New Delhi: Canada’s second largest pension fund Caisse de dépôt et placement du Québec (CDPQ), which has been investing in India’s financial services, logistics, real estate, energy and renewable sectors, is now exploring investment opportunities in consumer and healthcare sectors. In an interview to Mint, Michael Sabia, president and chief executive officer of Quebec-headquartered CDPQ, spoke about India being the centrepiece of his strategy of globalizing the company, and increasing the 12% share of emerging markets in CDPQ’s CAD300 billion portfolio to 15-16% over the next two to three years. Sabia also spoke about the next big growth wave happening in India and the corporate governance risks here vis-à-vis other economies. Edited excerpts:

Your office opened in 2016 and you have put in about $4.5 billion here. What has the experience been like so far?

Well, the experience started before we opened our office here. There were a whole series of visits and meetings which eventually led us to the conclusion that India would be a big pillar of what we were doing globally…You know, we manage in Canadian dollars (CAD) 300 billion and about 62-63% of that is outside of Canada. So, one of the big priorities that we have is, and in some respect the biggest priority we have, is the continuing globalisation of the firm. So, we have been bringing down our Canadian allocation, basically ever since I got there, for the last eight years and we are continuing to do so. So, that 60-62% that is invested outside, that number is going to keep on growing as a percentage of our total assets.

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.

What we see in India is the next big growth opportunity in the world. China’s been a great story…It’s always going to be an extremely important country in the world. That’s for sure. But in terms of capturing the next big growth wave, that’s going to happen in a major country in the world, we think that’s here. We think that’s here for a whole bunch of reasons. Having obviously to do with the age structure of the population. I mean that brings with it some challenges but the age structure of the population is a piece of that. You don’t see this that much in countries of the size of and importance that India has. All the work that is going on here around digitization and the combination of digitization and a more entrepreneurial culture. India being the third largest start-up country in the world...that combination of things is really important.

Then to add to that, you know some of the structural reforms that the government has put in place which have the effect of making the economy more efficient over the longer term... that we think is important.

And then the last thing which is important to us as an investor, then again which you don’t see everywhere and maybe we were lucky or we have been able to get the help of good people here. But there are a group of partners here for us that we find highly attractive…I mean we do have a partnership model of investing and we do a lot of that. It’s really at the centre of the investment process and in India we have managed to find and we are continuing to look for more, a set of partners who think like we think.

So, this is the biggest endorsement of what we have seen in the last few years on the economic policy landscape. Will we be right in assuming that according to you India is in a sweet spot and ready for a kind of takeoff?

Well, you’ve got to define takeoff. I see 7% growth, that feels airborne to me. I mean that’s a pretty healthy growth rate. I read a lot of stuff about India slowing down to 6% or six and quarter, maybe six and a half. Well, on a global basis, on an economy this size, the seventh largest economy in the world, that’s still a lot of growth. So, when we look at that and you know there was a GST (goods and services tax), there was demonetization…they were sort of headwinds through 2017, etc. But if you look ahead for an economy of this size to be realistically growing somewhere in the range of 6.5% and 7.5% per year, that’s a pretty astonishing growth opportunity. So for us, that just jumps out from a global point of view…That’s not to say that we have rose coloured glasses on. It’s not like that we think this a layup, to use a basketball analogy.

You know it’s not. There are issues here. Paul Krugman (American economist) was through here and said recently that it’s an issue in lots of peoples minds— you know the capacity of India to create the number of jobs that India is going to have to create, given the way that growth and the size of cohorts coming into the labour force. That is a big challenge. Growth today everywhere in the world is just less job intensive than it used to be…We are conscious of the scope of that challenge. We are conscious of the fact that business investment in India has not been a global phenomenon.

And sure, an economy like India is going to cycle through. There are going to be ups and downs. This is inevitable. It’s been partly India’s history. It’s most countries’ history for that matter. It’s going to be true here. And if you don’t have the staying power to go through those cycles, then perhaps this will be a less attractive place. But for us, we have that staying power.

It is counter-intuitive, as you do see a huge investment opportunity here but Indian businesses don’t see that opportunity. How do these two visions match?

One of the reasons why we have the partners that we have and we want to do more with the ones we have, and we want to do things with new partners is that they see the same kind of opportunities that we see. And they are investing to build their businesses. I am thinking here of Ajay Piramal, Uday Kotak, Rajesh Shah, I am thinking about Dinesh and TVS Logistics. I am thinking about the people at LOGOS…I am thinking of the Tata Group. Those are people who are seeing these opportunities and they are putting capital to work. And those are the people that we want to line up with.

Now, there are going to be other people. There are going to be some people, who from a financial point of view are more constrained, that they can’t invest as much as they would like. You are going to see some other people, who are probably little more short-term focused. And if you are short-term focused, sometimes you can be reluctant to put capital to work over a longer term because you are not sure what the returns are going to be; if you are worried about those returns paying out in the very near term. I mean there are a lot of things that will go into the next year.

One of the things that I think has been a significant factor and I think to some respect is till is a significant factor is the state-related Indian banking system. Maybe it’s got issues and it’s got a lot of issues with non-performing loans…This is going to be a long and gradual process. As the banking sector gets healthier then hopefully credit availability is going to get better and growth rates being where they are, businesses ought to be stepping up.

Of your total portfolio, how much do emerging markets account for?

Today, not a huge amount...around 12%. It is the fastest growing part of our business. We are going to grow that over the next two to three years to the order of 15 or 16% of our total assets but that’s still relatively small. The centre of gravity in the world is moving and the centres of growth in the world are changing. So for people like us, our portfolio structures have to come to reflect that shift in the centre of gravity.

How do you see the regulatory architecture that India has built?

It’s true that just about everywhere that regulatory uncertainty is a big factor that we have to contend with... everywhere we go, almost no matter where it is in the world. I can give you stories of things that have happened from a regulatory point of view in Canada that you would have never expected to have happened, but they did. So, anytime you touch a sector where there is a lot of regulatory dependence, it’s an additional level of risk. And by and large it’s a level of risk that no matter what you say to yourself, you can’t control. It’s an exogenous risk. So, we try to be careful.

Do India’s corporate governance standards worry you, especially over the last few months?

India has a different risk profile than Canada I guess or France. Countries have different risk profiles. So, we are aware of that but our business is about balancing risks and returns. It’s not just about earning returns and what we find here is a pretty interesting balance between risks and returns.

So are those issues there? Yes, they are there. Do they cause us to not want to invest? No, they cause us to want to invest with the right people because you can always find good investment opportunities if you find the right people.

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