Amend charters to invest in companies that don’t have set market capitalisation.
Global pension funds have started investing aggressively in primary market offers. Till recently, they were not looking beyond some of the largest Indian listed companies.
Foreign pension funds usually did not invest in any unlisted company, including initial public offers (IPO), as their investment charters did not allow them to venture outside the largecaps. Pension funds have strict parameters related to market capitalisation, which also put IPOs outside the investment matrix.
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“Some pension funds have amended their charters and can now invest directly in IPOs,” says the executive director of a leading foreign investment banking entity. “The amended charter allows them to invest in companies that do not have any set market capitalisation,” he added, while declining to name the funds that had done so in the recent past. Some pension funds from Denmark and Paris are believed to have invested in quite a few IPOs recently.
According to the Securities and Exchange Board of India, over 30 pension funds are registered in India as foreign institutional investors (FIIs). Pension funds of some notable entities, including American Airlines, British Petroleum, Aviva, British Airways, Citigroup, Shell, United Nations, Lloyds, Rolls-Royce, IBM and Unilever, are registered in India.
“Some of the really long pension funds globally which were not quite active in India are now present here,” says Indraneil Borkakoty, executive director and head of equity capital markets, Nomura Securities India. “The increase in the number of FII registrations proves this. Pension funds don’t face the kind of redemption pressure that other hedge or long funds face. So, higher participation from pension funds is good for the market. If ever there is a pull-back, it will not be so drastic,” he explains.
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Pension funds, collectively, account for one of the largest investor groups globally, with assets under management (AUM) in trillions of dollars. A report by Morgan Stanley in 2008 pegged the total AUM of pension funds in excess of $20 trillion, more than sovereign wealth funds, insurance companies, hedge funds and even private equity. While the latest numbers are not available, rough estimates peg the AUM at over $30 trillion.
A section of investment bankers, acknowledging that pension funds are investing more in India, say some of the entities also invest through other registered FIIs. This, they say, helps achieve the motive without much changes in the investment charter.
“Pension funds, like other investors across the globe, are increasing exposure to India, but this is not to say that they are increasing their exposure to the IPO market only,” says Munesh Khanna, CEO & MD, Centrum Capital. “Many of them also invest in Indian secondary equity markets through other funds of FIIs. Accordingly, as they increase their exposure to India, the exposure to IPOs also goes up.”
Vinay Menon, managing director – equity capital & derivatives markets, JPMorgan India, says, “Pension funds have been investing in Indian IPOs for a long time” but the recent past “has seen many more long-only funds coming to India from some newer destinations”.