Challenger in $41m bolt-on Chilean gas deal

The transaction is the recently-launched Challenger Emerging Markets Infrastructure Fund’s second deal and its first bolt-on to a platform company. Managing director hopes to replicate the Chilean strategy in Asian countries as the fund moves ahead with a $1.2bn fundraising effort.

Challenger Emerging Markets Infrastructure Fund has completed a $41 million acquisition of Energas, a Chilean gas distribution company.

The transaction marks the fund’s first bolt-on acquisition to one of its platform companies – Gas Valpo, a Chilean gas distribution company it bought in late June for $95 million. It also is Challenger’s second transaction overall since it held a “soft close” on $200 million in July, according to Andrew Jones, managing director of the fund.

A joint venture between Australian asset manager Challenger Financial Services Group and Japanese trading house Mitsui, the Challenger Emerging Markets Infrastructure Fund is a seven year closed-end investment vehicle targeting a total of $1.2 billion.

Mitsui and Challenger Financial Services Group are its cornerstone investors in the fund, with a total commitment of $100 million. Australian pension funds and Asian investors represent the balance of the initial funding, Jones said. A first close is scheduled for the first quarter of 2009, Jones said, although he declined to name a target amount.

Jones said that the Energas transaction has effectively doubled the size of Gas Valpo. He also expects the company to see significant growth going forward since its gas distribution network is located next to a liquefied natural gas terminal currently being developed by the Chilean government in the coastal port city of Valporaiso.

Chile is preparing to get its natural gas from ships rather than through pipelines from Argentina, which has restricted its gas supply to Chile in recent years beacause of increasing local demand, Jones said. Gas Valpo will benefit from increased throughput once the terminal opens for business.

On a combined basis, the two companies are yielding a 17 percent internal rate of return based on 10 percent leverage, Jones said.

Challenger is next setting its sights on Asia, where it targets five other emerging economies: India, China, Indonesia, Vietnam and Thailand. Jones said he plans on pursuing the same strategy of platform followed by a bolt-on acquisition in those markets, with six or seven total platform companies planned for the fund.

“If we get as lucky as we’ve been in Chile, it would be great,” Jones said.