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Why Canadian private equity firms are shopping in India

Amandeep Sandhu, chair of the India practice group at law firm McMillan, and Ravipal Bains, an associate, look at the reasons the sub-continent is so attractive.

Each winter, a number of Canadians return to India to catch up with their friends and families, to shop, and to celebrate the passing of another year. This trend, known as the NRI – Non-Resident Indian – season in India, is a boon for the local business communities. Now, it seems Canadian private equity investors want to join in the fun, too.

In 2016 Canadian investors have made several major investments in India. Taking the lead is Brookfield Asset Management which has invested close to $1 billion in Indian property assets. Businessman Prem Watsa’s Fairfax Holdings is also active and has invested in Bangalore International Airport amongst others. Keen not to be left behind, on the institutional side CDPQ has invested in TVS Logistics and plans to invest close to $600 million over four years in India. Canada Pension Plan Investment Board is also in talks (with KKR) to acquire a significant stake (approximately $4 billion) in telecom tower provider Bharti Infratel. Reports indicate that CPPIB’s plan is to increase its Indian investments to $6 billion by 2022.

There are a few reasons that explain this trend. For one, Indian firms face reduced access to capital as the country’s central bank, the Reserve Bank of India (RBI), has engaged in a big push to get banks to address their non-performing assets. Second, as a consequence of this belt-tightening, a number of highly leveraged Indian firms are now disposing of their assets in fire sales, especially in classes like real estate and infrastructure. These have traditionally been amongst the strengths of Canadian private equity firms. Third, combined with the recent downturn in oil sands and generally fewer opportunities for venture capital in the country, Canadian firms are looking abroad for investment options. Fourth, search for higher yields inevitably leads investors to emerging markets; however, countries like Brazil, Russia, and South Africa are witnessing economic and political turmoil. This narrows investment options and opens the door for macroeconomically stable economies like India to lure capital.

The forecast for these investments is generally positive. India’s GDP rose 7.1 percent in the second quarter of 2016 and is amongst the fastest-growing global economies. The new government has recently enacted a significant tax reform and is in the process of overhauling the bankruptcy code. While some investments are motivated by distressed asset sales, there have also been a number of successful PE exits. Bain and Company, a consulting firm, states that the “[private equity] exit market in India performed exceedingly well in 2015.” Successful exits bode well for the future and boost investor confidence.

However, there remains some scepticism over whether this trend is a purple patch, or heralds a new era. For one, if the RBI has its way the stressed capital situation will not last forever. Eventually, the Indian credit market will improve but in the short- to medium-term there will be opportunities. Still, the country needs more systemic regulatory reforms to realise its full economic potential. In its 2016 Doing Business report, the World Bank ranked India in 130th spot for ease of doing business, up just one place from 2015.

Overall, it is hard to not see this as anything but a positive sign for the Canada-India business relationship, which has traditionally punched below its weight. Odds are these investments will increase further. Murmurings coming out of Ottawa and Delhi indicate that both governments are keen to finalise the Bilateral Investment Treaty and Comprehensive Economic Partnership Agreement. Putting pen to paper on both these deals will provide a further boost to bilateral trade and investment.