Source: The Economic Times, Feb 07, 2017
Mumbai: For Anuj Ranjan, the globetrotting India head of Brookfield, the fundamental investment thesis behind buying a large telecom towers portfolio from Reliance Communications was not all that different from taking over Hiranandani’s 4.5 million square foot of swish office and shopping space in the financial capital. The world’s largest democracy with a billion plus population needs to communicate, share information as well as work and play to sustain its trillion dollar economy.
More importantly, both are scaled-up, income generating, operational assets which can be leveraged further using their global expertise to build out larger platforms. Similarly, they have high margins with low capital expenditure going forward and built-in escalators.
Toronto based Brookfield is the world’s 2nd biggest manager of alternative assets like real estate and private equity with $250 billion of assets and have already overshadowed traditional Wall Street heavyweights Carlyle, KKR or even Apollo Global Managament. So capital has never been a handicap for Ranjan and his 1000 odd team on the ground.
Fresh from raising $14 billion to invest in infrastructure — believed to be the largest single commitment to the sector of its kind — the Candian firm has been scouting around for compelling stories across emerging markets like ours. So when both the Hiranandani and the Reliance towers came up for grabs last summer, Brookfield jumped head long.
By the end of the year, they wrote a $2.6 billion to stitch up both — arguably among the largest FDI commitments in India in the year. The Brookfield Reliance Infratel transaction worth $1.6 billion alone is also the second-biggest private equity transaction ever in the country, behind Temasek’s $2 billion investment in Bharti Telecom in 2007.
Call it Canada calling. The bulge bracket Canadian asset managers from pension or PE funds have been the biggest India Bulls in the last one year, whipping up a storm with their investment frenzy. Between marque names like CPPIB, Caisse de depôt et placement du Quebec (CDPQ), Ontario Teachers or Brookfield and Fairfax, they have jointly committed around $7-8 billion across companies and funds so far, according to industry estimates. This would be among the single-largest country-wide commitment towards India in recent times.
Such Canadian transactions mirror the excitement of PE opportunities in India, which reached fever pitch in the peak vintage of 2007-2008.
This becomes even more striking once compared to FDI or trade data. Canada has never been
a top investment source for us with bilateral trade touching a mere $6.5 billion in March 2016. That’s only a tenth of neighbour US, the 5th largest FDI partner, as per the latest government figures.
“Our long investment horizon aligns to the financing and capital needs of India’s economy, growing entrepreneur culture and the strength of business in the country,” says Suyi Kim, Managing Director, Head of Asia Pacific at CPPIB.
From the building blocks — airports, roads, power plants to warehouses, logistics parks and commercial real estate to financial services and even financial services firms and even ecommerce companies, their bets are becoming bolder and complex, cheque sizes bigger. Even “regulated sectors” like banking, airports or distress debt is fair game as are risky emerging bets like ecommerce. Last February, instead of safe havens like government securities, Ontario
Teachers decided to put its pension capital to back a $200 million capital raise by Snapdeal.
By the time you will be reading this, probably the board of the sleepy community lender from Kerala and also one of the oldest private player in the country — Catholic Syrian Bank — would have given Prem Watsa– Canada’s Warren Buffet and among the earliest champions of the India story — their approval to acquire a controlling 51% slice of their bank through his flagship
Fairfax Financial Holdings. Late last November Watsa and his close confidante Deepak Parekh managed to swing RBI to allow the first takeover of an Indian bank by a foreign investor. This was Watsa’s 2nd bold bet within 1 year — having bought into GVK’s Bangalore airport earlier in 2016.
“We are currently at the initial stages of seeing direct investments by the larger pension funds. As they get a better understanding of the market and get more confidence based on the track record of initial investments, we expect an increased allocation towards India as well as participation from other large North American, European and Australian pension funds,” feels veteran invetment banker Ashok Wadhwa, Group CEO, Ambit, who has advised several
Canadian investors in the recent past.
Around the same time when PWC was doing a detailed dilligence of RCom’s towers for Brookfield during last Diwali, across the Atlantic, another investment prospect was hotting up. This too involved a blue blooded Canadian investor — Canada Pension Plan Investment Board (CPPIB).
Four years after buying GlobalLogic, a Silicon Valley headquartered IT outsourcing firm started by 4 IIT-ians with core operations in India for $420 million, PE Group Apax Partners wanted to take some money off the table. CPPIB historically has been one of the biggest investors into Apax’s funds as a sponsor — or limited partner (LP) in PE jargon speak — and have been pressing them for co-investment or co-underwriting opportunities. In 2011, Apax had joined forces with them and another Canadian pension fund PSP Investments to buy medical devices firm Kinetic Concepts in US in a multi-billion dollar trade. Since then, CPPIB has been scouting for emerging technology companies.
Meanwhile, in just three years, GlobalLogic had doubled in size under Apax’s watch, so it could either cash out entirely or dilute partially and still enjoy the upside. It chose the latter and within 3 months of bilateral discussion, CPPIB closed its 1st technology services investment at a $1.5 billion valuation, to become co-owners of the company. Apax too laughed its way to the bank, raking in more than three times money on a four-year-old investment.
Among the largest in the world, CPPIB alone has invested over $3 billion in India since 2012, the largest commitment amongst all its peers. With GlobalLogic, it now gets to ride one of the hottest new megatrends.
For most, the rising Canadian institutional interest is a natural progression that comes after the previous waves of Singaporean, Middle Eastern sovereign wealth fund interests. Historically though they have always been indirect investors through the global funds that they have backed and invested in as LPs. From KKR to Blackstone, from TPG to Bain, these relationships predates the Modi government.
Way back in 1994, CDPQ invested $250,000 in IndOcean’s fund — the first instance of Canadian institutional money trickling into India. Then for almost 22 years, there was limited traction till CDPQ, CPPIB set up offices here, recalls a senior fund executive who did not wish to come on record. Even during the boom years of 2004-08, there was no Canadian except for Fairfax. But now as India increasingly become strategic, the involvement is proactive.
This has also led to a windfall for even our home grown PE executives. Several domestic funds like Renuka Ramnath’s Multiples, True North (formerly IVFA) or even Kedaara Capital today count the Canadians like CPPIB or PSP Investments as among their key sponsors during fund raising. Its opened up a new market for them to tap as well.
“Earlier they used to invest through general partners like large PE funds, both domicile and global funds like ours. But now, they have started investing directly in big numbers. It’s a growing trend. Their confidence in taking the macro India risk is good for the country and economy in a long run,” agrees Sanjay Nayar, CEO, KKR in India.
But the aggression also changes the tried and tested industry dynamics. “Once they have tasted blood and built local capabilities, why would they share management fees and carry with their GPs (managers of the fund who execute the investments), ” asked an India head of a global buyout fund on condition of anonymity.
That means in larger transactions in infrastructure or real estate, the big asset managers are creating direct competition to traditional bulge bracket PE names or the usual SWFs like GIC or ADIA. Alternatively, they are chasing co-investment opportunities. Both Blackstone and KKR for example teamed up with CPPIB when Lafarge’s India assets came on the block or more recently to buy Bharti Infratel, India’s largest telecom towers company.
“It’s a complex market but moving in the right direction and is an important long-term destination for our capital. One of the reasons we established an on-the-ground presence with strong local talent was to help us understand and navigate this complexity,” Kim adds.
SLOW YET STEADY
Compared to their US counterparts, the Canadians have been far more conservative in scoping out high growth emerging market opportunities. Its only in the last 3-4 years that they have looked beyond the usual happy hunting grounds of Canadian bonds, global equities (read US and other OECD countries) and hedge funds to adapt a far global and diversified portfolios.
For a country that is 40% reliant on its banks and financial institutions and another 40% on energy, volatile oil prices forced looking beyond the usual safe havens. For example CDPQ which looked to deploying just under $3 billion in India by the end of 2016 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, only 8-9% of their $250 billion assets under management have so far been allocated for emerging markets including India.
In retrospect, this inherent conservatism perhaps saved the Canadian firms from the post Lehman meltdown when most US firms bruised badly. Similarly US PE groups that rushed into India during 2004-08 era too has had a chequered portfolio. Most, including the most sophisticated investors, had burnt while navigating the complexities of the local market and its makers. The Canadians in comparison had no baggage to deal with while convincing their headquarters.
It took Brookfield seven years after setting up its India outpost to break clutter and establish themselves as an owner and operator of high profile, chunky assets and complex businesses. In one of the largest commercial real estate transactions, Brookfield bought out Unitech Corporate Parks Plc. (UCP), a portfolio of six assets including special economic zones and information technology (IT) parks across the National Capital Region in 2014 for around Rs 4700 crore. Thereafter, last August, it took over distressed Gammon Infrastructure’s six road and three power projects for an enterprise valuation of Rs 2000 crore. The Hiranandani portfolio will now help them to break into Mumbai while Reliance is a far larger pan India play.
“People ask us whether we are we a strategic buyer or a PE fund. In fact, we are a strategic that evolved into a private equity fund over a decade ago, and so we actually bring both together,” Rajan had told ET in an earlier interaction.
“It’s unlikely that Brookfield will go for vanilla growth oriented companies. They always look for opportunities with arbitrage of value creation,” quipped an entrepreneur who has worked closely with them recently. “They are financial guys but with a deep understanding of business issues like contracts, operating assets.” For most of them now, the wager is on the macro fundamentals even if the opportunities are specific and micro. “With average global growth at 2%, India’s growth prospects are attractive.
As long term investors, we also recognize India’s potential which rests on its economic fundamentals,” said Anita Marangoly George, Managing Director, South Asia, CDPQ. “India’s attractive labour force – young and growing – is one of its key assets. Progress is being made in India’s governance through several structural reforms including the passage of the GST Bill and the Bankruptcy code, among others. All of these will contribute to strengthening the economic fundamentals of this country.” For patient capital providers growth is increasingly becoming difficult to find around the world and as the world’s 2nd fastest-growing major economy, India offers a runway “that looks exciting” over the next 10-15 years. As a fund manager who did not wish to be identified puts it, ” growth rates are growth rates. They go up and down. What matters more is what’s going on underneath.”
“The global economic balance has been changing fast so a lot of the fund managers felt they too needed to allocate assets accordingly and build global capabilities. Moreover with some of the emerging markets like China and Brazil have slowed down in recent years making India that much more attractive,” argues Vikram Gandhi, founder VSG Capital, a long time advisor to CPPIB. Some feel, Watsa’s billion dollar India specific fund raised after his meeting with Prime Minister Modi in November 2014, months after the change of guard in Raisina Hill, was a watershed. “When Prem went out and raised a fund there was a call to action. It was a new government and there was more urgency than ever before,” argues Watsa’s chief consiliegre in India since 2011, Harsha Raghavan, MD & CEO of Fairbridge Capital.
But even for the 66-year old Watsa, who recently compared Modi with Singapore’s Lee Kuan Yew while championing his efforts to crack down on crony capitalism, financial turnaround of state power distribution companies and pet projects like smart cities and Make in India, the UPA years threw enough opportunities like Thomas Cook, Ikya, Sterling Holidays to sink his teeth into. The Hyderabad born contrarion investor made his India debut back in 2001 picking up a 26% stake in ICICI Lombard, in 2001 through Hamblin Watsa Investment Counsel Fund and waited for a decade to write his next cheque to 9 per cent stake of brokerage firm IIFL in 2011.
“We look for local partners who we can work with for the long-term, whom we can scale up with over multiple cycles and are among the very best at what they do. And in India, we have established some very strong partnerships that we’re confident will help us to realize our investment expectations,” says CPPIB’s Kim.
In December, it agreed to invest $300 million to buy into select mall assets of Atul Ruia-led Phoenix Mills. It already has JVs with Shapoorji Pallonji Group for office spaces, L&T for roads while with Kotak Mahindra Bank where it owns 6% with an option to go upto 10%, it has floated a $525 million stressed asset fund.
To navigate a complex market like India, it pays to have a local partner for critical mass and intelligence. CDPQ too is looking at creating an Rs 5000 crore asset reconstruction platform with home grown Edelweiss Financial Services while Brookfield and SBI look to launch a $1 billion distress debt fund.
Along with Tatas, ICICI Venture and 2 other SWFs from the Middle East, CDPQ has also launched a dedicated $850 million investment vehicle to scoop up troubled and stranded power units across the country.
While Tata Power —- India’s largest integrated power company — will use its technical expertise to operate and resuscitate the troubled units and also handle the operation and maintenance post-acquisition as the asset manager, the financial investors will source deals, organise funds, conduct financial diligence, capital raising and debt refinancing. “Our core areas — property, infrastructure, power and private equity, that is building materials and industrial businesses — happen to be where a lot of the stress is. But the assets themselves are not stressed, but world class.
They just happen to belong to businesses that are stressed,” said Ranjan. But for their long term sustainability, stable policy is critical. “While the regulatory framework has improved significantly, it is key that these regulations remain consistent,” warns CDPQ’s George. “The growth rate in several of the key sectors in India also makes it a highly competitive market. Valuation multiples too in most sectors are higher than those in most developed markets.” For Nayar, private investing is also fraught with unknown risks. “If something goes wrong, these fund managers will get nervous and may start withdrawing funds, which will be a major negative,” he puts in a word of caution. But for the moment it is India that is the bright splash in world of grey. As George’s boss Micheal Sabia, Chief Executive Officer CDPQ, told a room full of attentive investors during his last trip to Mumbai, “India needs investors who focus on fundamental value and deep economic trends. In other words, India needs builders.” And here lies a niggling worry.
Many would say, meaty opportunities are still hard to come by in a market like ours. Much of the Canadian investments is still not flowing into as FDI to back physical assets but is largely flowing through equity markets. “Risk is not appropriately priced yet,” said a senior investment official who did not wished to be quoted. “Show me the opportunities where I can put in a few billions of dollars. Capital is not a problem when you have a trillion dollars in the pension pool, chunky deals are.”
Hopefully the Indo-Canadian corridor will make sure no one would be left complaining.