we invest. For example, as equity markets fell around the world in late 2008-2009, we were buying equities as we were systematically rebalancing to have 65% economic exposure to equities. It would have been very difficult to try and time that market. Similarly, over last year, as equity markets gained, we trimmed our equity exposure to keep it at 65% and bought bonds.
This investment is the first of many and we expect to expand it over time. At times we will do that, when the economy looks good, and at times when it looks weaker. We are not hot money and we aren’t going to move capital with a half-a-percentage-point change in interest rates. Our decision to be invested in India is not based on whether the Fed (US Federal Reserve) tapers (its fiscal stimulus programme) or doesn’t. When we come to a market, we approach it by finding the right long-term partners both in the illiquid and liquid sectors.
On the political front, we don’t care about the specifics about one party against another. When we invest in any market we are looking for predictability and consistency in regulatory and enforcement regimes. We want to invest in jurisdictions which adhere to the above. One thing important to remember is that long-term capital can go anywhere in the world. Our job is to maximize the risk-adjusted return, and in evaluating the risk side of the equation, we have to look at regulations. Consistency and predictability mean less risk and hence we look for less return from those jurisdictions. One of the things beneficial to India is that it is a democracy; there could be bureaucratic risks, but the system overall is enduring. Canada and India share a common heritage; we understand India well.
Are you assessing opportunity in areas other than real estate?
We are very interested in the infrastructure space. We have a lot of capital, scale, certainty of assets and a long-term horizon, so we can invest in illiquid assets. We are attracted to real estate, infrastructure, private equity, and we are examining the debt capital markets in India and looking at publicly listed equity. We look for our competitive advantages to meet up with the needs of a jurisdiction and then try and deliver capital against the need as that will get the return. We are comfortable in commercial real estate and infrastructure. Over time you can see us developing our exposure in the infrastructure space. Overall we will look to invest across asset classes.
Are you planning to be the only investor in this alliance or will you look at including others as partners?
This a very common structure we have used globally. We are not operators or developers; we are providers of capital. We want to marry our capital with local and industry expertise. In this case, we are utilizing Shapoorji’s expertise in India and commercial real estate sectors and not looking to bring in more partners. We are proving 80% of the capital and our expectation is that this will be the first $200 million capital invested. Our hope is to expand this relationship over time and have other relationships. The reason we are interested in income-producing assets is because we are good at providing capital. So, we provide financing to people who are good at developing the assets. Typically, we look for assets which are reasonably predictable and we understand as a financier.
Why not consider investment through existing funds available to foreign investors managed locally? That can be a less risky route.
Typically, we don’t invest in third-party funds in real estate or infrastructure. When you invest in funds, the amount of capital that you can put in is limited, and we much rather prefer scale and growth. Funds have a fixed life span and they have to provide liquidity at certain points in time. We don’t need liquidity and will happily own assets perpetually. A fund’s structure isn’t well aligned with both our scale and long-term horizon. By and large, particularly in real estate and private equity, around the world we don’t put in money in such existing funds. Our view is to create a joint venture type of structure which is more long term. It allows us to act more decisively and quickly. That also leads to our investments being less diversified. Hence, it becomes much more important to have a good partner because you need to have a partner who understands how to choose the right underlying asset.
What is the kind of return you are expecting? When you say long-term, what is the gestation you will allow the venture?
Risk and return go together. The returns will differ by asset, nature of the asset, location, so on and so forth. In terms of length of time, we are not looking for a quick flip. Our hope is that we will have these assets for quite some time and grow the scale of the portfolio rather than turn it over. We have nearly C$200 billion in assets today and we expect it to be C$300 billion in the next five-eight years. Last year alone, we grew our assets by C$22 billion. We don’t need to get our capital back. As long as our capital is protected and is producing risk-adjusted returns, we are happy. In India, we are staying and not going anywhere. I won’t say we are not going to sell as we have sold assets in the past. When we think that the market is overheated and we can make sizable returns, we will sell. But in normal conditions, we are happy to hold for a long period of time and this can mean decades. For instance, we have a road asset in Canada and when we bought the asset we invested C$4 billion in a single road and that was only for a 40% stake. We bought it in 2010 and now there are 89 years left for concession for this road. When someone asked how long I would own this asset, the answer is 89 years.
Do you intend to do different structured investments for different asset classes?
Yes. We think every market is idiosyncratic and we try and develop our strategy as we enter new markets to meet their needs. In India, we will start with real estate and infrastructure, given the deficit in this country as there is a need for these assets and considering we can provide large-scale capital in those asset classes. We also believe that it is a good fit for us. Having said that, this is just the start and you will see us building our lending capability. You will see private equity. But again, each market is different. For instance, in China, we have been investing quite aggressively since 2008, but we haven’t made any infrastructure investments there because the government can build better infrastructure. But in India, it is a better marriage between our capital and infrastructure deficit.
On the taxation front, is it a big part of the structure you choose?
Taxation plays a very big role. At the end of the day, we have to pay pensions in net returns. Net returns come after fees, taxes and stamp duties. When we are assessing the market, structure or an asset class, what we really care about is net returns because that is what we pay as Canadian pensions. The market for long-term investment is available across the globe. All we have to do (is) see where we can maximize our risk-adjusted returns and pay those pensions in decades to come. In jurisdictions which have higher taxation, unfavourable withholding rules and difficult structuring requirement, we need a higher rate of return to compensate for that. So there is indirect correlation between taxation and the rate of return.
How much of the returns do you plan to redeploy here and how much do you plan to take back? Any target on what you will commit to India?
We will be deploying more and more capital to India and that is fungible. We are constantly moving our capital, so it can’t be seen as what happens to one dollar invested in one project.
India is a large country with many social obligations thanks to its population. Are you concerned at all that the social demands of infrastructure development and things such as subsidized services may come in the way of returns from such investments?
We are looking long term. We believe that along with the government, we can help build infrastructure and improve the overall economy. We want to make sure that the corporate domain is aligned with policies and help the local community with infrastructure specifically. None of our investments are end game. We would like to have a win-win situation where all concerned benefit.