The Canada Pension Plan Investment Board has agreed to invest $332-million (U.S.) in a subsidiary of India's largest engineering and construction company, saying it sees India's infrastructure sector as a long-term growth market.
CPPIB said Monday it will make its first investment in India's infrastructure sector with an initial $166-million investment in L&T Infrastructure Development Projects Ltd., a subsidiary of engineering firm Larsen & Toubro Ltd. that develops highways and other major infrastructure assets. CPPIB has committed to a second investment of $166-million in 12 months.
The pension fund manager, which invests $219-billion in assets for the Canada Pension Plan, has increasingly been making investments in emerging markets, which it says have higher long-term growth rates than developed markets in North America and Europe. It favours investments that can become a platform for expansion and further growth in key long-term growth sectors such as infrastructure and real estate.
André Bourbonnais, CPPIB's senior vice-president of private investments, said the pension fund expects its new investment to become a long-term infrastructure platform in India.
"There's tremendous need – you just need to go there once to realize how much need for infrastructure there is," Mr. Bourbonnais said in an interview. "Toll roads are really a core infrastructure asset for us, and a core infrastructure need for India."
Mr. Bourbonnais said the deal gives CPPIB a platform to build more toll roads, and fits well with the fund's long-term growth strategy for India.
"We think there are strong fundamentals, a growth middle class, good demography, rapid urbanization. For all those reasons, we think it's a good investment."
Larsen & Toubro is India's largest engineering firm, and its infrastructure division owns the largest group of toll-road concessions in India, including 19 existing toll roads spanning 2,200 kilometres between some of the country's biggest cities. The company also owns a power transmission line project and a subway project in Hyderabad.
L&T Infrastructure, set up 13 years ago, describes itself as a pioneer in India of public-private partnerships, where projects are developed in partnership between governments and private sector companies. The company's web site says it handles a portfolio of infrastructure assets worth $7.5-billion in 23 projects across all sectors.
For L&T, the deal provides a partner willing to allocate capital to major long-term projects that can take years to develop, which can tie up significant financial resources if funded solely by the parent company. R. Shankar Raman, chief financial officer of L&T, said CPPIB's investment will give the company money to grow.
"With its long-term view, CPPIB is an ideal partner for L&T and will provide growth capital to L&T IDPL to expand its infrastructure development business," he said in a statement.
The investment will be in the form of preferred shares that will be converted in 2018 into equity shares, giving CPPIB a minority stake in the infrastructure company.
Mr. Bourbonnais said CPPIB preferred a two-step structure to give it time to assess the deal and agree between the partners on a value for converting the preferred shares into equity.
"We just want to make sure we've structured it in an appropriate way so that both parties will essentially come to the same conclusion as to the value of the company," he said. "And we have a mechanism if we don't agree in the future as to what the value is."