Infrastructure Financing
Latin American Partners
LIQ talks to Teseo Bergoglio, Co-Owner and Co-Managing Partner
1. Can you tell us about your Firm and your role?
LAP Latin American Partners (LAP) is a fund manager with a team of investment professionals that after working together for many years in private equity in Latin America, decided to focus on a sub-region of Latin America and to specialize in mezzanine, which we believe to be more suitable than pure equity for many of our target companies. That is the genesis of the Central American Mezzanine Infrastructure Fund (CAMIF), which has been making mezzanine and equity investments to medium-sized companies and projects in Mexico, Colombia, Central America and selected Caribbean islands. LAP stresses the importance of relations with local sponsors, advisors and governments, and offers regional coverage through offices in Mexico, Central America and Washington, D.C. The firm’s investments are made in compliance with international standards regarding environmental, social and anti-money laundering aspects. The owners and co-managing partners of LAP are James Martin and myself who together have 45 years of experience in investment and lending in Latin America.
James has been managing PE and mezzanine investments in Latin America since 1997 for EMP Global (EMPG) and later for EMP Latin America (EMPLA), an affiliate of LAP with main focus on power, transportation, environmental services, natural resources and energy sectors. Prior to joining EMPG, James worked at International Finance Corporation (IFC) where he headed the team responsible for global investments in water and environmental infrastructure and also closed a number of transactions in Latin America in the transportation and gas distribution sectors. Prior to IFC, James worked at BankBoston in Italy, in Mexico as Country Manager, and in Singapore where he was regional head of the Bank’s activities in Southeast and South Asia. James has a BSFS in International Economics from Georgetown University and a MBA from Columbia University.
I have been managing PE and mezzanine investments in Latin America since 2001 for EMPG and later for EMPLA, with main focus on shipping, railroads, power, telecom, port, oil services and gas transportation and distribution. Prior to joining EMPG, I worked at Enron Corporation’s Gas and Power Risk Management Group in Houston and Sao Paulo. Prior to Enron, I worked in the Corporate Banking division of BBVA Banco Frances in Argentina, originating and managing a $300 million portfolio of corporate debt, including project financing, acquisition financing, bonds, and syndicated loans across a range of industries. Prior to BBVA, I worked in the automotive industry. I have a B.S. in Business from Universidad del Salvador, a Masters in Economics from CEMA University, and a MBA from Georgetown University.
2. When was CAMIF closed?
We closed CAMIF at the height of the 2008 financial crisis a few weeks after the collapse of Lehman Brothers and managed to reach the target amount of US$150 million mainly as a result of the strong support of our institutional investors (including Inter-American Development Bank (IDB), IFC, Dutch development bank FMO, Finnish Fund for Industrial Cooperation Ltd. and Fondo de Fondos from Mexico, and the GP). Our investors believed in our team and investment thesis even in those difficult times. The fund has been almost fully committed, and fortunately so far we have lived up to their expectations by showing a strong performance of attractive expected returns and healthy liquidity.
3. As a private equity firm, what are the main indicators of a country’s economy and financial markets that you evaluate?
We look for strong economic patterns that lead to sustainable growth and continuous need for infrastructure investment. A key component of the success of an investment is getting the macro prospects right and it is not only about originating the right project at the right time but also about being in the right place. Combining a promising macro outlook with a project with a solid growth prospect provides downside protection to macro swings and unexpected changes in the business.
Within our target region we are attracted by overall macro and sector growth, regional integration, skewed energy matrices and strong prospects for changes in technology. We also study the regulatory framework of the sectors we are interested in and consider other aspects of the overall investment climate, such as rule of law and the government’s attitude towards private investment.
Regarding the financial markets, we look for countries with a clear need for our mezzanine financing and a lack of adequate long-term financing from third parties in terms of amount, tenor and with our tolerance for our level of subordination. Typically by strengthening capital structures with our mezzanine or a combination of our mezzanine and equity, we cover the funding gap that allows companies to mobilize third party financing senior to us in priority of payment and sharing of security.
4. So you mainly look for infrastructure opportunities?
Our main focus is basic infrastructure which in our case is widely defined and includes all forms of power (specifically renewable energy), transport, telecom, water and sanitation. We are at the same time growth oriented so we look for indicators that result in a continuous need for additional infrastructure investment. In our region these indicators include sustained country-specific as well as regional economic growth along with sector-specific shifts that create investment opportunities. As an example, we have found opportunities in the power sector as these countries seek to decrease dependence on expensive thermal generation (diesel, bunkers) toward renewables (hydro, wind, geothermal). In other sectors, changing modes of transportation and growth in data-based telephony are some trends that create exciting investment opportunities for CAMIF.
CAMIF also has the flexibility to lend or invest in other sectors such as natural resources, forestry, agribusiness, housing, real estate, health and education among others, which allows us to take advantage of attractive growth opportunities and achieve a balanced portfolio of investments across different sectors and countries. We have also found a similar compounded effect in sectors with strong prospects for import substitution with sustainable competitive advantages to produce locally. We seek to invest in companies that are competitive globally, as we see that as the best assurance of sustained success regardless of economic cycles.
5. What are the main elements of an infrastructure asset operator that you consider when evaluating an investment?
The key lending principle (which also applies to investment principle) from the 5 C’s of lending is the character and reputation of the sponsors and partners. Of course we review the track record of our sponsors and partners but character and reputation is still the main concern which cannot be overcome by the best shareholder agreement or loan agreement. It is also very important to see that the sponsor has a significant vested interest in the success of the project and we always expect a sizeable capital commitment by them.
Our interests should be aligned from the beginning and we should structure the transaction in a way that ensures alignment throughout our holding period. Given that we are growth oriented, we look for sponsor and partners that share the same long-term view and objective. Once we partner, we look for ways to grow the business through domestic expansion, acquisitions and internationalization.
6. What do institutional investors find attractive in an infrastructure fund?
Investors are interested in our funds due to our focus on mainly long-term mezzanine financing to infrastructure plays in emerging markets. We specialize in infrastructure, which is continuously in dire need of additional investment in our covered region. Investment in infrastructure in our focus region combines the benefits of typically predictable USD denominated long-term revenues, usually through long-term contracts with high-growth prospects, low volatility and frequent and consistent cash income to lenders and investors. We focus on a sub-region of Latin America with growing economies that are underserved by institutional investors. And we specialize in long-term mezzanine lending, which is an instrument that provides steady cash flow to the fund and our investors, and clear visibility and mechanisms for the return of the capital invested and its exit prospects.
Our investors also invest in our funds because they are interested in co-investment opportunities. We provide exposure to transactions that are difficult to originate and structure and in most cases would not otherwise be on their radar screen. Our deals require very close monitoring, and our investors typically cannot replicate this commitment of time and resources to individual investments and therefore rely more heavily on our capacity to co-monitor their direct co-investments alongside the Fund’s own investments.
Our ability to mobilize funds from our own investors is also attractive to our portfolio companies given that we can add value beyond the resources that we have at our own disposal. Our investors take advantage of our due diligence and analysis and can expedite their own decision process when analyzing direct co-investment opportunities with the fund. So far, we have created co-investment opportunities for our investors that are a significant multiple of the total funds committed to the fund and we expect to continue to do so in the future.
7. Still on institutional investors, what trends do you see in terms of: (i) their appetite for the asset class; (ii) the way they get exposure to the asset class: financial instruments (listed and not listed); participating in specialized PE funds; or direct investing?
We have seen an increasing appetite for the region for several years now as Latin America has gained a bigger share of total fundraising within emerging markets PE funds and a bigger share of total investments. Institutional investors that invest in our funds continue to invest through specialized funds, combine in-house investing and lending with third party manager efforts and are increasing their appetite for direct investing as well. We have seen some cases in which those institutions are setting up in-house asset management capabilities. All these trends will benefit the region, which should receive an increased share of capital inflows that would fund growth and development.
8. Do you seek control of assets?
We lend and invest in companies which, as is the general case in this region, are typically mid-sized family-owned firms that do not want to permanently lose control or suffer heavy dilution; therefore our mezzanine product is more palatable to them. We look for companies with strong management and proven track record that do not require heavy intervention from a financial institution like ours and therefore we do not need to seek majority stakes or control of those assets. But through loan covenants and/or supermajority right we ensure the necessary influence in the company.
We tend to add value not only by injecting long-term capital that represents a significant amount in the overall capital structure, but also by mobilizing third party capital and financing, usually from our own club of investors that contribute additional funds directly beyond those provided by the fund. Therefore, we tend to be a significant portion of the capital structure of those companies, and we hold significant minority positions which convey certain negative control rights but at the end of the tenor of our loans, owners usually regain full control and ownership.
9. What is the typical holding horizon of the fund and what recent transactions have you done in the region?
We are flexible and try to adjust our horizon to the specific needs of the companies and the preferences of the sponsors but given our main focus on infrastructure, we have to provide enough tenor to allow those projects to materialize and grow, and also match the increasingly long senior financing available in the region. In general, we have the preference to make long-term investments averaging 8-10 years which differentiates ourselves from other funds active in the region.
The mezzanine product typically combines a loan element with equity features which allows the fund to share in the upside of the project. Mezzanine is very flexible and has allowed us to finance a range of opportunities, from expansions of existing businesses to acquisitions and turnarounds. We have done straight acquisitions of minority and majority positions and we have also supported and financed minority shareholders to increase their ownership positions (LBOs) and even managements to acquire control ownership stake (MBOs). We have also done corporate restructurings and turnarounds as well as greenfield projects. In many cases we have done transactions in which we combined a direct investment in the equity of the company with a mezzanine financing with equity features of its own.
In terms of sectors we have invested in several renewable energy companies in hydro generation and biomass, in various ports terminal operators dedicated to bulk cargoes, both dry and liquid, as well as containers. We have also invested in telecom and in agribusiness.
10. How do you envision possible exits in the LatAm region?
While funds invested in the 90s in Latin America hoping that the capital markets would develop enough to make IPOs a likely exit venue, with the exception of Brazil in the later years, in the vast majority of the cases exits took place through trade sales to strategic investors. In our regional coverage of Latin America, we expect that trade sales will continue to be the most likely exit route in the years to come.
We come from a background of private equity and learned that in spite of closely monitoring investments through their life cycle and adding value for many years, the success of those investments depended mainly on one single liquidity event in the later years of the fund. Therefore we were exposed to exogenous factors (e.g. macroeconomic cycles) that could severely impact the return on those investments if they were to occur during the divesting years.
A key lesson learnt from our past experience in PE was to move to a mezzanine instrument and reduce our dependence on this single exit event as we now receive our return of capital and our return on capital during our holding horizon. The exit-related component of our overall return is no longer the make-it or break-it event it is for a private equity investment. However, our investment style continues to be more involved and hands-on like private equity.
11. Is there a secondary market for private equity stakes in infrastructure projects?
Even though global M&A activity has declined to a lower level after the 2007/2008 crisis, given that Latin American economies were not as affected as other developed economies, we saw overall M&A activity to suffer less in Latin America. In addition to this better performance compared to other regions, we saw infrastructure M&A activity to also be one of the strongest in Latin America, which experienced a rebound even since the global economic slowdown. There are local and cross border trade sales taking place and we expect this trend to strengthen in both Latin America and the infrastructure sector in particular. The level of M&A activity within the Latin American region and by foreign bidders acquiring Latin targets is expected to increase or even significantly increase in the next few years which should benefit PE investing in this space.
Infrastructure finance advisory in Panama
LIQ talks to Juan Toro, Director at Astris Finance
1. What is Astris Finance ("Astris") and what is your role?
Astris Finance is a US‐based transaction advisory firm specialized in infrastructure and energy, with operations in the Americas, Europe and Africa. The firm has offices in Washington DC, Paris and Mexico. We specialize in advising sponsors and institutional investors in structuring and financing infrastructure and energy projects in emerging markets.
2. Astris has been very active throughout the region recently, with which infrastructure players do you most often work with and why?
Historically, we have worked advising sponsors in the process of crafting financing strategies in the context of a bid, or assisting sponsors in the process of raising non-recourse debt at project level, whether through a bank syndicate, A/B loans structures, guaranteed debt packages, or capital markets. Lately, we have also started working on the buy side representing institutional investors and/or infrastructure funds acquiring assets in the region or setting up investment vehicles to go after greenfield projects.
3. How does Astris compete against the project finance divisions of big project sponsors?
We do not compete at all. They are our clients and we are set to assist them in reaching their goals: wining and financing projects. We complement project finance divisions and as such we have worked successfully with the most sophisticated sponsors in the world. We bring a fully dedicated team of specialists with asset and regional experience that allow us to provide the best advice to our clients.
4. Can you please describe the services you provide for companies looking to bid for a project?
Astris Finance contributes to the review of the bidding documents (early identification and mitigation of bankability issues in draft contracts, Q&A sessions), review of the adjudication criteria, and sizing and optimization of sponsor bid using our state-of-the-art financial models.
5. Moving to Panama now, can you describe the Balboa Avenue project?
The Project involves the development of a package of urban road works intended to improve the connectivity of Panama City’s western road network and alleviate traffic congestion. Key Project components include:
‐ Expansion works at Poets Avenue;
‐ Improvement works at Balboa Avenue;
‐ A new tourist breakwater in front of the Fish Market; and
‐ An interconnection network between Balboa Avenue and Poets Avenue, which involves the construction of a marine viaduct that will swing around the Historic District.
The USD 782 million project is part of the USD 1.5 billion Panama City Road Network Improvement Program and was awarded to Construtora Norberto Odebrecht ("CNO") pursuant to an international public bidding contest in March 2011. The financing takes the form of a 4 year revolving receivable purchase agreement to buy up to USD 567 million of promissory notes from the Republic of Panama known as Cuentas de Pago Parcial (“CPPs”). The CPP structure has been successfully used in the past in Panama for the financing of several projects. CPPs represent an irrevocable and unconditional payment obligation from the Republic of Panama, and are progressively delivered by the Government as construction milestones are achieved.
6. Who were the main players involved?
The main players involved were:
• Contractor: Odebrecht Panama
• MLAs: Bank of Tokyo‐Mitsubishi and Sumitomo Mitsui Banking Corporation
• Arranging and Admin Agent: Bank of Nova Scotia
7. What kind of services did Astris provide to its client?
Astris Finance acted as Financial Advisor to CNO throughout the bidding, structuring, placement, due diligence and closing of the financing. Astris Finance also advised CNO in the structuring of the interest rate hedging strategy, which consists of a string of forward‐starting USD zero coupon swaps.
8. What other sectors are you currently looking at in Panama?
We are currently looking at projects in the port and road sectors and also in the energy sector both conventional and renewables.
9. What are some of the ways through which the government of Panama is encouraging foreign private sector parties to invest their resources in the development and financing of the country's infrastructure?
The Government of Panama keeps looking for innovative payment mechanisms to support the development of public-private partnerships (PPPs). For instance, structures such as the CPPs help mitigate construction risk facilitating private participation.
The involvement of CAF in Panama
LIQ talks to Federico Flossbach, Senior Executive at Confederación Andina de Fomento
1. Why do you think that Panama is attracting so much interest from international infrastructure players?
The Republic of Panama is one of the Latin American economies that have had one of the highest growth rates in the last 10 years. In 2011, the growth rate of Panama's GDP was 10,6% which was higher than the average of 8,4% economic growth for the previous 5 years. It is also expected that the growth rate in Panama for 2012 will one of the highest in Latin America. The engines of growth of Panama's economy have been a) the growth in internal demand which has been fueled by public and private investment in infrastructure projects and b) a rise of export of goods and services mainly through an increase in the activity in Colon's Free Tax Zone as well as through the expansion of the shipping activity of the Panama Canal and an increase in financial services provided to non residents in Panama.
Taking into consideration Panama´s GDP growth potential and the current expansion and upgrade of new infrastructure projects, Panama has caught the attention of infrastructure players who want to assist Panama in the modernization and upgrade of its existing infrastructure platform. In that respect companies are looking for opportunities at infrastructure projects in roads and highways, ports and airports, energy projects, subway, hotels, the Panama Canal as well as water and sanitation projects, among others.
2. What are the main State policies behind infrastructure development in this jurisdiction?
The Government's strategic plan for the years 2010-2014 has identified four engines that will contribute to the growth of the GDP in the range of 6 to 9 percent on a yearly basis. The mentioned engines are logistics, tourism, agriculture and financial services.
In order to attain the GDP growth potential, major infrastructure needs of the logistics and tourism growth engines have been identified:
a) Logistics: i) finalize the expansion of the Panama Canal, ii) expand and improve existing roads and highways, iii) expand air cargo capacity, iv) reduce inland transportation costs;
b) Tourism: i) improve the transport connectivity of regional airports, roads and highways, and marinas, ii) improve the water supply and sanitation.
In order to achieve the above mentioned goal the development agenda identified in the strategic plan calls for: a) the enhancement of the planning capabilities of the Central Government, b) the improvement of the capacity of the public entities, c) the development an adequate legal and regulatory framework, d) the enhancement in the coordination of infrastructure projects among the various players (public and private, regional governmental authorities and central government authorities), and e) the development of human capital to fulfill the identified tasks.
3. In what ways does the CAF contribute to the development and financing of infrastructure in Panama?
CAF contributes to the development and financing of infrastructure in Panama in many different ways. Regarding funding needs of infrastructure projects, CAF´s strategy in Panama has been to assist projects with long term financing in the following sectors: roads and highways, energy, the Panama Canal, urban massive transport, and social infrastructure in water and sanitation. CAF has extended facilities to the financial sector through short and medium term lines of credit to facilitate banks to fund their trade financing as well as working capital needs.
CAF has also given Technical Assistance to public and private projects in Panama. In landmark projects CAF has assisted the private and public sector through its Technical Assistance program in the conception and formulation of the project from the onset of the project. Such an approach has ensured the financial, economic and social viability of the project.
The CAF´s approach to the financing of infrastructure projects is based on promoting self-sustaining infrastructure projects that assure economic development while taking into consideration environmental and social aspects as well the point of view of relevant stakeholders in the project. CAF also looks at the generation of positive economic externalities in the projects that it funds.
In the financing of infrastructure projects CAF has aimed to incorporate joint financing opportunities with other Multilateral and Bilateral Institutions as well as other Financial Institutions (Banks and others) in order to promote the flow of funds to Panama.
EDC - The Canadian export credit agency
LIQ talks to Jean Cardyn, Regional Vice President, South America,
Canadian companies understand that the potential for business growth today is higher in emerging markets than in the most industrialized ones. And while the neighbouring U.S. remains Canada’s main trading partner, in recent years Canadian companies have been increasing their focus on those faster growing economies -- many countries in Latin America (LatAm) being prime examples.
The Canadian construction industry, for one, which represents around 12% of Canada’s GDP and has traditionally focused on the domestic market (and to some extent the U.S.), is showing interest in Latin America, both for construction and concession projects. Indeed, Canada is known for the quality of its infrastructure, and has leading edge expertise in such areas as power generation, water/wastewater technology, engineering, healthcare, highways, airports, related equipment manufacturing and supply, concessions and related investments.
Export Development Canada (EDC), Canada’s export credit agency, has representatives in seven Latin American regions (out of 16 around the world). They can help Canadian businesses and their trading partners access practical financing and risk management solutions to facilitate, expand and create new trade between Canada and many Latin American countries.
1. Latin America is quite a volatile region from an economic, political and institutional perspective; what are the main concerns Canadian companies have when considering doing business there?
Canadian exporters and investors doing business in LatAm share similar concerns as those from other countries doing business overseas. These include being able to familiarize themselves with the local business environment and practices, cultural differences, and concerns about the stability of the economic and political environments, including reliable legal and regulatory frameworks and institutions. They also seek sound labour laws, availability of qualified manpower, competitive costs, reliable infrastructure and market access, transparency, sound corporate social responsibility practices and availability of reliable partners.
Canadian companies also want assurance that their contract structures and customers will be financially sound. Contract awards for infrastructure can take a long time, and competition can be challenging. Canadian companies’ participation in infrastructure projects will often involve the supply of equipment and services on sub-contracting opportunities with local or foreign companies.
Canadians see a growing number of Latin American countries, large and small, that have strong economies, political stability and reliable legal, regulatory and institutional environments, along with solid growth in recent years. All these elements are driving Canadian companies to look for opportunities in Latin America.
OPIC and LatAm Infrastructure
Timothy Harwood, with contributions from Sara Marcus
Infrastructure investment and development finance often go hand in hand in Latin America, where the need for modern roads, updated ports and airports, and state-of-the-art energy sources begs the involvement of the private sector. The Overseas Private Investment Corporation (OPIC), the U.S. Government’s development finance institution, is uniquely situated to help American businesses invest in projects in Latin America, working in partnership with local companies.
Since it was founded in 1971, OPIC has helped encourage the flow of private capital into regions where the private sector either lacks the confidence to invest or is unable to find sources of funding locally, even where genuine investment opportunities await. OPIC supports these projects with direct loans and loan guaranties – often with longer terms than are available through private lenders – as well as political risk insurance, and support for private equity investment funds. The resulting projects provide important developmental benefits for host countries, and in the process help American companies – particularly small businesses – to expand into new markets. It’s a virtuous cycle that benefits all involved.
In Latin America, growth prospects are promising, but the region needs to address its lack of infrastructure in order to reach its potential. World Bank data show that only 22 percent of roads in Latin America and the Caribbean were paved in 2009, compared with 62 percent in East Asia, and 87 percent in Europe. Budget constraints have limited the ability of Latin American governments to invest in their roads, ports and airports: public investment in infrastructure fell from 4.5 percent of GDP in the mid-1980s to just 1.5 percent in the 1990s, with no significant rise since.
Real Infrastructure Capital Partners
LIQ talks to Susana López, Owner and Partner
Real Infrastructure Capital Partners LLC ("REAL") has announced the first closing of its Latin Renewables Infrastructure Fund, LP with approximately US $50 million of commitments. The Fund will invest in utility-scale, renewable resource power generation - principally wind and hydro power - in Latin America, with an immediate focus on Central America. The target size of the fund is $150 - $200 million.
1. What is the background of the professionals that make up Real Infrastructure Capital Partners?
Our Managing Partners, Stephen Pearlman and Juan F. Paez have over 35 years of experience of investment, project development, and operational and financial management in the international energy and Private Equity business. The other two partners of the fund are Rodrigo Barfield and myself.
Stephen was President of the Americas Division of Globeleq, an acquirer, developer, owner and operator of electric power generation located in emerging markets countries. Stephen served on Globeleq’s Executive Committee, and was a board member of various operating subsidiaries. Prior to joining Globeleq, Stephen worked in a number of leading international and domestic power companies, including Suez, where he headed the North American Cogeneration business; Enron, where he headed the Integrated Projects business unit (large scale gas and power projects) in the Southern Cone based in Buenos Aires and Sao Paulo; and PSEG Global, where he headed Latin American project development based in Buenos Aires. Stephen’s development and acquisition transactions exceed $1 billion of equity investment in transactions totalling more than $4.7 billion in value. His power generation experience spans a wide range of technologies including renewables: wind, hydro, geothermal, and biomass, as well the major competing technologies of natural gas, oil, coal and nuclear.
Juan was a Partner with New York-based private equity investment firm Conduit Capital Partners LLC (Conduit). For over ten years, and across three managed funds, he was responsible for managing and/or investing more than $420 million of equity investments in various energy-related assets in the Latin American and the Caribbean regions. Juan’s experience has involved all aspects of the private equity investment business in the power sector in Latin America, including origination, investment, asset management and divestment of portfolio companies. His experience runs across all levels of ownership structures from minority interest to controlling positions. Juan brings to REAL in-depth operational and management expertise in various markets across the region and across different types of power generation technologies. Additionally, He also brings extensive origination and investment experience as well as direct, recent experience with the regulatory dynamics and environment present in each market in the region, as well as extensive working relationship with different market participants that offers a unique source of deal origination.
Juan and I have very extensive experience working together as a cohesive investment team for many years. I worked as Vice President evaluating new investment opportunities for the Latin Power Funds at Conduit Capital Partners, where I evaluated and culminated investments in thermal, hydroelectric and other renewable power projects in Latin America and the Caribbean and was actively involved in the development and management of many of the Fund's investments. I have also collaborated extensively with Wolfensohn Capital Partners as an Investment Consultant evaluating opportunities in the Renewable Energy, Forestry and Green Chemistry sectors in global Emerging Markets.
As for Rodrigo, he was a Director of Investments with Middle East and Asia Capital Partners’ (“MEACP”) Asia Clean Energy Fund. Prior to MEACP, Mr. Barfield was a Deputy Director of Investments for Emerging Markets Partnership’s IDB Infrastructure Fund, covering infrastructure investments in Asia and the Middle East, specifically involved with investments in energy and oil and gas services companies. Previously, he was an Infrastructure Finance Specialist at the World Bank.
We each bring in a very complementary and comprehensive set of skills to the fund. Stephen’s extensive experience in the market affords REAL the wisdom of somebody who has navigated many business and economic cycles in Latin America, he has pretty much “seen it all”. Juan’s long experience both investing in and managing assets in the region, and working hand in hand with me, grants REAL the opportunity of bringing a solid team with extensive and successful experience collaborating jointly in the market, while Rodrigo’s experience establishing new funds and fundraising perfectly complements our investment know-how.
2. As a private equity fund manager, what are the main indicators of a country’s economy and financial markets that you evaluate?
There are two aspects of our target countries’ economies that we closely watch and evaluate: from a microeconomic perspective, cost of energy and energy mix; from a macroeconomic standpoint, GDP and population growth.
We at REAL believe in the evolution of energy matrix in emerging economies towards a strong component of renewables. Nonetheless, we question the long term sustainability of government subsidies and tax credits as mechanisms to substantiate the use of renewables over other conventional sources of electricity. Renewable energy should be competitive from a price standpoint against other forms of energy in order for the investment to be successful in the long run. The countries we target have such conditions, where high prices make renewable in most cases the low-cost energy provider and therefore requires no subsidies or futile governmental support that can be short lived as seen even in mature economies (see the example of Europe).
Additionally, electricity demand is always highly correlated to economic and population growth. Historically, in the target countries, electricity demand has grown at a faster pace than the countries’ economies, even during economic slowdowns. There is a large amount of investment directed towards manufacturing industries, commerce and the exploitation of natural resources and mining in the region, which are electricity intensive industries. Furthermore, economic growth combined with sustained population growth and increase of middle class consumption drive electricity demand and investment.
Bringing projects to market: the view from a private sector advisor and investor
LIQ talks to Federico Girardotti of Faros Infrastructure Partners ("Faros")
1. What kind of services does Faros provide and who are its main clients?
Faros Infrastructure Partners is a boutique asset management and investment firm focused on transportation and energy infrastructure, and ancillary revenues. We work with investors, project sponsors, private equity houses, infrastructure operators, funds, family offices, and financiers looking to make investments or acquisitions. We work through the life cycle of the project: due diligence process, bidding, financial closing, take over, asset management, refinancing/exit.
2. What is Faros’ experience in Latin American infrastructure development and finance?
Faros started as a European focused group but rapidly evolved incorporating the Americas to the scope. We have an office in the New York Area and an associated office in Mexico City in addition to our London office.
We have worked in the Americas from renewable energy in California, to toll roads in Mexico, to the recent airport privatization process in Brazil.
In Mexico we have advised a conglomerate in bidding for a toll road, and financing it after winning the tender. We have also looked into another toll road and have been involved in an airport project. We currently manage a commercial infrastructure network focused on ancillary revenues.
In Brazil we came in with a strategic investor to work in the recent airport privatization process. We expect to participate in the potential second round of airports.
Ashmore Colombia Infrastructure Fund
LIQ talks to Camilo Villaveces, CEO of Ashmore Management Company
1. What are the main factors (economic, legal, institutional, financial) that have contributed to the current level of infrastructure development in Colombia?
It is important to differentiate sectors. Colombia can be a model in the development of infrastructure in some sectors (like power generation, transmission and distribution) and at the same time Colombia can be a model of how not to develop other infrastructure sectors, particularly roads and land transportation.
Why have these sectors developed so differently? In my opinion, mainly because the regulation of the power sector was thought and enacted to attract investors that have the capital and the expertise to face the risks present in these activities. For example, at the end of last century, the demand for power in Colombia stopped growing and for a limited period of time capacity was higher than demand. The sector successfully absorbed this situation, because the companies acting in the power sector were well capitalized companies that were prepared to absorb the shocks resulting from unexpected changes in the business cycle. Consequently, a sector that for years was the number one contributor to the fiscal deficit of the country became a dynamic, well structured sector that does not consume fiscal resources and at the same time secures an efficient service to the Colombian population.
The success story of the power sector is totally different than the failure story of the road concession program, full of unfinished roads, court procedures, scandals and corruption. Why? In my opinion, because the toll road concession program has been carried out without the required capital. Because of ill structuring and also because of the violence that affected Colombia for many years, the concession program was not able to attract investors with the capital required to absorb the risks involved in the business of constructing toll roads. Besides, ill structuring and even corruption affected the sector. Right now it´s clear that the road concession program has to be awarded to companies that have both the capital and the expertise to perform according to their contractual obligations.
2. What is your role in Ashmore Colombia Infrastructure Fund (the “Fund”)?
I am the CEO of Ashmore Management Company (Colombia), general partner of the Fund.
3. What kind of institutional investors have commitments in the Fund? Has the Fund reached its target of commitments?
We obtained commitments from pension funds, insurance companies, multilateral agencies, governmental agencies, family offices, as well as seed capital from the Fund´s sponsors.
The Fund has reached its target and we are not doing any additional fund-raising in the short term. We will do fund-raising again after we can show the market our results (the value of the Fund´s unit has increased in 2.5 years from COP 10,000 to more than COP 15,000) and that the Fund is operated in Colombia with world´s best practices. We believe that being able to show the excellent track record we have will be the best way to launch new fund(s) in the near future, when we have invested the capital that we now have.
Infrastructure and Private Equity in Colombia
LIQ talks to Jorge Castellanos, Managing Director at Darby Private Equity
1. What are Darby’s activities in Latin America at the moment and particularly in Colombia?
Darby has had a long history of involvement in Latin America and particularly in Colombia, dating back to its first PE fund in 1994. Currently, there are several funds in the investment phase in Latin America. In addition, there have been several recent press releases detailing the successful exits from Darby Funds, including the sale of three Colombian investments: Petrosantander, TEBSA, and Avantel.
2. As a private equity firm, what are the main indicators of a country’s economy and financial markets that you evaluate? What is your reading of Colombia’s current indicators?
Our general considerations may be grouped in three categories: overall economic prospects, openness and fair treatment of private investors, and dynamic sectors requiring equity and mezzanine financing. Colombia ranks highly on these indicators, as evidenced by growing FDI inflows over the last few years, and the more recent interest in Colombian PE investments, both from domestic investors and from abroad.
3. A few years ago, Darby launched an infrastructure fund together with Colpatria. What sub-sectors within the infrastructure sector have proven to be more appealing to the fund’s management?
Infrastructure investments in Colombia and the immediate region are the main focus, with a particular emphasis on transportation activities.
Colombia: Insights on Social Infrastructure Development
LIQ talks to Kristin Dacey, Senior Investment Officer at the Inter-American Development Bank
1. Can you briefly describe the IDB’s portfolio of social infrastructure projects in Colombia? Which are the main ones?
The IDB covers social infrastructure projects in all of Latin America and the Caribbean in both public and private sector sides. On the private sector side, we support health and education infrastructure including the construction or expansion of hospitals, clinics, schools, universities, and daycare centers. One example is the Centro Médico Puerta de Hierro in Mexico. IDB provided 12-year financing to help the company build two new hospitals, 40 beds each, in the central Pacific coast cities of Tepic and Colima. The IDB credits, which combine senior and subordinated loans, total $12 million, denominated in Mexican pesos. Another example is the Universidad Politécnica Salesiana, a socially inclusive Catholic university in Ecuador. IDB approved a $15 million loan to finance its expansion, including the construction of new buildings, purchase of equipment, and the creation of a student loan fund. We have identified interest in IDB financing the construction and/or expansion of several hospitals, clinics, schools and other education projects to support Colombia’s social infrastructure.
On the public sector side, the biggest education projects approved within the past 18 months are a $46 million loan to Colombia to reduce inequalities among schools located in different parts of the country; a $27 million loan for a program focused on early childhood learning in Paraguay; a $25 million loan also for early-stage learning in three provinces in Peru; and a $7 million financing for initiatives in Honduras to benefit schools serving the very poor. In the areas of social protection and health, a $66 million loan to Brazil will improve the Unified Social Assistance System, including programs to combat hunger; a $35 million program to construct and upgrade hospitals in the department of Potosí in Bolivia; and a $50 million loan to Panama aimed at reducing infant and maternal mortality and addressing chronic malnutrition and training physicians and nurses.
Moreover, the private and public arms of the bank work hand in hand to help governments develop effective private-public partnership frameworks that can help generate a strong private sector response and attract quality investors in the provision of high-quality services in our member countries.
2. Let start discussing the pre-investment phase, how is the Bank’s pipeline of projects fed? That is, who identifies possible projects: the Bank, the national government, and/or the sub-national governments?
The IDB has offices in every country in Latin America and the Caribbean, and uses this presence in the region to help originate the “pipeline” of projects proposed for future financing. On the public-sector side, priority areas are identified through the preparation of Country Strategies, publicly available documents prepared jointly by the Bank and borrowing-member country authorities at the beginning of their terms in office. Because the IDB works closely with the national and sub-national governments, we sometimes receive referrals from them for private sector deals. The IDB also has officers, like myself, who cover certain sectors and are continually in touch with local private sector players active in the social infrastructure space.
The Role of Investment Banks in Colombian Infrastructure Development
LIQ talks to Jean Pierre Serani, Managing Director at the Investment Banking Division of Bancolombia.
1. What’s your job as Vice-President of Origination at Banca de Inversión Bancolombia?
I lead the origination team in charge of getting mandates for M&A, Project, Corporate and Acquisition Finance, and Capital Markets. The Bancolombia´s investment bank division has a regional reach, covering deals in Colombia, Peru, Central America and the Caribbean.
2. Can you give us your opinion on the state of infrastructure investment in Colombia?
Colombia needs desperately to improve its infrastructure if it wants to be competitive in globalized economy. The most critical problem is in our national and regional roads and public transportation on the main cities. But we also need large investments on ports and airports. The country needs to undertake large investments if we aim to catch up with other countries on the region such as Mexico and Chile.
Recent Initiatives Taken by the Brazilian Government to Foster Private Financing of Infra Projects
Ricardo Simões Russo (Partner), Enrico Bentivegna (Partner) and João Fernando A. Nascimento (Senior Associate) of Pinheiro Neto Advogados
After more than a decade of economic stability and timid (when compared to other emerging countries) although resilient growth, it is time for Brazil to tackle its most critical deficiency: the country’s infrastructure.
With most of the investments in infrastructure deployed back in the 1970’s and mid 1980´s, Brazil now faces a grim scenario: recurring power blackouts (apagões), especially during draught seasons, overwhelmed airports, roads requiring immediate maintenance, incipient railway network and insufficient port services. According to the latest “Global Competitiveness Report 2011-12” , Brazil, currently the 6th largest economy in the world, occupies the 53rd position in general competitiveness and only 104th in quality of overall infrastructure.
This scenario is a consequence of, among several other macroeconomic factors, a low rate of investments in infrastructure. It is estimated that Brazil has invested, in average, approximately 2% of its GDP in infrastructure since 1985. The main reason for this decline in infrastructure investments is the general deterioration of the macroeconomic environment verified in Brazil in the mid-1980’s, when the country was suffering with a soaring inflation and an upsurge in its public indebtedness.
There is consensus among all sectors of the Brazilian society that if the government does not act energetically in order to create a favorable environment for investments in infrastructure the country’s development may enter stagnation in the next years.
The Growth Acceleration Programmes (“PACs”) and BNDES
As an attempt to remedy the shortfalls concerning public and private investments in infrastructure, Brazilian federal government has put in place two large infrastructure programs, the first one in 2007 (“Programa de Aceleração do Crescimento” or “PAC” - Growth Acceleration Program), and the second one in 2010 (also known as “PAC II”). As a result, the share of public investments in infrastructure alone reached 3.2% of the country’s GDP in 2010.
Both PAC and PAC II program and the investments deriving therefrom rely heavily in public financing. As the main financing agent for infrastructure projects in Brazil, the Brazilian National Social and Economic Development Bank (“BNDES”) plays an essential role in the Brazil’s equation to sustain economic growth, competitiveness and innovation.
According to its own reports, BNDES is likely to disburse up to R$ 150 billion (US$77 billion) in 2012 , which represents a slight increase over last year’s R$140 billion (US$ 71 billion). This increase, although not very significant, evidences that Brazil is not ready yet to reduce the role of BNDES in the economy, so as to foster the participation of the private sector in the financing of infrastructure projects.
In addition, according to research reports published by the BNDES , there is a need in Brazil for investments in the amount of R$ 1,324.00 billion during the period of 2010 to 2013. Further, presently, approximately 90% of long term financings in Brazil were granted by state owned banks, BNDES and federal financial institutions.
In order to accomplish the above mentioned endeavor, the Brazilian government must improve the tools available in the Brazilian market, in order to promote the participation of the private sector in long term financings required for the implementation of infrastructure projects.
In this regard, recent rules and regulations were enacted in order to promote the creation of a long term financing private market. Such rules have as their main purpose not only foster the participation of private entities on long term credit transactions but also aim to promote in Brazil the development of the local debt securities market.
Infrastructure Bonds – Requirements and Benefits
Through the enactment of Law No. 12,431, of June 24, 2011 (“Law 12,431/11”), which was further regulated by Decree-Law No. 7.603, of November 9, 2011 (“Decree-Law 7,603/11”), the Brazilian government created certain mechanisms to promote the use by local companies of the capital markets for the purposes of their long term financing. Among these mechanisms the so-called “Debêntures de Infraestrutura” (Infrastructure Bonds) were created, the first type of securities in Brazil designed specifically to raise long-term private funds to be applied in infrastructure projects.
The Peruvian Electricity Market
LIQ talks to Michelle Haigh, Vice President and Investment Manager at Conduit Capital Partners
1. How does the current state of Peru's economy and political situation affect the electricity market from your investment criteria point of view?
Peru’s economy has experienced steady growth over the past ten years, from four to ten percent annually. In fact, it has been the fastest growing economy in South America in the last ten years. This GDP growth has led to an increase in power consumption of 85% over the period from 2000 to 2009. During that period, electricity demand has grown seven percent per year, while supply expanded by only three percent per year, putting pressure on the system and increasing the need for new investment. As economic growth is projected to continue at around five percent per year, we expect continued increase in power demand, particularly considering that Peru has among the lowest level of per capita electricity consumption in the region. Electrical power is needed to support increasing industrial activity. Continued advances in electrification (rural access) to provide power to the 15% of the population that does not currently have access to electricity will also contribute to the growth of power demand. Finally, as the middle class expands, the increased use of household appliances and other power-consuming devices increases demand for power on a per capita basis. This rapid growth in the demand for electrical power results in a very large need for new investment as power generation is a highly capital intensive business.
Economic growth in Peru is supported by a stable political environment and continuity in the regulations that govern the power sector and investment in general. When President Humala was elected in 2011, there was concern that Peru’s history of protecting investor rights could be threatened. However, experience to date and the selection of the ministers surrounding the president demonstrates a continued commitment to protect investor rights and maintain a predictable regulatory and tax environment, which is critical for any private investor. This is demonstrated by Peru’s investment grade rating from the credit rating agencies. The regulatory framework in the power system is balanced with specialized agencies responsible for oversight of defined segments. The Comité de Operación Económica del Sistema Interconectado Nacional (COES) coordinates the operation of the national power system, while the Organismo Supervisor de la Inversión en Energia y Mineria (OSINERGMIN) oversees reference prices and power concession contracts.
2. When you analyze the Peruvian electricity industry, do you see a greater potential for greenfield projects or for acquisitions of existing assets?
In any market, we seek opportunities both to acquire operating assets and to build new generation plants. In new plants, we focus on projects with full permitting that are close to entering construction. Given the growth in demand in Peru, we see compelling opportunities for new projects to add capacity to the system. There are an estimated $5 billion of new private projects in the planning stages.
Further, greenfield opportunities are supported by the existence of experienced construction companies in Peru. Greenfield projects require construction contracts that have a fixed price and which require the contractor to complete the project by a fixed date, with guarantees for on-time delivery and plant performance levels.
3. Talking about Power Purchase Agreements, as owners of power plants, why do you need them? And particularly in Peru, what is the average term length of PPAs and who are the most common counterparties?
The Power Purchase Agreement (PPA) is the foundation of any generation project. Only with visibility on the future revenues of a project is it possible to evaluate the cost of building the project and the resulting return to the investor. Without a long term contract, it is very difficult to obtain a reasonable level of debt financing. A contract period of 15 to 20 years allows for long-term financing and a reasonable equity return at an attractive power price. It is critical that the counterparty to the PPA, the off-taker, is a credit-worthy entity with the financial position to support the revenue payments over that period of time. Further, it is important to the long term viability of the project for the price of power to be competitive with alternative sources.
In Peru, most PPAs are with the distribution companies and large industrial companies. There are periodic auctions to sell energy to the system, and these are awarded based on the most competitive price. These are market-friendly contracts and allow for long-term financing.
Local Pension Funds and Infrastructure Development in Uruguay
LIQ talks to Ignacio Azpiroz of Union Capital and Maxmiliano del Vento of Partners Group
Ignacio Azpiroz: Last year a new PPP law was approved unanimously and the recent steps towards its implementation represent an appropriate legal framework to promote the participation of local investing institutions in future projects. Access to the asset class had been quite limited until now, but given the new regulation, I envision a substantial shift in the following months. In Uruguay, there is consensus among economists that, in order to maintain economic growth in the long run, the investment/GDP ratio must increase. As long as the PPP projects are adequately structured I am convinced that pension funds will support these initiatives.
Maximiliano Del Vento: Partners Group was founded in Switzerland in January of 1996 and has seen then steadily increased its presence to a global organization that includes over 550 professionals in 15 offices around the world. With approximately EUR 24.8 billion in assets under management across private equity, private infrastructure, private real estate, and private debt, the firm has remained as an independent company, allowing it to focus exclusively on private markets assets and minimizing potential conflicts of interests. Partners Group has been an early player in the infrastructure sector, making its first investment in 2001 and its first private infrastructure fund investment in 2002. As the infrastructure market matured, Partners Group developed significant infrastructure expertise through a number of investments in infrastructure partnerships, direct and secondary investments. These investments have been broadly diversified across geographic region and sector (e.g. transportation, communication, utilities and social infrastructure). Early on, Partners Group recognized the importance of making use of the full spectrum of private infrastructure opportunities: brownfield (existing), rehabilitative brownfield, and greenfield (development), across geographic regions and accessed through direct, secondary and primary investments. As a result, Partners Group began to establish the team, tools, systems and geographic presence necessary to address this broad set of opportunities. Since then, Partners Group has built up its expertise, relationship and knowledge base in global infrastructure markets, by investing over EUR 1.3 billion and completing 52 transactions in more than ten countries in the course of the past decade.
• How was the portfolio of the local pension funds, AFAPs, made up before the recent changes to the legal framework? Can you describe these changes in the framework? And, how do you envision the portfolio to change in the near future?
Ignacio Azpiroz: Current portfolio opportunities are reduced, not because of little interest from AFAP but because there are few projects available in the market. Considering both direct and indirect investment in infrastructure, AFAP’s participation today is about 5% of the portfolio. Montevideo’s International Airport is now a new landmark for the country and we are proud to have participated in this project. With regards to the recent changes to the legal framework, there are two main points from the lenders point of view: the concession pledge and the step in right implementation. In addition the pension fund limits regarding PPP investments was increased from 25% to 50%. I envision 10% to 15% participations in the asset class. The system currently holds 9 billion AUM which represents 17% of GDP and, if we take into account that it is still in the accumulation phase, these are big numbers for the size of the country.
• Why do infrastructure investments make sense for local pension funds?
Ignacio Azpiroz: I believe that this type of assets is intrinsically related to the portfolio’s objectives. These are long-run investments with a very attractive risk/return relation. In addition, there are several other positive aspects, including: a) diversify our portfolio; b) cash flows are indexed to inflation; c) improves the quality of life of our affiliates. It is important to point out that this kind of investments in infrastructure are also part of other pension fund portfolios of the region, such as in Chile, Perú, Colombia and México.
Maximiliano Del Vento: The continuing volatile macro-economic backdrop and record low real yields for safe assets have resulted in growing interest by institutional investors in an asset classes that can generate stable performance whilst still producing desirable yields. Infrastructure investments are attractive to institutional investors such as pension funds as they can assist with liability driven investments and provide duration hedging. Infrastructure projects are long term investments that could match the long duration of pension liabilities. In addition infrastructure assets linked to inflation could hedge pension funds liability sensibility to increasing inflation. In our experience, pension funds are increasingly looking at infrastructure to diversify their portfolios, due to the low correlation to traditional asset classes. In summary, the asset-class is attractive for pension funds because infrastructure assets typically: i- show low correlation to broader economic cycles, providing a key diversification benefit to pension fund portfolios heavily exposed to equities and bonds; ii- provide a stable predictable return with strong downside protection; iii- generate a running cash yield providing capacity to fund pension obligations; iv- trade at compelling risk premiums over government bonds; and v- provide inflation protection due to inflation-linked (or at least inflation correlated) payment structures.
• When it comes to infrastructure investments, do AFAPs invest/work together?
Ignacio Azpiroz: This is an important issue. At Union Capital we believe that any improvements regarding the development of the final security will benefit all interested parties. All key actors (developers, sponsors, funders and government agencies) should look for synergies in order to achieve goals, gain experience and move forward in a synchronize way.
• Are there opportunities for international institutional investors? Has there been interest shown by big international players in the Uruguayan market?
Infrastructure Investing: An Alternative Perspective
LIQ talks to Anadi Jauhari, CAIA, Senior Managing Director at Emerging Energy and Environment LLC and to Rajeev J. Sawant, Ph.D., Assistant Professor at Baruch College in New York
In this article, Anadi Jauhari shares his insights on the topic of alternative investment strategies, including hedge funds, listed and unlisted private equity in the context of the region’s huge infrastructure needs. Dr. Sawant explores the perspective of institutional investors as capital providers for infrastructure development focusing on both the promise and the challenges of investing in infrastructure assets.
Could you give us a sense of the scale of the challenges and investment required in the region in the context of the capital-raising environment?
Anadi Jauhari: Infrastructure investment in the region has lagged that of the middle income Asian countries such as Korea, Malaysia and Indonesia by a wide margin. At roughly about 2% to 3% of GDP annually in recent years, infrastructure investment levels in the region are considered barely sufficient to maintain the existing base of infrastructure. Similar to other emerging markets, economic and population growth, urbanization, and rising per capita incomes have created the need for more infrastructure-related investments. There is clearly an acknowledgement of the fact that the region’s existing infrastructure bottlenecks hamper productivity, limiting the full growth potential of the economies. A level closer to 4% to 6% of GDP per annum is recommended by the World Bank to meet new growth and maintain existing infrastructure stock. At about $5 trillion nominal regional GDP, this crudely translates into $200 billion to 300 billion per annum of infrastructure investment over the next 15 to 20 years. These investments are required in transport, energy, water and communication, as well as other social sectors, and will likely come from public and private sources.
How will such huge demands for capital be met?
Anadi Jauhari: These demands will be met by a combination of private capital both foreign and local, as well as by development banks and multilateral institutions. Local capital includes pension funds, insurance companies, family offices and high net worth individuals, while private capital may potentially include foreign institutional investors, pension funds and the sovereign wealth funds. Such foreign investors find some country markets in the region attractive due to their view on long-term fundamentals underlying such markets.
Recycling local savings to productive investments requires institutional and governance arrangements which are beginning to get established and be noticed following the success of the Chilean model. The region’s favorable demographics support the growth in the pension assets in Chile, Mexico, Peru, Brazil and Colombia. This is motivating for pension fund managers and country regulators to go beyond conservative investing and look to public equities and alternatives. The combination of more capital coming into equities via the growth of the local equity markets including the potential integration of the Chilean, Colombian and Peruvian stock exchanges in addition to the relatively more developed Mexican and Brazilian exchanges, is a positive development.
Private equity funds being raised in the market - $8 billion in 2011 and $16 billion expected in 2012 as per Preqin – are more generalist funds which target the overall growth in the region, though some of the capital may find its way into infrastructure, and over time in the medium term, we will see the development of sector or country focused infrastructure funds. Though private equity will still be part of the ecosystem, it alone cannot meet the region’s infrastructure needs, and will likely complement and or act as a bridge to the public equity markets in the region, especially as public markets become deeper and more integrated. Private equity capital can bring in private sector efficiencies in the build-out or in the private ownership and operation of such assets and will be important in the development of infrastructure stock in the region.
The interest of many foreign asset management firms to set up shop in the region to benefit from the favorable trends in the availability of local pools of capital, and the emergence of a local talent base of fund managers, is also a positive development which will likely further reinforce the deployment of alternatives.
Infrastructure assets by their very nature can support debt due to their stable cash-flow and operating profiles. The availability of debt capital to support infrastructure investments will come from local banks and local capital markets, though development banks are expected to play a role with the pull-out of the European banks. Foreign institutional investors in certain markets may view infrastructure debt attractive relative to the risk and return profiles of the assets and their favorable view on the sovereign and regulatory risks in these markets.
Raising Capital Offshore for Infrastructure Companies and Projects
Declan Sherman, Managing Director and Founder of Everlight Capital.
It has been an active several years for Brazilian private equity funds in terms of raising capital. BTG Pactual recently announced plans to create an investment fund of at least US$1.75bn for funds dedicated primarily to Brazilian infrastructure projects. In 2010 and 2011 we saw Advent International close their fifth Latin America private equity fund raising US$1.65bn, Gavea Investimentos raise US$1.9bn for their private equity fund and Patria Investimentos complete the raising of a $1.55bn infrastructure fund. Most of this capital has flowed into Brazilian investments and in each of these funds either some or all of this capital has flowed into infrastructure projects. A key characteristic of these funds is that significant amounts of capital either came from or is expected to come from international investors.
Project Bonds
Ana Corvalan, Director Project Finance, EMEA & Australia, Esprito Santo Investment Bank, London Branch.
Since early 2011, a number of high level discussions have been taking place in the market with a view to identifying new ways to continue financing project developments, especially in view of the financial crisis which has limited the lending capacity of the banking sector. The European Commission took the lead on these discussions and along with the European Investment Bank, launched the Project Bond Initiative which was followed by at least one other initiative.
Private Equity Fund of Funds
LIQ speaks to Estevao Latini, co-Founder and Managing Director of Latin America Alternatives
1. I find Latin America Alternatives (“LAA”) Management to be quite a novelty for our region. Can you tell us a little bit about how the Partners of LAA came up with the idea?
A founder of the firm, Rod Walkey, was a CIO of a well known family office in the USA. In 2006 Rod made an investment for the family office in a PE Fund-of Funds group in Asia called Asia Alternatives. Based on the great experience with this Asian product, he decided to make the same allocation to Latin America, but did not find any firm exclusively in the region, seeing the opportunity to develop the same business model in Latin America.
The Short Story on Infrastructure
Andrew A. Bogan, PhD and Thomas R. Bogan, CFA, Managing Members of Bogan Associates, LLC
While infrastructure investing has long been considered to be primarily a private equity investor’s domain, the past decade has seen a significant increase in infrastructure investment in publicly listed infrastructure companies whose stocks trade on equity markets around the globe. Since the global scale of public equity investors is far larger than private equity funds, it seems likely that over time this trend will continue with more infrastructure operators choosing to do initial public offerings of their common stock to raise additional capital. However, with listed securities trading on an exchange, infrastructure companies will not only have to contend with the scrutiny of investment analysts and their stock recommendations, but also with short selling, where a hedge fund or other investor borrows shares from a broker and sells them into the secondary market, betting that the price of the stock will fall in the future.
BNDES' Project Structuring Division
LIQ Proprietary Research
Infrastructure development is and will remain paramount as Brazil aims to sustain its economy’s robust growth and prepares for the upcoming 2014 World Cup and 2016 Olympics, and there is a general consensus that bottlenecking caused by insufficient infrastructure presents a great danger and challenge to the country. In spite of its spectacular rise to being the 7th largest economy in the world and the largest in LatAm, Brazil was ranked 64th in the world in an infrastructure index by the World Economic Forum as part of its World Competitiveness Index.
Value for Money: When are PPPs the best alternative?
Jaime Jesus Betalleluz Fernandini - Infrastructure, Government & Utilities Advisor
A growing number of countries have created Public Private Partnerships (PPP) to promote the offer of assets and services of infrastructure by the private sector. The experiences gained in different countries could indicate that economic infrastructure is generally a more conducive environment for the creation of these kinds of partnerships than social infrastructure (e.g., health care and education) for three main reasons.
Latin American Hedge Funds
LIQ talks to Victor Hugo Rodriguez, Founding Director of The Hedge Fund Association (HFA) – LatAm Chapter
1. As Director of the LatAm chapter of the Hedge Fund Association, what is your overall opinion on the state of LatAm based hedge funds?
The state of local and regional hedge funds is a great indicator of the state of the regional capital markets. For the last ten years, LatAm hedge funds have shown a strong and steady growth primarily due to the activities of hedge funds based out of Brazil. What are the main reasons? Excellent macroeconomic policies, great political leaders and the fact that the Brazilian mutual fund industry evolved in such a way that facilitated the development of hedge funds, under the regulation of the local Comissão de Valores.
Currently, more than 80% of LatAm hedge funds are headquartered in Brazil.
While Brazil has taken the lead in recent times, the hedge fund industry in other LatAm countries will benefit in the short to medium term future as the quest for alternative investments among asset managers around the world continues.
The regional industry showed relative strength during the market dislocation of 2008. The performance of LatAm hedge funds only declined 4.98% which showed that capital preservation was of the utmost importance for managers. While one can claim that the BRIC economies have fallen a bit behind lately, there is no doubt that, among them, Brazil represents a great entry point in the event of a healthy pull back.
2. Do these hedge funds invest regionally or in a particular country?
Interesting question. Practitioners always try to invest in their own countries because of the comparative and competitive advantages they can have. However because managers look for liquidity, diversification and new investment opportunities it is natural for them to adopt a regional perspective. Currently, some hedge fund managers have two main portfolios (sub-funds): (i) the domestic portfolio and (ii) the LatAm ex-Brazil portfolio.
3. Why would a hedge fund manager have an ex-Brazil portfolio?
Well, like I said before, 80% of the hedge funds are based out of Brazil. A hedge fund manager from any other LatAm country will find it hard to convince investors about his/her expertise in the Brazilian market. It is easier to sell the comparative and competitive advantages you may have in other countries.
4. The line between hedge funds and private equity funds is getting more and more blurry in more consolidated markets, is this case too in Latin America i.e. do hedge funds invest in private equity?
Hedge fund managers can and do invest in what are now called "special opportunities". Private equity investments are very important for institutional investors around the world and Latin America is not an exception. However, as the region begins to see more Initial Public Offerings, I think that the typical hedge fund managers will stick to listed equity investments. You should note that the technological infrastructure of regional stock exchanges is more than ready to handle large trading volumes as more investors and issues access the regional capital markets. Also note that in order for IPOs to continue growing, governmental incentives are needed for family business to consider trading off opening their companies for public scrutiny. To finish, it is important to remember that a great number of hedge funds in Latin America have a very important mix of equities and credit (bonds) in their portfolios; this is the way they prepare for possible times of increased volatility. They are pretty savvy managing risks these days.
5. Are there funds of hedge funds active in Latin America?
This is also a very interesting question. There are funds of private equity funds and hedge funds. This is because institutional investors from the United States, Europe and Asian consider these vehicles to be very valuable and are willing to pay extra fees for the know-how of where to invest considering the large number of hedge funds in the region in order to reduce their exposure to operational risks. This is interesting because funds of funds are retreating in other regions. Worth commenting as well is that local pension funds are currently analyzing these investments for potential changes in the future.
6. Given your job as Director of LatAm Alternatives you are probably the right practitioner to ask about how do LatAm’s institutional investors view alternative investments.
At LatAm Alternatives we deal with North American and Latin American institutional investors. In the case of LatAm institutional investors they have been rather cautious. For these investors, education is and has always been a very important issue. This particularly true after the big mistakes of 2008 and fraud cases such as the well known Madoff case. Having said this, the LatAm institutional investors are eager for solid, transparent and sound alternative investments opportunities because of the diversification benefits, adjusted volatility and returns.
7. What are some of the main concerns global institutional investors have when it comes to analyzing potential alternative investments in Latin America?
They consider the following aspects: (i) liquidity of the investment strategy; (ii) strength of the strategy (iii) the team's professional and academic background and what kind of relevant exposure the team's members have had; (iv) fund's size; (v) market's size; (vi) social and political stability of the country; (vii) correlation between the fund's past performance and the economy and world's markets; (viii) the custodians (Multi primes perhaps); (ix) what type of risk management tools the fund's manager is using; and (x) how the manager separates alpha from beta and how he/she actually generates returns.
8. How do they approach the due diligence of these vehicles?
Institutional investors have rigorous due diligence questionnaires and they also perform internal investigations of potential investments. They also hire firms such as LatAm Alternatives as consultants to know "who is who" which is critical when negotiating.
9. Are there infrastructure funds active in the region?
Of course. In the alternatives markets there are three fundamental areas: market strategies, private equity and infrastructure. There are funds active in Brazil, Mexico, Chile, Peru, and Colombia. I would like to mention that these types of funds will grow even more in the next decade due to the consolidated expansion of middle class in Latin America and the great infrastructure need in the region.
10. If so, what is the state of these funds?
They are very active particularly because local institutional investors find them as a very appropriate investment. As I mentioned before, infrastructure funds together with hedge and private equity funds will all keep on growing because there is a lot of liquidity out there and the region's middle class keeps expanding.
On a last note, people that work in the capital markets and particularly in Alternative Investments around the world have a particular mission to "give back to society" in the form of philanthropy. We in Latin America should do the same. There are no excuses. If you can't give out monetary resources you can give out your time. We will be proactively promoting The Hedge Fund Care in Latin America. Our countries need our help and we the LatAm Hedge Fund Community will step in even further. Please visit http://www.hedgefundscare.org/
Chinese Investment in Latin American Infrastructure: Synergies, Opportunities and Challenges
Darin Bifani, Founder of Puente Pacífico Investment Advisory Ltda
Despite the distance between them, China has become LatAm’s third most important commercial partner behind the United States and the European Union. Following a long period of modest activity, Chinese investment in LatAm skyrocketed to approximately US$15 billion in 2010 and annual bilateral trade increased 12-fold from the year 2000 to approximately US$118 billion. While a significant amount of Chinese investment in LatAm has involved buying natural resources to support its industrial growth and help feed its approximately 1.3 billion people China has also agreed to provide billion of dollars in connection with important LatAm infrastructure projects, including rail upgrades in Argentina, electricity acquisitions in Brazil and dam construction in Costa Rica.
Infrastructure Debt Funds and Exchange Rate Risk in Latin America
Patricio Abal, Editor - Latin Infrastructure Quarterly
A few months ago, we were consulted by an investment professional at a certain infrastructure advisory firm on how managers of an infrastructure debt fund (IDF) in an emerging market could hedge against the exchange rate risk. This matter is of critical importance when LPs lend to an IDF in a hard currency (e.g., U.S. dollars, euros, yen) and the IDF’s assets are in the project’s currency. At this point, we would like to highlight the value of providing debt financing in the same currency as that of the borrower’s revenue. Not only is it critical for the borrower itself but it is also convenient for the lender and the economy as a whole because the number of potential borrowers exponentially increases.
Mezzanine Finance For LatAm's Infrastructure
Patricio Abal, Editor - Latin Infrastructure Quarterly
Mezzanine finance is an innovative and complex way to finance corporate expansion projects, acquisitions, recapitalizations, and leveraged buyouts, as well as to structure refinancings. A mezzanine financing can be structured in a number of ways, a versatility that facilitates its capacity to evolve with market conditions and adapt to meet particular financial needs of companies and projects. As Eduardo Farhat, a Principal at Darby Overseas Investments (Darby), the private equity arm of Franklin Templeton Investments specializing in emerging markets and an experienced player in mezzanine finance worldwide, says, “A well structured mezzanine transaction aligns all interests around the success of the project and provides all sides with a better deal, as it mitigates risks from the investor side while avoiding unnecessary dilution from the sponsors.”
CleanTech Infrastructure
Anadi Jauhari, CAIA, Emerging Energy and Environment LLC (EEE)
The region has the benefit of deploying the newest technologies developed elsewhere and hence, leapfrog other countries with more established energy infrastructure. As US, Canada, Europe, and Asia (especially China) begin to direct investment dollars in the development of clean technologies, which, once commercialized, can be transferred and deployed in the region.
As the cost of producing energy from renewable sources has come down quickly and if our long-term outlook is one of scarce natural resources (oil, gas etc), then cleantech, as an energy solution, becomes economically attractive. Also, as evident from recent renewable energy auctions in Peru, Brazil and Uruguay, renewables are competitive with traditional forms of energy without explicit subsidies. Clean technology solutions – especially distributed generation – can be implemented quickly in smaller communities – as often there are no scale disadvantages with smaller renewable generation sources. Such projects can have direct economic benefits – through the localization of supply chains. Such green stimulus is an important contributor in creation of jobs which makes clean energy politically acceptable.
