How Ontario Is Counting On Its Pension From India

INDIAN PENSIONERS have had it good for the past couple of years. Imagine a modest shopkeeper in Mumbai, diligently setting aside a portion of his earnings into the National Pension System (NPS). Five years later, he finds his nest egg has grown by an impressive 18-20%, thanks to savvy equity investments. He’s not alone; 7.35 crore Indians are now reaping the benefits of the NPS and Atal Pension Yojana, which are transforming retirement planning in ways previously unimaginable. But it’s not just Indians who are making the most of this growth story — so are the Canadians!

In the Great White North, the pension system is a well-established promise of security. Canada boasts both public and private pension plans, with two primary public ones: the Canada Pension Plan and the Quebec Pension Plan, and five provincial public sector plans. In Ontario, Canada’s most populous province, teacher pensions are managed by the Ontario Teachers’ Pension Plan (OTPP), the country’s largest single-profession pension plan run jointly by the Ontario Teachers’ Federation and the Ontario government.

OTPP serves a vast community of 340,000 members, with the average age of its pensioners at 74. On average, in Ontario, teachers retire at 59, drawing an annual pension of around $50,000. Remarkably, there are 148 OTPP pensioners over the age of 100! But as the number of golden years stretches longer, so does the shadow of inflation. Canada’s Food Price Report forecasts a family of four will spend $16,297 on food in 2024 — a rise of up to $701 from the previous year.

It’s a steep climb that affects not just the living but also the dead.

In Ontario, the number of unclaimed bodies has surged from 242 in 2013 to 1,183 in 2023, with the rising costs of funerals cited in 24% of cases. A Reuters report highlights that the Canada Pension Plan is being fortified to offer a top-up to the death benefit. Yet, as Funeral Services Association of Canada president Jeff Weafer remarks to the news agency: “That is not enough. The reason deceased individuals are going unclaimed by their families is — affordability.”

While there are no easy answers to either mortality or inflation, the job for insurers becomes that much harder.

To ensure that there are enough assets to cover future liabilities, Canadian pension funds, over the years, have ventured into vibrant and burgeoning overseas markets, including India. The overseas foray is also driven by the relatively smaller size of the Canadian market. Additionally, the cessation of real return bonds by the government has heightened the pension funds’ need for alternative inflation-protected investments. Real return bonds were crucial for managing inflation risk and balancing assets and liabilities. According to rating agency ICRA, Canadian retirement funds have, as of March 2023, invested over $55 billion in India, making it the 17th largest foreign direct investment contributor.

OTPP, with net assets of C$ 247.5 billion ($186 billion), is one such insurer making the most of the India growth story.

Deepak Dara, senior managing director and head of India, tells Fortune India, “Ontario Teachers’ is a mature pension fund, which means it’s a defined benefit plan. People are working for a lesser number of years and, and living for longer, and that creates a challenge. If you’re a mature programme, and the ratio is 1.2 to 1 (or every 1.2 people contributing to the pension plan, there is one person drawing a pension), which means you need to go higher up the risk curve to generate returns, but in a way that is sustainable.”

It’s unsurprising to see this narrative showing up in OTPP’s investment portfolio, where the plan’s risk tolerance has steadily declined over the years. While the exposure to equity assets has shrunk, the percentage of inflation-sensitive assets, including infrastructure, has increased. For institutional investors in Canada, infrastructure is treated as a distinct asset class within the allocation to inflation-sensitives since these investments tend to correlate closely with changes in inflation, thus serving as a hedge against the rising cost of future pension benefits. In 2009, OTPP’s asset-mix policy allocated 45% to inflation-sensitive investments, 40% to equities, and 15% to fixed income. Today, the mix has shifted to 37% equities and 39% fixed income, respectively. The higher allocation to fixed income and related funding reflects the growing attractiveness of the asset class in a high interest rate environment.

But what is also drawing pension funds’ interest to India is the significant infrastructure investment — close to $1.5 trillion (₹111 lakh crore) was spent over the past decade across transportation, energy, urban development, and digital infrastructure.

Bruce Crane, who leads OTPP’s investment activities and portfolio management across APAC, explains that the fund’s approach in India is anchored on creating platforms that own infra assets. “As India’s economy grows, so will the usage of these assets, thus enhancing their profitability. Besides, the government’s support for renewable energy and infra creation, along with its openness to foreign capital, makes India an attractive destination,” Crane tells Fortune India.

Notably, OTPP’s investment philosophy is deeply rooted in the Canadian model, where institutional investors adopt a more hands-on approach akin to general partners rather than traditional limited partners. This active management strategy has propelled the funds closer to India in the quest for higher yields. Most prominent Canadian pension funds entered the country in 2015, with the Canada Pension Plan Investment Board emerging as the most aggressive player, ratcheting up investments to $16.5 billion (C$22 billion). Caisse de dépôt et placement du Québec and OTPP have followed closely, establishing themselves as the second and third-largest players in the region (See: The roll call).

With a target to achieve C$300 billion ($225 billion) in net assets by 2030, OTPP is betting big on India. In 2022, the firm set up its base in Mumbai, marking Dara’s return to a country he had left in 2009. It was during his tenure at BCG Canada, which he joined to help set up BCG's private equity practice in Canada, that Dara first worked closely with OTPP on a strategy project related to the pension plan's new venture growth business. This initial engagement not only deepened his understanding of OTPP but also set the stage for his future role. Working closely with Olivia Steedman, the global head of TVG, and Ziad Hindo, the then-CIO of OTPP, further enriched his perspective. Dara’s transition to OTPP in 2020 marked the beginning of a new chapter. “Working for Ziad for two years, I gained valuable experience, worked on a five-year investment strategy that incorporated our approach to addressing climate change, and which spanned multiple asset classes. Part of that work also involved developing strategies for China and India. Then, our Asia head asked me if I would put my money where my mouth is and help build up our presence in India, which I saw as an exciting jurisdiction,” reveals the 39 year old.

Coincidentally, the focus on India has come amid OTPP’s pullback from China. In 2023, the fund pulled the plug on direct private equity investments in China, besides winding up its China-focused equity investment team in Hong Kong. The fund’s current exposure to China is now 2% (C$5 billion/$3.75 billion), underscoring the growing significance of India in its investment portfolio.

Though OTPP opened its India office in 2022, its third in Asia-Pacific after Singapore and Hong Kong, the fund’s journey had begun way back in 2012 when it first invested in Kedaara Capital’s India-dedicated maiden PE fund-raise of $540 million. Four years later, OTPP made its first direct start-up investment when it led a $200 million fund-raise for Snapdeal. In 2017, the private capital team in Hong Kong made the fund’s first direct co-partner investment with Kedaara in Spandana Sphoorty, a leading microfinance institution. The big push, however, came in 2022, following the twin $300-million deals in Mahindra’s renewable energy assets and the acquisition of hospital chain, Sahyadri Hospitals.

Elaborating on the India strategy, Dara explains: “The way we played out (investing in India) is by partnering with managers initially. Private equity began by initially allocating funds to managers. The next step was to co-invest alongside them. Following that, we started co-underwriting with managers, collaboratively evaluating opportunities together. Now, we are engaging in control transactions independently. So, the risk aperture had to be brought up one step at a time, which is the more prudent way of doing things.”

Big, Better, Best!

That the fund is playing for big stakes became evident when it bought out Everstone’s stake in the Pune-based multi-specialty healthcare provider, marking the OTPP’s first control PE deal. By taking operational charge, OTPP aims to catapult this regional hospital chain into a formidable player in western India. “What you’re seeing in the market is an opportunity — there’s a premium for assets of scale. That’s not because it’s an arbitrage; on the contrary, it’s because it can take a long time to build this sort of scale in India,” explains Dara.

The eight-hospital chain aims to double its over 1,000-bed capacity through organic and inorganic growth in the near term. Abrarali Dalal, director and CEO of Sahyadri Hospitals, views the deal as a validation that healthcare has matured as a sector, driven by increasing insurance penetration, a higher propensity of patients to seek high-quality care, and greater health awareness among patients. “A 2-3x increase in market share of organised players has come amid sustained unit economics and margins,” says Dalal. For instance, Sahyadri clocked ₹759 crore in revenues and PAT of ₹68 crore in FY23.

In the pandemic-hit FY21, amid cash flow issues, revenue and profits of hospitals took a knock. The subsequent years (FY22 and FY23), though, proved to be a stellar period with operational performance surpassing pre-pandemic levels. Sahyadri’s profit, too, nearly trebled (2.78x) from ₹24.6 crore in FY21 to ₹68.4 crore in FY23 even as the RoE expanded by more than 1,000 bps from 3.17% (FY20) to 13.64% (FY23). “Even as we continue to focus on Tier-II and III cities in western India, we are confident of maintaining our best-in-class margins and return ratios,” emphasises Dalal.

OTPP’s investment philosophy, though, extends much beyond financial returns, one that aims at nurturing long-term value-generating sustainable businesses, particularly in sectors such as healthcare and infrastructure, where investments often have a long gestation period.

Within infrastructure, OTPP’s investments span roads and renewables, strategically aligning with the government’s priorities. As an anchor in the National Investment and Infrastructure Fund, OTPP has gained insights into government’s infra priorities besides opening a window of opportunity to participate in national monetisation schemes. The fund has also made significant investments in roads and highways, partnering with KKR Highway Infrastructure Trust. “India is a highly attractive market when it comes to roads. Our two platforms allow us to get operational roads through the National Monetisation Programme as well as toll-operate-transfer and, if available, through secondary road programmes,” says Dara.

Emphasising the strategic importance of inflation protection in investment decisions, Dara mentions: “As asset managers, one of our key strategies is to achieve inflation protection. If we can link this to the GDP growth of a country such as India, it can result in an extremely favourable outcome.”

Not surprising that the partnership with Mahindra Susten, a developer and operator of renewable energy projects, exemplifies this strategy.

The Roads To Renewables

Early this year, OTPP listed its SEIT (Sustainable Energy Infra Trust) in partnership with the Mahindra Group. Seeded by Mahindra Susten, the trust is the largest renewable InvIT platform with a generation capacity of around 1.54 GW. Both the Mahindra group and Ontario Teachers’ will jointly invest up to ₹3,050 crore in Mahindra Susten and ₹3,550 crore in SEIT.

Putting the alliance in perspective, Crane remarks: “Mahindra was exploring solutions for their renewable business, and we saw a chance to collaborate. Mahindra’s reputation, corporate DNA, leadership, and alignment with our values made them a suitable partner.”

While Mahindra has traditionally focused on automobiles, technology, and financial services, it has made a thoughtful foray into renewables, thus firmly embedding itself in India’s alternative energy narrative. Anish Shah, group CEO & MD of Mahindra & Mahindra, tells Fortune India: “We want to achieve 5x growth in our renewables platform, and the partnership with Ontario Teachers’ has only strengthened our right to win.”

Renewable energy, importantly, distinguishes itself from other asset classes given the regulatory support, thus adding a layer of stability and certainty. “This has given us the comfort to engage in greenfield projects within the sector. But what’s pertinent to note is that we are not infra developers but, primarily, act as financial sponsors with operational capabilities,” clarifies Dara.

OTPP’s commitment to renewable energy, however, goes beyond strategic considerations; its pensioners have also demanded that the fund support clean energy projects. This commitment neatly aligns with Mahindra’s pledge to adopt 100% renewable energy by 2030 across its businesses. In April, Mahindra announced its ₹1,200 crore ‘Hybrid’ solar + wind project in Maharashtra, aimed at delivering clean energy to commercial and industrial customers. OTPP couldn’t have asked for more. “We want to build a portfolio of businesses that are not only financially successful but also socially responsible and environmentally sustainable,” says Dara.

Mahindra, too, is not limiting the scope of its partnership with OTPP to renewables. “As we scale our businesses, we will definitely look to work with our partners, including OTPP, whose investing approach aligns with our ethos,” says Shah.

Leveraging Local Expertise

To play for the longer haul, OTPP is leveraging local expertise. The team in India, which has grown from four to 14 members, brings a wealth of experience and a deep understanding of the local market.

Within private equity, OTPP has identified healthcare, IT, and financial services as its primary verticals, supported by the depth of expertise within its team. “Rahul Mukim, whom we hired from Carlyle, leads private equity for us in India. He is deep in healthcare. We have Kaustubh, who we just hired from Multiples, who is deep in financial services,” explains Dara.

This depth is important in a market such as India, where economic conditions can be dynamic. “Even though we have people leading asset classes, having a common pool of capital gives us the flexibility to cross-staff people across asset classes in India, and we have done that on multiple opportunities,” reveals Dara.

This flexibility allows OTPP to dial up or down its investments based on market conditions and opportunities. For instance, the fund adjusted its approach in renewable energy to focus more on greenfield opportunities as the market for operational assets turned competitive. It’s not without reason. As per the CEEW Centre for Energy Finance, a not-for-profit policy research institution, non-conventional energy FDI in India exceeded $2 billion for the second consecutive year (FY24).

Guiding OTPP in its India journey is Keki Mistry, non-executive director of HDFC Bank, who is the senior advisor to the fund. “Comparing Ontario Teachers’ to other pension funds overlooks their unique approach. Having worked closely with Deepak and his team, I’ve seen they operate more like a private equity fund — competing in that arena rather than against traditional pension funds — since over 80% of its assets are managed in-house,” Mistry tells Fortune India.

Yet another nuanced aspect of OTPP’s strategy is its engagement with the entrepreneurial ecosystem in India. This is particularly important in sectors such as IT services and late-stage growth companies, where innovation and entrepreneurship are key drivers. Dara notes the significant transformation in India’s business landscape over the years. “When I was leaving India over 15 years ago, entrepreneurship was sort of looked down upon. Today, people are leaving their cushy jobs in finance and management consulting to start a company,” says Dara.

This vibrant ecosystem is offering OTPP enough opportunities to invest in high-growth companies. Its investments in Xpressbees, a leading logistics firm, and Perfios Software Solutions, a fintech-focused SaaS company, are prime examples. “We built out our strategy, identified the areas we would like to focus on, and built out our pipeline. (With the crossover capital gone) this is an asset class we really, really like in the current vintage,” says Dara.

Mistry believes the experience that Dara’s team has will give them the right to play across asset classes and sectors, especially in private investments. For example, infrastructure as an asset class can absorb large amounts of capital whereas in both private equity and late-stage growth, opportunities continue to get deeper. “Vintage matters a lot more in these asset classes. For instance, some years may be good for investing in both late-stage growth and private equity and others may be better for private equity. In fact, you really have to go deeper into sectors to make that call,” explains Mistry.

India Ahoy!

From an investing framework, OTPP’s strategy in the Asia-Pacific region involves targeted, stable investments with trusted partners, focusing on sectors and regions that align with its long-term goals. “Markets are cyclical. Therefore, being multi-asset class allows us to dial down in a specific asset class or sector for a while and ramp up in other areas where there are enough opportunities,” says Dara.

Competition in infra and private equity has, however, increased over the years, as alternative asset behemoths such as Blackstone and Brookfield, too, have been aggressively building their presence in India. Crane, however, believes it’s a natural progression. “Increased competition benefits the market by maturing it, thus making it a better and safer place to invest. The overall business environment has improved, with better advisory services from banks and lawyers, and innovative investment products such as infrastructure investment trusts,” says Crane.

Dara cites Brookfield’s journey in India to illustrate the patience needed for building a robust investment portfolio. “I spoke to Aditya Joshi (of Brookfield) when I was moving here, and he asked, ‘How long are you planning to stay?’ I replied, ‘It might take six or seven years to build it out, but I don’t want to be a terminal employee.’ He then told me that Anuj Ranjan (Brookfield’s previous India head) had a similar thought but ended up staying 14 years! So, the point is: it takes time to build a sustainable portfolio in India,” says Dara with a smile.

This long-term investing perspective is crucial, especially given that Steve McGirr, board chair at OTPP, mentions in the 2023 annual report that the fund is, currently, paying out more in pensions than it receives in contributions. While the fund generated investment income of $5.5 billion in 2023, sufficient to cover net pension outflows, Jo Taylor, president and CEO, is candid about OTPP’s performance. “A positive net return of 1.9% is not what the fund aspires to make for our members,” Taylor writes in the annual report. In fact, when the fund had opened its India office, Taylor had stated that India would account for 5-10% of OTPP’s assets over the next 15-20 years. Given that India now plans to invest ₹143 trillion on infrastructure between 2024 and 2030, OTPP will have enough opportunities coming its way. Mistry, too, sounds confident: “This is just the beginning; India’s opportunity landscape will continue to expand.”

That being the case, Dara and his team have ample time to write out OTPP’s India growth story, provided the concerns raised some years ago by Stefane Marion, chief economist at National Bank of Canada Financial, don’t set the alarm bells ringing in the corridors of power. Marion had pointed out that policymakers need to solve Canada’s investment conundrum before increasing the cost of capital for domestic businesses by raising taxes. “We are already bleeding capital. This is not the time to put ourselves at a further disadvantage,” wrote Marion. But till things don’t come to a boil, it could well be advantage India.