Ritu Arora, CEO and chief investment officer-Asia at Allianz Investment, says the firm is actively looking for investment opportunities in India
Allianz Investment Management, which recently committed $250 million into a fund managed by Shapoorji Group for real estate investments, sees India as a focus area, and is actively looking for investment opportunities in the country, chief executive officer and chief investment officer-Asia Ritu Arora said in an interview.
She said Allianz was looking for attractive valuations as well as a steady stream of cash flows to match its liabilities and, as real estate offers these returns, the firm was targeting to 5% of over €56 billion real estate book to the Asia Pacific region, and added that 60% of this will be allocated to growth economies like India.
Arora, who is also a member of the investment management board of Allianz Investment, as well as a board director at Bajaj Allianz Life Insurance and Bajaj Allianz General Insurance, said from a big picture perspective, India had improved dramatically over past three years. “But India still has some way to go in terms of living up to its promise with significant reforms needed in the direct tax, land acquisition and labour market space," she added. Edited excerpts:
For private equity (PE), 2017 has been the best year for both investments and exits in India, surpassing their respective previous highs. Growth, start-up and private investment in public equity (PIPE) deals saw multifold increase in investment flow in 2017, compared with a year ago, even as consumer, banking, ﬁnancial services and insurance, IT and manufacturing contributed significantly to the total deal value. India now has more than 250 participating and active funds. In this context, what are the next hot spots for value creation?
In general, it is a good sign if an economy has multiple hot spots as they stand for value creation. We actually do not see that competitive intensity has increased in the mid- to upper-mid PE market in India to a large extent. India has traditionally been strong in pharma and business services, and we continue to expect strong deal flow in these, as well as sectors which cater to the growing middle class: financial services, consumer and education, and healthcare services.
Investments should once again increase in the consumer technology space with exits, such as Walmart’s acquisition of Flipkart, improving the sentiment. Infrastructure is another area we expect will attract significant capital as the government looks to monetise existing projects. We have seen early successes of the toll-operate-toll (TOT) model earlier this year. Commercial real estate and real estate, in general, has been attracting significant capital in the past couple of years. On the credit side, the sentiment for investments has improved dramatically following the introduction of the new insolvency and bankruptcy code (IBC). This is one area that can attract a lot investor interest going forward.
How has the India story been for Allianz in terms of opportunities for investments and also returns? Take us through Allianz’s strategy for India? Are there enough worthwhile deals in India to chase?
India as a market and as an investment destination holds a lot of promise and excitement for Allianz. A very recent example of that is our anchor investment in the first private infrastructure investment trust in India—IndInfravit Trust. We also recently committed $250 million into a fund with the Shapoorji Group for real estate investments in India. So, clearly, India for us is a focus area and we are actively looking for investment opportunities that match our investment goals as a long-term insurance investor managing a portfolio of worldwide €660 billion in proprietary assets.
On PE side, where we have been observing the market since 2000, we have been historically concerned about high valuations and the relative nascence of the industry in India even as we have been cognizant of India’s growth potential. Our approach to the market has, therefore, been a cautious and measured one.
How is the flow of pension and sovereign money changing the PE landscape in India?
Pension and sovereign money is typically long-term patient capital and comes in large chunks. The incremental flow of this money towards PE landscape in India has ensured that there is no dearth of capital for good businesses. Essentially, good and scalable business ideas have been able to raise capital reasonably easily. With respect to real estate, the flow of this money has allowed the sector to find a bottom at a time it has been impacted due to a general slowdown in demand and far reaching reforms.
At Allianz, we are looking for attractive valuations as well as a steady stream of cash flows to match our liabilities. Real estate offers these returns and we target allocating 5% of our €56 billion real estate book to the Asia Pacific region—60% of that will be allocated to growth economies like India and last September we announced our first real estate transaction in partnership with Shapoorji Pallonji. Strong secular growth, stellar demographic trends and improving transparency are supporting stable real estate occupiers as well as investor demand. In particular, we like the office sector, which is ideal for long-term core investors like Allianz.
For real estate firms, as they can no longer rely on banks for bailouts, how important have foreign investment and private equity funds become? Are we set to see a slew of foreign investors looking to gain entry into the finance-deprived, potential Indian real estate market?
As the changes brought in through the non-performing asset (NPA) resolution start to have an impact, local real estate firms need to rely on capital markets and private funding. As such, foreign investment will play a stronger role in financing the real estate market. But it is not only the provision of financial closure that investors like Allianz bring to the table. Before investing, we insist that local players follow global standards and we hold them accountable to delivery timelines, costs, quality and environmental responsibility.
In the area of public investment, is there a story in particular that you see for India? How has the current government played a role in terms of any change that you may have witnessed in the entire ecosystem for investors—both global and local?
The asset recycling approach highlighted in the last budget for infrastructure investments is expected to generate investment opportunities for long-term investors looking for cash flow. We expect the monetisation of toll roads and other infrastructure like airports, ports, etc., to be a significant source of capital for new public investments. The entire ecosystem around InVits, be it regulations, taxation, etc., is now very clear and so it becomes easy for investors like Allianz to invest in infrastructure assets like toll roads. In fact our IndInfravit Trust investment is actually an InVit structure through which we now co-own five toll road assets in India. The development of the ecosystem around InVits has been so beautifully done that it offers long-term investors like us clear investment returns and risks while also allowing the government to raise much-needed capital for building new roads and infrastructure.
Big picture, for India, which areas have an oversupply of capital and which are underinvested? What according to you is the best approach to harvesting co-investments alongside general partners (GPs)?
I would look at it from a different lens. Are there good businesses in India that are starved of capital for growth? I would believe: No. So, really it is more about finding the right opportunities to invest.
I suppose one objective measure of an oversupply of capital would be high valuations, and correspondingly a situation of underinvestment would be characterized by lower valuations. The challenge for PE fund managers would be to judge whether the market is overvaluing or undervaluing an asset in each case relative to their ability to add value to the asset to derive a return on their investment.
The best way for an LP (limited partner) to ensure a good flow of co-investments from GPs would be, apart from having capital, to ensure they have an efficient evaluation and decision-making process, which would translate into clarity of decision-making and certainty of closing for the GP.
How do you plan your exit strategies in India, something that was a concern till recently for many investors? Do you think, exits are difficult in India, and what could private investors do to eventually have meaningful exits? Or, do you share the view that India is finally beginning to witness meaningful exits, and that we are seeing capital being returned to investors?
As an insurance investor, we are long-term players and invest primarily for yield generation. However, if we need to, we believe we will be able to exit at remunerative valuations, given the increasing institutional interest in India and the deepening capital markets.
In India, as in other emerging markets, experience has shown that it is important to be agile and sensitive to the fact that windows of liquidity can be short-lived and subject to macro conditions beyond one’s control, such as government regulations, local laws, and forex fluctuations. It is, therefore, important for foreign investors to invest alongside partners who are experienced in delivering liquidity and navigating challenging situations.
Are valuations in India a concern going forward—this year or the next? Or, are we headed for a correction rather, and if yes, what could lead to that at a time when dry powder is abundant?
Public markets in India have no doubt been frothy as investors globally have rewarded emerging markets for higher growth by giving higher multiples. The Indian market for the good part of the past two years has been trading at one standard deviation higher than average multiples, with the recent correction only. Nonetheless, I believe emerging markets continue to be traded as an asset class rather than individual opportunities. Therefore, any global concerns like trade wars, reduced liquidity, etc., will impact all EMs. The impact might be different for different economies, depending upon their macro conditions, but there will be an impact nonetheless.
When you look at India, with significant amounts of challenged capital getting recycled, combined with a slew of IPOs and tech deals, do you think LP sentiment is at an all-time high as the country finally appears to be living up to its promise? Does this mean we are now set to see the next stage of PE investments in India—buyouts, path to controlled deals?
On the supply of funds, what we have seen in India as well as other Asian PE markets has been a flight to quality, with good fund managers being oversubscribed while others might find the fund-raising environment more challenging. In terms of the kinds of PE deals that are emerging, we are seeing more control and buyout deals in both China and India due to succession issues, as well the challenge faced by families and founders in managing much larger businesses and facing up to greater international competition.
LP sentiment, on the contrary, has sobered up over the last couple of years as LPs and funds have become more pragmatic in deploying capital. Ideas are being thoroughly evaluated before investments are being made, which is a very good sign for the long term. We are quite active in India in the Private Equity space through our in-house investment manager Allianz Capital Partners.
Big Picture, things have improved dramatically over the last three years. But India still has some way to go in terms of living up to its promise with significant reforms needed in the direct tax, land acquisition and labour market space.
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