Thread by @Funter21510910

What explains Canadian Pension Funds' risky bets in India?

Pension Funds are custodians of retrial money of public and hence are expected to be conservative. Canadian Pension Funds, however, are different. Thread 1/11

These Pension Funds are not shy of picking up assets in the troubled sectors. Real Estate and Infrastructure assets are key bets of these funds in India. They have invested in roads, airports, solar energy, commercial real-estate and other perceptibly riskier assets. 2/11

As per Financial Post, the Canadian Pension Funds '...rank as five of the top 30 global real estate investors, seven of the world’s biggest international infrastructure investors, and were at the table during six of the top 100 leveraged buyouts in corporate history. ' 3/11

As per a report, 35% of the assets of top 10 Canadian pension funds are invested in alternative asset classes such as infrastructure, private equity and real estate. Not hesitant to take geographical risks, these funds have almost 80% of their assets in foreign countries. 4/11

Some pension funds even employ risky financial structures e.g. leverage strategy of Hedge Funds.

The question therefore arises - What led to this high risk appetite of Canadian Pension Funds? I have attempted to list out a few reasons here. 5/11

A) The low interest rate regime in Canada over the last many years made it difficult for the pension funds to rely on traditionally safe investments. To match the return mandate, these funds sought higher yields through investments in risky assets. 6/11

B) Many pension plan sponsors in Canada are using high discount rates to calculate the present value of projected future benefits because it keeps contributions from employers and workers low. High discount rates nudges pension funds to generate more return. 7/11

C) There are very few investment restrictions on Pension Fund managers which enables them to take riskier bets. In contrast the Indian Pension Investments are heavily regulated. Not only the asset class but also the portfolio weightages are pre-decided. 8/11

D) The large pension funds receive huge contributions on regular basis. This liquidity enables these funds to allocate assets to less liquid, higher return assets without worrying about unexpected cash outflows. 9/11

E) Canada has never faced a financial crisis and therefore has had a relatively relaxed regulatory regime which enables these funds to experiment with asset classes across geographies. 10/11

The investment model of Canadian Pension Funds may be risky but it the right recipe that the cash starved Indian Infrastructure Sectors require. These funds could end up being the biggest land lords in India in days to come. 11/11

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