The Last Word: The opportunity in India

Piramal Enterprises, an Indian multinational company with roots in glass textiles going back to the late 1980s, this year pitched a compelling case to Canada Pension Plan Investment Board, a global top ten pension fund by assets, and the Dutch-based pension fund manager APG Asset Management. Jayesh Desai, co-head of structured investments group, talks to Anna Devine about how the tie-ups came about and progress so far.

Q. How did the tie-ups with CPPIB and APG come to fruition?
Our approach in both cases was very similar. We told them: ‘We don’t want to put your investment into a blind pool of money.’ We will basically invest the allocation 50:50 alongside our own capital and look after the investment. It shows we have sufficient skin in the game. There is a sharing of risk on an equitable basis. What was interesting is that it resonated very well with both of these investors.

Q. What is your overall strategy?
In 2010, we sold our business, which was the third largest healthcare business in India, for $3.8 billion. Essentially now we are in the process of morphing into a financial services company using the proceeds from that sale as our balance sheet. [As well as being substantially invested in a non-banking financial company which lends to commercial vehicles], we manage several real estate funds [totalling] close to $2 billion. This includes our arrangement with CPPIB in which the two parties have committed $500 million towards mezzanine investments in residential real estate. The third arm is the structured finance division [which] makes mezz investments in the infrastructure sector. That is what the APG deal [announced in July] will invest in with $1 billion over the next three to four years. [Piramal and APG have each made an initial commitment of $375 million to the strategic alliance.]

Q. What do you think is the best opportunity in India right now?
Infrastructure clearly is the largest opportunity set that there is in India. The government has estimated that infrastructure needs a total investment of around $1 trillion over the next five years. The private sector needs to contribute around 60 percent ($600 billion) of that. The equity requirement will be very large and from a risk/return point of view, we want to play in the mezz space.

Q. How does the deal pipeline look?
We have around five transactions in the infrastructure space under due diligence and [hope to] close two or three in the next four months. In the last year, we have invested $80 million in a renewable energy company and $100 million in a roads company. In real estate, we have been managing funds since 2006. The CPPIB transaction will invest largely in residential real estate. We will look at commercial real estate [in due course]. At the moment we have $25 to $30 million invested since signing with [CPPIB] in February and we have a two to three year investment timeframe on [deploying the full $500 million].

Q. What kind of returns are you targeting?
In infrastructure mezz we are targeting high teens, anywhere between 18 and 20 percent. In real estate, we are looking at low to mid 20s.

Q. What are the future plans for the firm?
Our objective is to build a financial services company. We have sufficient balance sheet capability and we will look at other sectors and verticals in time. One of the bigger opportunities on the horizon we feel is distressed assets. We think that entire space will be an interesting opportunity in time. The total distressed assets in the Indian banking system (including non-performing assets and restructured assets) are estimated at $10 billion by the Reserve Bank of India and we believe that there is an immediate opportunity in this regard.

Q. Given historically India has been seen as a challenging place for overseas investors what do you think of current prospects? Do you think it is getting easier?
Yes but we’ll continue to see difficulties. In that sense I think mezzanine works well. Most of our investments will be secured and we will always look to see that we have sufficient equity behind us. The real estate and infrastructure sectors are heavily regulated but we are finally seeing government action. The guidelines for investing in debt have been strongly liberalised in the last two to three years.

Jayesh Desai is the co-head of structured investments group at Piramal Enterprises in Mumbai, India. He joined the company in April 2012 as head of the group, which scouts for opportunistic deals in the space of infrastructure.