Capital no constraint for India plans: CDPQ boss Michael Sabia

MUMBAI:India and Mexico have edged past China to emerge as the two primary markets for Caisse de Dépôt et Placement du Québec (CDPQ), as Canada’s second-largest pension fund looks to diversify its portfolio geographically, moving away from its traditional markets of North America and Europe to deploy more than the current 8-9% of $250 billion of assets it manages worldwide in high-growth emerging markets.

“Both India and Mexico are complex markets but there is more transparency and steadiness in the operating institutional framework,” Michael Sabia, CDPQ’s president, told ET during a recent trip to India. “In China, there are still a lot of things that are difficult to navigate such as where is the locus of decision making. And it’s not always a predictable thing.”

CDPQ will be deploying just under $3 billion in India by the end of this year alone, buoyed by simpler rules, smoother implementation of policy and a central government that is almost “managerial” in fixing problems and removing roadblocks through structural reforms by way of the proposed goods and services tax (GST) and the bankruptcy law.

It has already identified key sectors such as financial services that serve a growing middle class including insurance, non-banking finance companies (NBFCs), infrastructure, energy and real estate through its arm Ivanhoe Cambridge besides logistics, transportation and information technology.

Additionally, the fund has already put $1.3 billion in listed Indian companies and is open to deploying more. “We will be opportunity constrained, not capital constrained,” said Sabia, who met ET with members of his senior leadership team late last week.

For patient capital providers such as CDPQ, growth is increasingly becoming difficult to find around the world and as the world’s fastest-growing major economy, India offers a runway “that looks exciting” over the next 10-15 years. “Growth rates are growth rates. They go up and down. What matters more is what’s going on underneath. As long-term investors, we are more focussed on the fundamentals,” Sabia said.

The top brass was in India as CDPQ is close to deploying half-a-billion dollars in two transactions. It has joined forces with Edelweiss to invest in its asset reconstruction arm (ARC) with an initial corpus of $300 million, with an option to increase this to $700 million in the next four years to buy bad loans from banks. It is also finalising a $180-million investment to acquire a 42% stake in south-based TVS Logistics Services, cashing in on a sectoral boom driven by ecommerce.

CDPQ, which opened its India office in March, has also made a commitment of $150 million to the country’s renewables sector. Together with sovereign wealth funds State General Reserve Fund of Oman (SGRF) and Kuwait Investment Authority, it teamed up with Tata Power and ICICI Venture in September to create a joint platform to acquire distressed and stranded power assets — based on renewables, gas and fossil fuel — and transmission projects. The three global investors will together deploy around $650 million of equity to create a dedicated pool of $850 million, making it one of the largest commitments by sovereign wealth funds and pension capital in the country so far.

Finding growth
Apart from a large labour force and economic reforms, India’s 250-million strong middle class is poised to more than double in the next 70 years, posing unprecedented opportunity.

Also, services comprise about half the country’s GDP unlike manufacturingdominated China. “We are also far more familiar and hence comfortable with the legal system in India than China,” said Rashad Kaldany, executive vice-president, growth markets. The strategy is to partner established local players like the Tatas or Edelweiss and build a platform to develop projects or turn them around. CDPQ is scouting for those with in-house management bandwidth or a stable of talent.

“We, like Edelweiss, believe operations create value, financial engineering doesn’t,” Sabia said. “The latter is math and ends up going away. The former is durable value. What we are doing with them is to create a pool of capital that can participate in the acquisitions of stressed loans off bank balance sheets. It’s potentially a $100-billion opportunity — even half of that is huge.

Where do you get such scope anywhere in the world?” Similarly, along with Tata Power and ICICI Venture, CDPQ will also look for brownfield opportunities in power generation before taking on development risks.

Most large stressed assets have multiple lenders and a partner like ICICI Venture would be able to help persuade banks to participate in a revival plan. CPDQ’s global infrastructure assets include Heathrow Airport and Port of Brisbane besides stakes in Bombardier Rail and large cancer facilities in Australia.

Some concerns
Still, the lack of a deep, liquid corporate debt market is of some concern, as is governance. “In the last one and a half years, we have expanded our fixed income portfolio to include some sovereign bonds from emerging markets,” said Kaldany.

“Those bonds are both local currency paper as well as foreign currency denominated. But when we invest we evaluate the liquidity of these instruments. We are buying papers from high-growth economies but that are liquid.” Despite the backlash against globalisation, the clock can’t be turned back, Sabia said. “Nafta (North American Free Trade Agreement) has been in place for so long that US companies have become dependent on Mexico-based manufacturing. It will be extremely painful for US to turn that clock back,” he said.

“What may happen may not be politically tolerable for countries to embrace new trade agreements.” There is a need to stimulate demand through aggressive fiscal policies across the OECD countries.

“Governments have to embark on a massive infrastructure spending to spur growth of the kind the world has not seen since World War II,” Sabia said. “If that means they need to borrow, so be it. The Bank of England rates have not been this low in 5000 years.”