Canadian pension funds are looking to tap the private debt space in India where a prolonged credit crunch is hampering the ability of companies to raise funds from traditional lending sources.
That includes Canada’s largest pension fund manager Canada Pension Plan Investment Board (CPPIB), which according to a 5 December report by Mint, plans to add private debt investments to its India portfolio. A senior adviser to CPPIB in India, Vikram Gandhi, had said CPPIB will allocate capital to the private debt market in India and an announcement will be made shortly.
According to Gandhi, CPPIB sees a big opportunity in the lending space, where businesses have a good asset base but are facing issues on the liability side, including stressed assets.
While CPPIB may start a $1 billion credit fund, another Canadian pension fund Ontario Teachers’ Pension Plan is also looking to start a $500 million credit fund in the country, two people aware of the development said, requesting anonymity.
“Both these pension funds are looking to start their funds in joint venture partnerships with local firms," one of the persons cited above said.
“Ontario Teachers will specifically focus only on the performing credit segment, and will provide structured senior debt to high growth, performing companies," the person said.
Ontario Teachers did not respond to emailed queries, while CPPIB declined to make further comments.
Setting up of credit platforms by the pension funds comes at a time credit disbursements are declining in India.
Overall loan growth in the country has nearly halved to 6% in the September quarter, from over 11% a year earlier because of a sharp drop in disbursements from non-banking financial companies and slower credit flows from banks, according to a 11 November report by brokerage Credit Suisse. Credit costs, however, remained high even with moderation in slippages, as there was a delay in recoveries under the Insolvency and Bankruptcy Code, the bankruptcy law of India, the report said.
The slowdown in loan growth was reflected in the borrowing of companies, as fund flows from banks and non-banks to the commercial sector plunged 88% to ₹0.9 trillion between in the fiscal first half, from ₹7.36 trillion in the year-ago period, according to the Reserve Bank of India’s half-yearly Monetary Policy Report.
“The credit crunch in the market is making some of the good companies, mainly in the mid-cap space, borrow at yields much higher than those in stable markets. And that makes the performing credit space ripe for investments as pension/sovereign wealth funds could lend at attractive yields to well-performing companies that are now starved for credit to fund their growth cycle," said Shantanu Sahai, executive director and head of debt finance and debt capital markets at global investment bank Nomura.
“These funds are not averse to investing in big mid-cap and large-cap firms in sectors such as infrastructure, telecom, industrials and manufacturing companies, or intermediary companies unlike usual PE firms who typically tend to focus on new-age industries like healthcare, financial services, technology or consumer space. And hence, while firms in these sectors are still managing to get capital from usual sources, it is the companies in the old age economy— industrials, telecom; etc that are starved for capital and that is where the value of some of these alternative credit providers starts to become a lot more pronounced compared to the others," he added.
CPPIB’s current exposure to India stands at around Canadian $10.6 billion, with investments across public and private equity, real estate and infrastructure. In future, its allocation to India is only expected to grow as it wants to increase its exposure to emerging markets to one-third of its total portfolio. Within emerging markets, China, India and Brazil are the top priorities for CPPIB.
Ontario Teachers, one of Canada’s largest single-profession pension plans, was a late entrant to the country compared to its peers. In August, Mint reported that the fund was actively scouting for investment opportunities in India’s green energy and airport space.