Global pension funds warm up to new sectors in India

Logistics, warehousing and clean energy are some of the new sectors that are attracting interest of cash-rich pension funds

July 4, 2018

The online shopping boom sparked by the growing e-commerce sector is inducing global pension funds to make a beeline for India’s over US$110 billion logistics and warehousing sectors which did not look exciting earlier

International pension funds are also showing equal interest in investing in clean energy assets, with opportunities boosted by Government of India’s target of installing 175 GW of renewable energy capacity by 2022

In April this year, PM Narendra Modi, during his visit to Norway, invited the Norwegian State Pension Fund Global to invest in new sectors in India on the strength of the complementary economies of the two countries

Growing investments into logistics fit in with huge infrastructure projects such as the Dedicated Freight Corridor and the Delhi-Mumbai Industrial Corridor which the Indian Government has launched as platforms to strengthen the economy

The online shopping boom sparked by the growing e-commerce sector is inducing global pension funds to make a beeline for India’s over US$110 billion logistics and warehousing sectors which did not look exciting earlier. A case in point is the recent involvement of the Canadian pension fund manager, Canada Pension Plan Investment Board (CPPIB), and IndoSpace, promoted by private equity firm, Everstone and US-based Realterm. They have entered into a deal involving an investment of over US$1.3 billion, most of which is coming from CPPIB.

This apart, the pension funds are also showing equal interest in investing in clean energy assets, with opportunities boosted by Government of India’s target of installing 175 GW of renewable energy capacity by 2022. This is in addition to the hitherto ignored “distressed assets” segment where the ”buy low but sell higher” concept had seemed to appear advantageous to them.

Logistics tops the list

The most exciting development, however, is being witnessed in the warehousing and logistics sector, following introduction of the Goods and Services Tax (GST). This, coupled with the Government’s ‘Make in India’ programme, has given a major push to investments in this area. Meanwhile, the delays encountered on inter-state borders within India has given way to a smooth flow of goods traffic. In the process, the travel time for movement of goods has been reduced from five days to about three in most cases, leading to major savings in cost and time.

No wonder then that the Dutch pension fund manager APG Asset Management, as well as American buyout group, Warburg Pincus, began scouting to invest in India’s warehouses, the objective being to tap the growing demand for modern and efficient storage space from thriving online retailers. According to estimates, the booming e-commerce market in India is expected to grow to US$220 billion by 2025. Consequently, the supply of modern warehouses is expected to double by 2020 to over 200 million sq feet.

It is estimated that global pension funds, along with sovereign wealth funds, could invest about US$50 billion in India’s infrastructure over the next five years. Predictably, the trend has been encouraged by a sea change witnessed in policies including the grant of infrastructure status to the sector, emphasis on ‘Make in India’ and the introduction of GST. All of this augured well for foreign investors.

This explains the involvement of pension fund managers such as APG and CPPIB, in addition to Canada’s Caisse de depot et placement du Qubec (CDPQ), among others. The latter, for example, was encouraged by the Indian Government’s plans for reforms as it agreed, in anticipation as it were, to invest over US$155 million in TVS Logistics Services Ltd in end 2016, itself.

The National Investment and Infrastructure Fund (NIFF) has been set up by the Government in partnership with domestic and international investors with the mandate to raise long term patient capital for infrastructure development

 

Growing infrastructure

CPPIB has been investing in India for some years now and has already committed funds to L&T Infrastructure Development Projects and Bharti Infratel. Together with the Shapoorji Pallonji Group, it is also eyeing office buildings in major Indian cities. In November, 2015, another Canadian pension fund, PSP Investments, took a stake in Reliance Infra Power Distribution and followed it up a year later with investments in four Indian toll roads totalling 710 km. It is said to be looking out for more.

These investments fit in with huge infrastructure projects such as the Dedicated Freight Corridor and the Delhi-Mumbai Industrial Corridor which the Indian Government is working on. These would provide seamless connectivity to remote parts of the country, making availability of warehouses imperative. The projects involve construction of almost 9,500 km of railroads across the country.

Meanwhile, the National Investment and Infrastructure Fund (NIFF), which has been set up by the Government of India in partnership with domestic and international investors such as sovereign wealth funds, insurance and pension funds and endowments, has been mandated to raise long term patient capital for infrastructure development. NIIF has identified projects projects covering connectivity to power transmission for investments. It is reportedly talking to Qatar Investment Authority, Abu Dhabi Investment Authority and Russia’s RUSNANO for future investments.

Clean energy invites more interest

India’s determination to push for clean power, post the Paris Agreement of the United Nations Framework Convention on Climate Change (UNFCCC), saw the government embark on a major programme to promote renewable energy including solar and wind. Out of the 175 GW of renewable energy target, solar alone would account for 100 GW. At present, the installed solar generation capacity hovers around 20 GW.

This has evoked particular interest from the Canadian and Dutch pension funds, going by their stated plans. For example, the Ontario Teachers’ Pension Plan, CDPQ, CPPIB and APG find solar energy more meaningful for investment. In fact, CDPQ, which has US$199 billion in net assets, has planned to invest in India’s solar sector with Azure Power, a New York-listed firm, for generating about 1 GW solar capacity.

In April this year, Prime Minister Narendra Modi, during his state visit to Norway, invited the Norwegian State Pension Fund Global to invest in new sectors in India on the strength of the complementary economies of the two countries. Among the areas identified were energy, clean transport and environmental technologies. In 2017, the pension fund invested US$11.7 billion globally, an increase of 2.5 billion from 2016.