A combination of scale and breadth of investable opportunities across asset classes as diverse as toll roads and office blocks, renewable energy, ecommerce and fintech, and a constructive environment for foreign direct investment are the top draws for deploying capital in India, said the chief executive of one of the biggest retirement funds in the world.
“As we continue to scale, it is important for us to build capabilities and infrastructure to invest in one of the world’s largest economies — and also among the fastest growing — to be able to participate in global growth,” John Graham, CEO of the Canadian pension colossus CPP Investment Board (CPPIB), told ET in an exclusive interaction. CPPIB manages more than $500 billion (?33 lakh crore) of assets worldwide, but only 3.06% of the corpus has been deployed in India so far. “For us, it’s important to have a portfolio that is diversified by geography and diversified in terms of asset class. India offers both the breadth of scope and sophistication of the market,” he said.
During his five-day maiden trip to the country since taking over CPPIB early last year following the controversial exit of his predecessor Mark Machin, Graham met Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman, dined with corporate captains and even soaked in the “high energy vibe and excitement” of young entrepreneurs and VCs, breaking bread with them over breakfast.
Machin had to step down following his trip to the United Arab Emirates to receive a coronavirus vaccine despite federal rules banning inessential travel, and a long line of older and immunocompromised citizens waiting for their shots. That resulted in the elevation of Graham, a former physical chemistry doctorate who spent almost a decade as a research scientist at Xerox before becoming an asset manager at CPPIB in 2008 and subsequently building its sprawling credit business for close to a decade.
WHY DIVERSIFICATION MATTERS
Since 2018-19, CPPIB has been building its exposure to emerging economies — and China in particular — in the hunt for juicier returns. More than 85% of its funds are invested outside of Canada with Asia Pacific being the second largest geographical cluster, after the US. Plans to increase exposure to Asia’s biggest economy and allocate up to 20% of its assets to the country by 2025 are still on track, Graham said.
“It’s really important to be global and diversified. We have said we will deploy up to a third of our assets into emerging markets, including China,” Graham said. “That’s different from a third. But even then, if we see a great scope to deploy capital we will. We do not have a fixed allocation.”
This diversified, global spread and flexibility also helps dealing with big swings or shocks like the Covid pandemic and the ongoing war in Ukraine that has taken a big toll on global macroeconomic prospects.
Graham said Covid did not impact the long-term investment strategy but through the pandemic, the firm was tactical and invested in “unique” opportunities that presented themselves.
“Early in Covid around March 2020, there was an opportunity to invest in credit markets that were dislocated. As liquidity came back, that opportunity went away. So we have been agile in adjusting,” Graham said.
Globally, pricing across global capital markets also became attractive but Graham said “the swiftness and magnitude of fiscal and monetary interventions by various central banks and governments” also made these prospects very short-lived.
But with global interest rates tightening, does he see the need to tweak his investment thesis? “We have been navigating inflation and interest rate hikes in the past fiscal year and our strategy is built in a way that it stays robust against any macro-economic backdrop – Covid or geopolitical uncertainties triggered by Russia-Ukraine…It’s really important to have long term investing beliefs, not make strategic decisions in terms of crisis or be too dogmatic,” he said.
REAL ASSETS, TANGIBLE RETURNS
But in times of flux bets on real assets – airports, real estate, infrastructure and even equities provide some protection against inflation and volatility.
Graham, though, acknowledges that pockets of real estate, especially the commercial segment, will get impacted as hybrid workplace models become commonplace as people gradually come back to their offices. “Some sectors have been beneficiaries of Covid, some have been affected,” he said. “For us, one of the tenets of investing is we are a bottom-up, detail-oriented, deep-diligence, deal-by-deal investor and our office portfolio has typically leaned toward high quality, tier-1 assets with pedigree partners and tenants. This has proved to be largely resilient even as hybrid models tend to become more popular post-Covid, compared with Tier 2, tier 3 cities and assets,” he said.
This statement comes on the very same day CPPIB announced a Rs 5,300-crore joint venture with Tata Group arms to develop commercial real estate.
Far smaller than mega asset managers such as BlackRock, Blackstone, Brookfield or Vanguard, CPPIB banks on steady quarterly inflows from the more than 20 million Canadian workers who put their pension money into the fund — a key plank of the country’s retirement savings system. Thus, it becomes an even bigger fiduciary responsibility to “leverage the breadth of our investment capabilities to deliver the best returns”.
SPOTTING UNICORNS
In that context, CPPIB’s big bets in high risk, digital and tech startups across the world, including Indian unicorns or soonicorns like Byju’s, Flipkart, Delhivery or news aggregator Dailyhunt, have raised eyebrows. Technology usage was arguably the one bright spot during the health crisis, spurring development and uptake of things such as grocery delivery and online education. CPPIB opened an office in San Francisco in 2019, its second in the US after New York, bringing it closer to Silicon Valley. It was one of the anchor investors in the Paytm IPO just days before the issue imploded, thereby highlighting the volatile nature of backing early-stage companies.
“Different assets play different roles within our overall portfolio,” said Graham. “We have exposure to low volatility, cash generating assets and there is an important place within our portfolio for growth and we strive to have a balance between growth and value within our portfolio. It’s important to size it properly within the broader portfolio and then even more important is we pick the right companies to invest in.” Talking specifically about Paytm, Graham said he was not too fussed about “short-term events but was focused on the intrinsic value of a company over a longer-term horizon,” which could last for even multiple decades.
Drawing comparisons with Asian tigers South Korea or China, Sujeet Govindaraju, CPPIB’s head of India Office, highlighted the internet economy has a massive potential to stimulate domestic and household consumption that in turn creates large, valuable companies in sub sectors.
“We look for such sub-sectors and how they are trending. Ecommerce penetration is 5.5% in India versus China where it is 27-28%,” he said. “Even if the Indian market doubles, there is room for large companies.”
This is especially true in fintech, the CPPIB leadership believes.
“Instead of sharp volatility in stock prices, we worry about management capability to monetise the customer base that they are building,” added Govindaraju. A digital moat, according to him, based on value addition, convenience and consumer data is far more robust for the long term.
The other area of focus for the firm is sustainability and assisting old-economy cement, chemicals, steel and manufacturing companies to wean away from fossil fuels and make the transition to net zero.
“India is definitely a target market for our Sustainable Energies Group and our investment in ReNew Power is an indication of that. We are excited about ESG and the transition to net zero,” said Graham. CPPIB’s current renewables portfolio is C$7.67 billion ($6.08 billion) and represents 1.54% of the total fund. “But the plan is to double that exposure in the green transitioning of assets by 2030.”
https://m.economictimes.com/news/economy/finance/diverse-opportunities-make-india-fdi-magnet-says-cppibs-john-graham/amp_articleshow/90810108.cms
