When Canada Pension Plan Investment Board (CPPIB) and Caisse de depot et placement du Quebec (CDPQ) teamed up with Oman's State General Reserve Fund (SGRF) to invest Rs 2,000 crore in engineering major Larsen & Toubro's (L&T) infrastructure development arm L&T Infrastructure Development Projects Limited (L&T IDPL) in the last quarter of FY14, it was the first foreign pension funds directly invested in Indian companies.
While there have been instances of sovereign funds taking the direct route for their investments in India, pension funds or university endowment funds have always preferred becoming limited partners (LPs) in private equity (PE) funds to make investments in India.
Soon after the move by CPPIB and CDPQ, another Canadian pension fund, PSP Investments, partnered with IDFC PE and Abu Dhabi's National Energy Company (Taqa) to buy out two hydel power plants operated by Jaiprakash Power Ventures. PSP Investments put in Rs 1,560 crore for a 39 per cent stake in the two hydel power plants.
"Long-terms funds such as pension plans and university endowments still have a majority of their investments in OECD (Organisation for Economic Co-operation and Development) countries. But they are starting to reallocate assets to newer markets," says Vikram Gandhi, founder of Delhi-based VSG Capital Advisors, who is also a senior advisor to CPPIB for its investments in India.
OECD is an international economic organisation of 34 countries founded in 1961 to stimulate economic world trade. These are largely developed markets such as the US and Europe, where the pace of economic growth is slowing down.
"So the trend is not that they are saying 'no' to investing through PE funds. The trend is that they are looking at direct investment in India and such other markets as an additional avenue to get more exposure to emerging markets," says Gandhi.
According to Venture Intelligence data, PE firms invested $2,273 million across 89 deals in the quarter ended March 2013. This is nearly twice that was invested in the corresponding period of the previous year with $1,179 million in 103 transactions. While this clearly shows a revival in PE investments, it is notable that the largest deals were those of L&T IDPL and Jaiprakash Power Ventures. This clearly shows the appetite of LPs such as pension funds.
"It is possibly for the first time that LPs sitting on the sidelines are getting opportunistic with such large deals to take advantage of the rupee's current valuation," says Sridhar Venkiteswaran, executive director at Avalon Consulting, a Mumbai-based strategic consulting firm. Venkiteswaran adds that the rupee cannot be the sole reason for such PE investments, which are primarily based on fundamentals. These deals have been in talks for a while and the right timing could be of help.
The value of the rupee has come down from an average of 44.14 against the dollar in the last quarter of 2006-07 to 61.79 in the corresponding quarter of 2013-14. This is a whopping 40 per cent depreciation. PE players do not usually hedge their investments against currency fluctuations. So, this literally means that their return would be down by the same amount. However, the Street is now expecting an appreciation in the rupee's value as the new government is expected to bring more foreign direct investments. And this could be the right time to make direct investments as there would be obvious gains with the rupee's appreciation.