CPPIB Invests in India's First Green Trust

Swaraj Singh Dhanjal of livemint reports that Piramal Enterprises has signed an agreement with CPPIB to co-sponsor India’s first renewable energy-focused infrastructure investment trust (InvIT):

The proposed InvIT will have an initial targeted corpus of up to $600 million with an option to scale up further, Piramal said in a regulatory filing. CPPIB and Piramal will initially allocate $360 million and $90 million, respectively, to the corpus.

The InvIT would seek to acquire up to 1.5-2 gigawatts (GW) of stable and long-term cash-generating renewable assets, with a firm focus on diversification of clients of both solar and wind assets as well as the customers of the electricity.

“We are pleased to partner with CPPIB on the launch of the first-ever InvIT in India, focused on renewables. The foundation of this partnership is based on a shared ethos and values that leverage CPPIB’s global track record of value creation in the infrastructure space with Piramal Enterprises’ long-term strategy and goodwill in India," said Ajay Piramal, chairman, Piramal Group.

“We are enthusiastic about the opportunity as it is truly scalable and continue to remain committed to creating value for our shareholders," he added.

Both Piramal Enterprises and CPPIB will act as co-sponsors of the proposed InvIT and hold up to 75% of the units with CPPIB holding up to 60% and Piramal holding 15%.

The two co-sponsors will seek to raise capital from other investors for the remaining 25%.

“The renewable energy sector is at an inflection point and is witnessing significant consolidation, the pace of which is likely to increase in the near future. We believe that the timing is therefore opportune for aggregating assets in this sector given that the existing players are willing sellers in light of a constrained capital market environment—both debt and equity," said Piramal.

This is the first truly neutral “white-label" InvIT—led by a fiduciary and supported by patient capital and strong corporate governance—that we believe, can serve as a strong catalyst for the sector as a whole, he added.

The latest tie-up with CPPIB adds to Piramal’s other ventures with marquee long-term investors.

In February 2017, Piramal entered into a strategic partnership with Ivanhoé Cambridge, a real estate subsidiary of Caisse de dépôt et placement du Québec, Canada’s second-largest pension fund, to provide long-term equity capital to top residential developers across five Indian cities.

In 2016, the company set up a distressed asset investment platform, along with private equity firm Bain Capital Credit, in order to invest $1 billion in stressed assets.

And, in 2014, Piramal tied up with Dutch pension fund APG Asset Management to invest $1 billion in Indian infrastructure companies through structured debt.

Ankit Doshi of VCCircle notes there is quite a bit of interest in India's infrastructure investment trusts (InvIT) from other Canadian pensions, sovereign wealth funds and top private equity funds:

CPPIB had invested in the InvIT of L&T Infrastructure Development Projects Ltd (L&T IDPL). Another Canada pension fund, OMERS, bought 22.4% interest in L&T IDPL for Rs 870 crore.

Last week, global alternative assets manager KKR said it would acquire a controlling stake in Sterlite Investment Managers Ltd and purchase a sizeable portion of units in India Grid Trust, an InvIT that holds several power transmission projects. Singapore sovereign wealth fund GIC is also participating in the multi-layered transaction.

The rising interest of private equity firms and strategic players in InvITs is not a suprise. In fact, despite the early hiccups, many InvIT sponsors and operators are either actively looking to raise capital or acquire assets to increase their asset base.

This is after the capital markets regulator Securities and Exchange Board of India (SEBI) approved increasing the leverage limit for InvITs and real estate investments trusts (REITs) to 70% of assets from 49% to boost newer InvITs to float their offerings and help the current ones raise more capital. The decision was part of the board meeting held in March this year.

Last December, the markets regulator sought to streamline the process of listing REITs and InvITs by allowing alternative investment funds (AIFs) and affiliates of merchant bankers to participate in the anchor allotment of such public offerings.

VCCircle had reported in January that India Grid Trust was looking to drive growth inorganically by acquiring assets.

India Grid Trust is among the three InvITs that have floated initial public offering since SEBI notified regulations in 2016 for setting up such trusts.

IRB Infrastructure Ltd was the first company to float an InvIT's IPO in May 2017, receiving high demand. However, IRB’s InvIT made a muted stock market debut with its units listing only at a slight premium to the fund’s initial offering price.

That rubbed off on India Grid Trust InvIT whose public offering coincided with IRB InvIT’s listing. Sterlite Power’s InvIT fared even worse, with the IPO struggling to find investors.

Thereafter, players such as L&T floated a private placement for their InvIT offerings while Anil Ambani’s Reliance Group and Gautam Adani’s Adani Enterprises called off their plans to float an InvIT.

Livemint also states that Piramal reported consolidated revenue of over $1.9 billion for 2018-19, with nearly 40% of it generated from outside India.

Piramal's founder Ajay Piramal is a billionaire, a well-respected businessman and an excellent partner to have in India. He sees more consolidation in the renewable energy sector and believes this is the first of many renewable-energy focused infrastructure investment trusts (InvIT).

Recall last week, I discussed how Canadian funds including BCI, CPPIB and OMERS are in talks with Reliance Industries to invest in two infrastructure investment trusts set up to own Reliance Jio’s tower and fiber assets.

That deal, when completed, will generate steady cash-flows that should yield a 12-13% internal rate of return (IRR), excluding leverage.

We don't know the expected IRR of the proposed InvIT with Piramal but I suspect it's in the same vicinity on an unlevered basis, even more once you factor in leverage.

Interestingly, the InvIT will have an initial corpus of $600 million with an option to increase it further. CPPIB will contribute $360 million to this corpus while Piramal will put in $90 million and the trust will seek to raise the remaining amount from other investors.

Given CPPIB's extensive network, I expect other large Canadian pensions and global sovereign wealth funds will be asked to invest in the trust.

The key here is this is a scalable infrastructure investment trust in India generating steady long-term cash flows. The fact that it's in the renewable energy sector is an added bonus because it allows CPPIB to commit to its responsible investment principles.

The fact that CPPIB is taking part in the first ever renewable-energy infrastructure investment trust in India isn't to be taken for granted, after all, CPPIB was the first pension in the world to issue a green bond.

And CPPIB isn't the only Canadian pension looking at India's renewable energy sector. Last October, the Caisse de dépôt et placement du Québec (CDPQ) increased its investment in Indian solar power company Azure Power Global by 40 per cent.

In September 2018, the Caisse agreed to acquire a 40 percent stake in CLP India Private Ltd, an Indian power generation affiliate of Hong Kong-based CLP Holdings Ltd:

The Caisse agreed to pay 26.4 billion rupees ($476 million) in cash for the stake.

CLP will hold the remaining interest.

The deal will allow CLP India to expand its investments in low-carbon growth areas in India, CLP said. These areas include renewable energy as well as non-generation opportunities in transmission, distribution and other customer-focused businesses.

These are significant sums being poured into India to expand renewable energy projects.

The key in India is to find the right partners to work with to build solid long-term relationships and both the Caisse, CPPIB, and other large Canadian pensions have done so.

Below, Ajay Piramal, Chairman of Piramal Enterprises and Shriram Group speaks to CNBC-TV18's Nisha Poddar about the global trade war, the road ahead for the Piramal Group & acquisitions in the pharma sector (August 2018).

I also embedded a speech Mr. Piramal gave while accepting an award during the IAA Leadership Awards on 27th July 2018 at St. Regis Hotel, Lower Parel, Mumbai. Great speech, take the time to listen to how he confronted and overcame personal challenges to create a great conglomerate.