Scale Offsets Risk for Canadians on $15 Billion India Spree

  • Canada Pension, Caisse, Brookfield, Fairfax among acquirers
  • Fastest growing major economy ‘chaotic but democratic’

Canada’s biggest asset managers, never afraid to push the investing envelope, have been loading up on Indian assets -- big time.

Investors including Brookfield Asset Management Inc. and Canada Pension Plan Investment Board have signed deals for mobile-phone towers, office properties, a stake in an airport, and distressed debt, betting that scale outweighs risk in the world’s fastest growing major economy. After record deals last year, the Canadians have ramped up their India investments to more than $15 billion, the bulk of it in the last few years, according to calculations compiled by Bloomberg.

“It is a very important, critical market for us,” Suyi Kim, Asia head for Canada Pension, said in an interview in Mumbai, citing India’s rapidly developing private-equity scene and a market big enough to absorb investments from the C$298 billion ($217 billion) fund. The Toronto-based manager bought a 10.3 percent stake in telecom-tower owner Bharti Infratel Ltd. with KKR & Co. in March for almost $1 billion, adding to investments of about C$3.5 billion in the country as of December.

The Canadian funds have been lured by the size of the reward. They’re investing in a country that’s growing at more than 7 percent and will have the world’s largest workforce by 2030. India’s benchmark stock index have surged to a record, out pacing the Canadian market by almost three times since Prime Minister Narendra Modi took office and pledged to overhaul the economy to unleash the power of 1.3 billion people. The latest reform, a goods and services tax designed to unify the market and make doing business easier, is set to go into effect on July 1.

On Thursday, both India’s benchmark indexes touched record highs and are poised for their longest winning streak in almost three months.
But India also has major challenges, including $180 billion of distressed debt, which at about 17 percent of total loans, amounts to the world’s worst bad-loan ratio, and is slowing credit growth. Weak private investment, lackluster productivity and red tape also threaten to hurt the $2 trillion economy.

Read here for a run down on India’s transition to the GST

Soured loans are where two big Canadian investors see opportunity. Caisse de Depot et Placement du Quebec, which manages assets of about C$270 billion for Quebec’s retirees, has a 20 percent equity stake in Edelweiss Asset Reconstruction Co., India’s largest buyer of delinquent debt. The Caisse said in October it’s targeting $600 million to $700 million in stressed assets and specialized corporate credit in India over four years.

Brookfield in July also signed a memorandum of understanding with State Bank of India to set up a joint venture to invest in stressed assets, with the Canadian firm planning to contribute about $1 billion into the partnership.

Anita George, managing director of South Asia for the Caisse praised the government’s attempts to get credit moving again. The government last week gave the Reserve Bank of India, the nation’s central bank and financial regulator, new powers to spur lenders and borrowers to take writedowns.

Anita George

Photographer: Dhiraj Singh/Bloomberg

Still, George is under no illusions about a country that can throw investors a “googly,” using the cricket term for a ball that comes at you from an unexpected quarter. That’s why the Montreal-based fund invests as a minority partner, she said.

“To be very frank, often we have a lot to learn,” George said in an interview in Mumbai. Indian companies don’t like to give up control so it works out for both sides, though the Caisse is very involved in governance and insists on board seats, she said.

For more on India’s pitch to buyout firms, click here

A representative for Brookfield said the Toronto-based company declined to comment on its India push. The company agreed to a couple of deals in October that more than doubled its Indian assets to $5 billion. It bought mobile-tower assets for an upfront payment of about $1.6 billion in the largest private-equity deal in the country to date and commercial property for about $1 billion.

It’s not the first time Canada’s asset managers have broken new investing ground in a concerted way. After the government freed them up in the 1990s to move beyond stocks and bonds, they turned to private equity.

Canadians also bought a record $3.85 billion in property in Manhattan in the decade through 2015, more than any other foreign country. More recently, the pension funds have been increasing leverage and setting up in-house hedge funds to bolster returns in a world where bond yields are paltry and the ranks of their retirees are swelling.

India has always been viewed as high-risk, high-reward for global investors, said pension expert Malcolm Hamilton, a fellow at Toronto-based C.D. Howe Institute, an economic research firm. “Modi’s government gives investors greater confidence.”

To read more on why the Caisse plans to invest in Indian government debt, click here

So far, pension funds have been well rewarded taking that higher risk, though the ability to to do so will diminish as their pensioners age, Hamilton said. “If they are lucky, they will succeed until interest rates move up and they can afford to de-risk.”

Apart from the demographics, the scale of the country’s entrepreneurial class is also a major draw, said George.

“I’ve seen so many companies that have started as startups and have actually been able to scale up and that to me is an amazing story.” Those have included Azure Power Global Ltd., in which the Caisse has a stake of about 21 percent.

“It’s a great story because he’s now at 1,000 megawatts, he’s the largest pure-solar play in India and he’s listed on the New York Stock Exchange,” she said.

Telecom towers are another focus area for Canadian acquirers as a battle for market share is expected to prompt carriers to boost investments to offer faster speeds and more capacity, boosting demand for towers.

Brookfield and Canada Pension are both said to be weighing a bid for a bigger prize -- Indus Towers Ltd -- after their initial forays in the sector. A takeover could value India’s largest wireless-infrastructure company at more than $12 billion, according to people with knowledge of the matter.

Fairfax Financial Holdings Ltd. has been among the most active in India, through its controlling stake in Thomas Cook (India) Ltd. and Fairfax India Holdings Corp. Fairfax has invested about $5 billion in the country, agreeing deals for a stake in a Bangalore airport and a financial services company.

While a rise in Hindu nationalism may one of the political issues investors may be watching, George said she has faith in Indians ability to push back if extremes surface.

"It’s the largest democracy and that aspect is very important,” she said. “Chaotic but democratic.”

— With assistance by Bhuma Shrivastava, and George Smith Alexander

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