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Conduit Capital wins $1.4bn pipeline concession in Peru

Over two years in the making, the 700-mile natural gas pipeline represents the largest project the New York-based infrastructure investor has ever been involved in and marks a significant economic development project for the Latin American country of 30 million.

Conduit Capital Partners, a private equity firm that invests in Latin American infrastructure assets, has won a $1.4 billion contract to build a 700-mile natural gas pipeline in Peru.

The pipeline will carry natural gas from the country’s Camisea gas fields to the port of Ilo in Southern Peru and is expected to be completed by 2012. The project represents the largest infrastructure undertaking Conduit has ever been involved in “by a factor of three to four”, according to Conduit Chairman Scott Swensen.

Conduit will develop the pipeline through its portfolio company, Kuntur Transportadora de Gas, which it

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formed in 2006 for the purpose of building the pipeline. Conduit partner Samuel Gomez, a native of Peru and Kuntur’s president, sprearheaded the project.

The pipeline marks a significant economic development project for the Latin American country of 30 million,which expects to see an additional 500,000 jobs and $5 billion of new investment as a result of the pipeline.

Peru received two other proposals for the pipeline after Kuntur’s, one from a local affiliate of France’s Suez and another from Houston-based Energy Transfer Partners.

Suez’s and Energy Transfer Partners’ proposals ran into technical and environmental concerns from the Ministry of Energy and Mines and Kuntur was awarded the contract. 

“We have done our homework and our application was very strong. We did studies on technical side and also on the environmental side,” Gomez said.

Asked whether Suez and Energy Transfer Partners had tried to steal their lunch at the last minute, Swensen and Gomez simultaneously responded “yeah”.

“The reality is we had a groundswell of local support for our pipeline and the others had none of that. They came in late into the game and didn’t make it,” Swensen said.

The $1.4 billion project will be financed half with equity and half with debt. Conduit, which is currently investing out of its $393 million Latin Power III fund, has already committed $68 million toward the project. Nearly half of the remaining equity is expected to come from strategic investors and the rest from co-investments by Conduit’s existing LPs.

Swensen said that interest from multilateral and bilateral lending institutions such as the Inter-American Development Bank and Dutch development bank FMO has been so strong that “quite frankly even if we had to go out today I’m pretty sure we could get financing”.

Conduit, which has had a presence in Peru since 1996, has a long history of investing in the region. Its Latin Power I closed on $100 million in 1993 and has returned an estimated 2.2 times committed capital and generated a quarterly internal rate of return of 10.3 percent. Its second fund, Latin Power II, which closed on $157 million in 1998, holds just one remaining asset and is poised to return 2.1 times committed capital. It is generating a realized quarterly internal rate of return of 15.5 percent. 

Asked for advice on investing in Peru and other Latin American economies, Swensen and Gomez had two suggestions: “go local” in terms of hiring talent and “be environmentally responsible” and conscious of locals’ concerns.