CPPIB will invest $166 million (about Rs 1,000 crore) in engineering firm Larsen & Toubro's subsidiary L&T Infrastructure Development Projects, India's largest toll-road operator.
A second tranche of a similar amount will follow in 12 months. The investment will be in the form of preferred shares, to be converted into equity shares by 2018 at a mutually determined valuation.
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Andre Bourbonnais (below left), CPPIB's senior vice-president for private investments spoke to Indira Kannan in Toronto about why CPPIB liked India and toll roads. Excerpts:
You've said you have a mechanism to deal with any disagreements on the value for converting your preferred shares to equity. Please explain.
It (L&T Infrastructure Development Projects) is our first major investment in infrastructure, so we wanted to structure it with various milestones attached to it and opportunities for one or both parties to determine if the partnership was not working as well as we expected or there was a disagreement on the valuation for the conversion; there's a mechanism to provide for that.
We see a very long-term potential for both this asset and our presence in India. Nobody should read into the fact that this is a structured investment, that we're not committed to India.
CPPIB has stepped up its investments in India in the past few months. Is this because of any changes that you see in the Indian investment climate?
No, we've been looking at India for a long time and we are long-term investors, so we don't look at any particular timeframe as a snapshot of when we should invest. We feel very good about India, the demographics, a growing middle class and that infrastructure is going to be a focus of the new government, and also the fact that coincidentally, with all of our discussions, a new government, a majority government, was elected and that will provide stability, at least for the medium term.
What do you see as the main challenges to investing in India?
Taxation is a growing concern across the world, across our jurisdictions, and that's not specific to India; generally, taxation and regulatory issues are the two main concerns.
What other asset classes are you looking at in India?
I'm responsible for private equity, both the funds and the direct infrastructure in private debt and we are trying to be active in all of those sectors from a private investment point of view.
The partnership with L&T was our first infrastructure asset. On the private equity side, we have one fund investment and are looking at a number of other potential fund investments.
And, we have two direct investments alongside some of our private equity partners, in Aricent and in Hexaware.
On the private debt front, we are very active in terms of trying to source transactions in India. We think the Indian market for private credit opportunities has huge potential and we have a team in Hong Kong that is focused on essentially Asia and India. I've spent I would say a disproportionate amount of time in India recently to source those transactions.
Why did you choose toll roads for your first infrastructure investment in India?
It's an asset class that we like, if we just look at the need of the country for transportation assets. We own toll roads around the world - some in Canada, Latin America and in Australia. We understand it well and it's not a very complicated asset to manage. The most complex thing in Canada is you have to remove snow off the highway, which is not a concern in India.
Toll roads are a politically-sensitive issue in India. Do you have any concerns that this could impact your investment?
Every time you invest in long-term infrastructure, the biggest risk is generally regulatory, whether it's going to come from pressure from users or changes in government. But quite frankly, given the needs in India for transportation, we also feel fairly comfortable that on a commercial basis, it's an asset whose very necessity will be recognised.
We haven't seen organised protests. We see it sometimes when you want to create an extension and it's because of a not-in-my-backyard syndrome that people will complain about the trajectory of the roads. But we haven't seen any protests on the fundamental idea of toll roads.
How involved is CPPIB in the companies you invest in?
We will play a role on the board and try to influence, from a strategic point of view, the direction of the asset. But our deal teams are also very involved with the deal teams of our partners to share concerns about management of the asset, bring in best practices, and hopefully create a positive collaboration, not only at a strategic board level but also at the work level.
What do you bring to the table apart from the monetary aspect to your investments?
We invest in a few asset classes within infrastructure - transportation is one of them. Given the fact that we own roads in various jurisdictions, other than the monetary advantages you mentioned, we can bring best practices from our experience around the world.
Many officials in India, including members of Parliament and state Assemblies, are exempt from paying road tolls. Are there similar examples in Canada?
I wasn't aware of that but I can tell you as far as I know, everybody who goes on the 407, which is our electronic toll road here in Canada, has to pay tolls. I don't think there's any exemption for politicians in Canada.
Could you bring that practice to India?
(Laughs) I will leave it to L&T to make those representations.
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