Mumbai: For Canada Pension Plan Investment Board (CPPIB), which manages one of the world’s largest pension funds, India is emerging as an important investment destination. CPPIB, which began investing in India in 2009, has total investments of about C$7 billion ($5.23 billion) in the country. Mark Machin, president and chief executive of the CPPIB, and Vikram Gandhi, a senior adviser to CPPIB, comment in an interview on investments in internet companies, the good and the bad of the India opportunity and about the country’s importance for the pension fund. Edited excerpts:

CPPIB, for most parts, gives an impression that it’s a fund that seeks annuity incomes. How does an investment in an education technology company like Byju’s fit in there?

Machin: We have invested in education-related companies in other emerging markets, and in China such as Nord Anglia. This one is really interesting because it is a fast growing education related company, when India is going through a structural change. We have a lot of investment strategies, some of which have got us quite far in India.

Gandhi: We have got some growth investments and some yield investments. That’s our portfolio. So if you look at Kotak Bank, our largest investment in India, it is largely a growth investment. It may not be an internet play but ultimately it is a growth on Indian economy, Indian business and Indian consumer. Some of our real estate assets here are yield investments. These are operating assets where we are getting rent on a commercial building.

Mark, you led Asia before heading CPPIB globally. You have committed about $5 billion in India, where do you go from here?

Machin: I like India a lot. Globally, we are going to increase our emerging market exposure to a third of the fund from the current 15%, so we’re $368 billion and will be $600 billion by 2025, so as we go along, emerging markets will become more important, and we have three important ones- China, India and Brazil. Brazil is the smallest. There are a handful of other ones like Mexico. But China and India are the two biggest. Everyone knows the long-term demographics—China’s working age population has declined, they are aging rapidly. Whereas India is still growing and needs to educate its population. They can use Byjus and other ways to do that.

Capital itself is no more a differentiator anymore. We are already sitting on a huge dry powder in India. What does CPPIB bring to the table?

Machin: What is different about us is that we are super long term, and we will keep growing, to hit a trillion dollars by 2033. So we never have to sell anything. Just hold investments and keep finding investments. A lot of our peers are fund structures or very mature funds, so to buy something they have to sell something else. We have this very unusual pool of capital. Most pension funds are mature. We are really long term with a stable pool of capital. Secondly, scale wise, we are going to have more and more capital to deploy.

So what new strategies would you be exploring in India?

Machin: We are interested in exploring a credit strategy. We have not made as much progress as we would have liked. Hopefully, in a year’s time I will be able to say that we have made progress. We have deployed some capital but are looking at a partnership approach.

Gandhi: Within credit, we definitely won’t be doing straight vanilla deals. Our credit strategy is more focussed on structured credit and things like that.

You had entered into a partnership with Kotak for a stressed assets strategy. So, do we understand that’s not happening now?

Machin: We just haven’t felt we have seen the right opportunities to do that together. It is on the backburner for now. In terms of credit, all the meaty assets have not been taken off under IBC.

Gandhi: Yes, but that is the short-term perspective. In terms of requirement for credit, the market is going to be massive. If you just think about the underlying growth, it won’t just require equity capital, it will need debt capital. So that’s a big opportunity for us. We are not going to do one-off deals, that is for sure.

Machin: CPPIB is happy with the partners we have and continue to be selective – we have high standards for investment. In the longer term, we will grow the number of partners we do business with. A lot of capital is waiting to come here and there is real competition for capital. FII flows can go both ways. Currently, faster money is going in the opposite direction. India is currently down by about $10 billion. We plan to take advantage of this opportunity. India has had a good run over few years and we still see it as a major long-term opportunity.

What are your biggest challenges as you allocate capital to India?

Machin: Valuation. It has the highest P/E multiple among major markets and in Asia. PE premiums in Asia is at all-time high. Cheap is always relative to cash flows. That is always the number one issue. Second is we’re highly selective of the deals we do, so that means opportunities are restricted. In each sector, strategy is different. We are not restricted by capital. We could have easily deployed twice as much capital as we did.

Gandhi: The partners we have are very important. Long-term partnerships are very important for us, with the same kind of objective. There is a lack of large transactions that make sense for CPPIB. Given how big we are and given the fact that we don’t have a resource constraint, you have to by default focus on large transactions, and while flow has improved, there honestly aren’t that many deals. And as you said, a lot of the meaty stuff is already gone.

Let me ask you what is your message to the team during your India review?

Machin: I’m relaxed about where we are right now. As long as we are not missing big, good value opportunities, it’s alright. As of today, I hear the various strategies cooking and it is looking in decent shape. We have a really first class team of people, really quality professionals who are really driven to do first class deals. At the same time, being long term doesn’t mean we have to be slow.

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