'For long-term investors, India presents a great opportunity': CPP Investments CEO John Graham on betting big on India’s growth

Q: We have seen a quarter century of strong growth from CPP. If we look at the next 25 years, how is the fund reorganising itself, managing scale, and diversifying across asset classes, sectors, and geographies?

A: The legislation that created CPP Investments dates back to 1997, and the first cheque of $12 million came in 1999. Today, we manage C$632 billion. Of that, over C$400 billion is investment income, so about two-thirds of the total fund value. I would describe the organisation’s journey as evolving from crawling to walking and then running. We started by crawling as a passive investor, then built capabilities to invest actively, though very selectively, in certain geographies and asset classes. I have been with the organisation for 16 years, and through that time, we have developed capabilities in major asset classes including real estate, private equity, public equity, credit, and hedge funds. We have also built a global footprint with seven offices outside of Toronto. Today, I would consider CPP Investments one of the more sophisticated and active institutional investors in the world.

Looking forward to the next five to 10 years, much of our history has been focussed on building capabilities, relationships, and infrastructure to support our investments. We now have the asset class exposure we want and will focus on executing our strategy. In terms of geography, we invest in both developed and emerging markets, but we are quite selective within emerging markets. We really try to be quite surgical about which emerging markets we dedicate effort into. We aim to focus on fast-growing markets with scale, with India being a key market. As we look to the future, we are transitioning from a build phase to an optimisation and execution phase, focussing on implementing the strategy we have developed.

Q: Could you elaborate on the ‘surgical approach’ you mentioned, especially in relation to targeting fast-growing markets?

A: Scale is important. We have exposure to a lot of countries through our passive portfolio. But when it comes to actively investing in infrastructure, credit, private and public equities, we adopt a surgical approach. We focus on larger countries around the world, such as China, India, Mexico, Brazil, Chile, and Colombia. We need scale.

Q: Which areas specifically do you expect to expand in the coming years?

A: We are currently in optimisation mode. We have a relatively large private equity portfolio, a significant real assets portfolio, credit, public equities, and some hedge funds. We have largely met our target allocations for each asset class. The actual changes in these allocations over the next few years may vary by 1% or 2%, but overall, the adjustments will be minor. I expect any changes to be relatively small, more around the edges rather than dramatic shifts.

Q: Many countries are increasingly adopting protectionist policies, shifting from multilateral to bilateral and regional agreements. We also face new challenges, such as the resurgence of pandemics, disruptions caused by new-age digital businesses, and transformational changes like Generative Artificial Intelligence (Gen AI) and climate change. How do you plan to navigate them?

A: There is a lot to address, starting with geopolitics. Investors worldwide are now considering how to integrate geopolitical factors into their asset allocation and investment processes. Looking back over the past 15 years, the market has been relatively favourable for global investors, with low interest rates, low inflation, and benign geopolitical conditions. Today, however, we face higher and somewhat sticky inflation, elevated interest rates, and significant geopolitical considerations. As far as trade is concerned, while we are investors rather than multinational sellers, geopolitical factors remain crucial. The historical rules-based order is less applicable now than it was in the past. This raises questions about how investors should look at their asset allocation and portfolio construction to account for these risks. Having built a global footprint over the past 15 years, we have developed a distinctive capability in this area. We have an internal team dedicated to incorporating geopolitical considerations into our investment process. We have screened almost every investment through a geopolitical lens in the past five to 10 years. We also engage with external risk consultants to gain additional perspectives. As a result, every position in our portfolio is screened through a geopolitics lens. Moving forward, we expect this approach to continue. Although being a global investor has become more labour-intensive and time-consuming, we are committed to maintaining our global investment strategy.

Q: Inflation has moderated in the US, Europe, and some other big markets since the peak of 2022 and 2023. But there hasn’t been softening in interest rates. What do some of the big markets look like in terms of the macro outlook?

A: Looking at global trends over the past few years, we are still dealing with the Covid-19 hangover, including the substantial policy responses that followed. We saw extraordinary monetary stimulus with interest rates being lowered significantly, as well as considerable fiscal support, with governments injecting money to sustain pre-Covid levels. Much of that money remains in bank accounts and corporate balance sheets. As a result, consumer demand remains strong, and many corporations that received support from fiscal budgets have substantial cash reserves now. Fiscal spending also continues to be significant in the US. This ongoing demand has strained the market’s capacity to supply, contributing to persistent inflation.

When it comes to interest rates, I don’t think you’re going to see interest rates going back to where they were pre-Covid. The period before Covid-19 should not be seen as the norm, as it took over a decade for the economy to recover from the global financial crisis and reach the desired employment levels. The current situation is different, with the US operating close to full capacity and geopolitical risks heightening national security concerns. Companies are increasingly considering near-shoring and on-shoring to mitigate risks, which could be inflationary. You have a tremendous demand for capital as a result of the energy transition and the expansion required for data centres to support Gen AI. This significant capital demand, coupled with the near-term energy transition requirements, is likely to be inflationary in the near term.

Q: Your big investments are in the US. How much weight do you give to the political landscape given the likely return of [former President Donald Trump]?

A: I think with respect to politics, we have been investors in the US for 25 years, pretty much since we started. One of our fundamental investment beliefs is that we’re a long-term investor. And we expect to invest through different administrations. And another thing I think is important as a long-term investor is not to have your investment thesis or investment approach completely predicated or dependent on the policies of a given government. They can be constructive. I think, like everybody else, we will watch what happens in November and continue to invest.

Q: Given the 6% exposure you have to the Chinese economy, how do you assess the current economic situation on the mainland?

A: I think with respect to China, we continue to think it’s important to maintain the capabilities and the relationships to invest in the big economies around the world. So, we continue to have what we think is a prudent exposure and investment in China. Our appetite is probably not the same as it was a few years ago. The opportunity set is probably not what we thought it was going to be a few years ago. But we continue to think it’s an important market for the fund and one that we continue to look at and continue to stay invested in.

Q: The government has a vision of making India a developed nation (Viksit Bharat) by 2047. Sitting in Canada, how do you see the Indian economy evolving?

A: There is a lot of enthusiasm in the market. As I look at our portfolio, which is currently about C$28 billion invested in India, one key aspect to highlight is the diversification within that portfolio. It includes investments in energy, infrastructure, real estate, private equity, public equity, credit, and fixed income. We have got everything. This diversification reflects the breadth of the Indian economy. With India’s growth rate contributing significantly to global growth, we anticipate ongoing opportunities to expand our diversified portfolio, particularly in infrastructure and both public and private assets. India is on a tremendous growth trajectory and is building out infrastructure and physical assets. For long-term, patient investors like us, this presents a great opportunity. Overall, we are very enthusiastic about continuing our investment in India. And things we’ll continue to look for are continuing efforts to build up the capital markets, building deeper capital markets, and increased liquidity in the market, all of which are positive signs for the future trajectory of the market.

Q: Are you primarily interested in clean and green technologies in the energy sector?

A: Our approach to investing in energy is that we believe the world will transition to net zero over time. However, we also believe it’s important to invest across the entire energy spectrum. As an investor, we continue to invest in oil and gas while also maintaining a large and growing portfolio in renewables. Our investments in conventional energy focus on capital expenditure and operational expenditure to support these producers in transitioning to greener production methods.

Many global investors have left the sector, which leaves companies needing capital for transition in a difficult position. We see a significant opportunity in stepping into the market to help these companies transition to greener sources of energy production, particularly because many are currently undervalued. By aligning with management on energy transition goals, we aim to support their shift to greener practices while benefiting from potential value increases. We committed a few years ago to double our green and transition assets by 2030, from C$65 billion to C$130 billion, and we have made good progress towards this goal.

Q: You mentioned private credit and the potential for significant opportunities. Are there particular areas where you see potential?

A: Private credit is an area that is expected to grow, and I see it as a significant opportunity. There is considerable discussion about private credit in the media, and I view it as quite symbiotic with the existing banking system, where in some cases private credit is a very natural holder of the asset or the paper. We continue to grow our private credit portfolio modestly and continue to seek opportunities. For example, in the US, we are the majority shareholder of Antares Capital, a US-focussed middle-market lender for private equity-owned companies. We acquired it from GE almost nine years ago, and Antares has proved its resilience through various economic cycles, including the global financial crisis and Covid-19. This history of disciplined credit underwriting and low loss rates underscores the stability and potential of private credit. We are interested in learning more about how the market is evolving here in India.

Q: Over the past 10 years, your returns have averaged around 9.2% per annum. Do you expect challenges in maintaining this rate?

A: With returns, there are multiple components to consider. Over the past 10 to 15 years, everybody benefited from the favourable environment, with tailwinds from constructive monetary policy, low rates, benign geopolitics, and supportive fiscal globalisation. At CPP Investments, our goal is not just to maximise returns but to achieve the best risk-adjusted returns. A 9.2% rate of return on our portfolio size is great, and we will do everything we can to continue to drive returns like that. However, achieving these returns will be harder going forward. Returns are a combination of the risk-free rate plus a risk premium. For example, in private equity, driving returns increasingly depends on operational performance rather than financial engineering, which it used to be earlier. One of the pluses is that with interest rates at 4-4.5%, we are halfway there in government bonds. As an institutional investor, having rates where they are, it’s not the worst thing in the world.

Q: The Indian market is quite fragmented, with only a few large players in the infrastructure space. Does this make it challenging to find substantial investment opportunities?

A: You have to be patient. Our infrastructure portfolio in India certainly has a fair amount of road investments through InvITs (infrastructure investment trusts). While any specific asset may not be that large, when you start to collect 15, 16, and 17 roads, you get to scale. Having the vehicles, having the platforms where you can actually aggregate assets, is a way to get scale. In renewables, although each project might be of modest size, building a portfolio of many projects leads to substantial scale. So, as we think about investing in infrastructure, we often do it through platforms where they’re aggregating or developing the assets. And over time, you get scale. You know that you won’t have scale, maybe out of the gate, but over time, you get to scale and you build it.

@anandadhikari