Patria Investments is the one of the largest Latin America-based alternative asset managers, and the 68th biggest infrastructure investor in the world, according to the 2022 edition of our II 100 ranking, situated in the largest country in the region and the most populous city in the Americas.

The firm has been investing in infrastructure since 2006, across power and energy, logistics and transportation, telecoms and data infrastructure, with its flagship fund series raising over $5 billion across four closed vintages. Its main countries of focus are Brazil, Colombia and Chile – and according to Andre Sales, Patria’s head of infrastructure, the opportunity sets in these countries are broad.

“Brazil, being one of the largest economies on the globe, has one of the poorest qualities of infrastructure. What does that mean? That means opportunity for private investment to come in,” he said. “[Latin American infrastructure] has been left behind over the past few decades… but these are big economies.”

Indeed, according to the World Economic Forum, Brazil’s infrastructure ranked 78th in the world in 2019. It’s GDP, meanwhile, was the 12th largest in the world in 2021, according to the International Monetary Fund.

Latin America has large economies with massive need for buildout, as well as the lowest geopolitical risk in the world, according to a 2021 working paper authored by the Board of Governors of the US Federal Reserve, the World Bank, Itaú and Patria Research. There’s obviously money to be spent – but where should it go?

Credit where it’s due

“There is huge potential ahead of us [in Latin American infrastructure credit]. For every infrastructure project, a typical capital structure would be around 30-50 percent equity and 50-70 percent debt… So, for every opportunity that I’m describing to you [in equity], the credit opportunity is even larger,” Sales said.

Patria recently launched its inaugural Patria Infrastructure Credit Fund and is working towards its first close. Targeting BRL 5 billion ($1 billion; €939.3 million) with anchor investments from the International Finance Corporation and Corporación Andina de Fomento, it is not only a first for the firm, but for the region itself.

“30 years ago in Brazil, it was just the National Development Bank [providing project finance]. It was almost a monopoly. In the last 10 years, it moved from the National Development Bank [BNDES], to BNDES plus some of the large banks,” Sales explained. “Now, we’re positioning ourselves to be another provider of credit solutions to a market that is increasing and growing significantly.”

Patria felt the need for flexible credit structures for years as an alternative asset manager in the region, and hopes other players think of doing the same. “As Latin American citizens, we would love to have other people doing the same. The market is a giant market,” Sales said.

Another avenue that is not as new for the firm, but nevertheless has seen a growth of funds worldwide, is core infrastructure. While the vertical might be floundering in LatAm’s neighbors to the north, down south it’s thriving.

“One avenue that we continue to grow is our [evergreen] core funds… the core funds are buying more mature assets that are already generating cashflows and yields,” Sales explained. “We established already two funds in Brazil and we’re looking at a number of opportunities for other core funds.”

Patria’s two core funds currently in market are Patria Infraestructura Energia Core Renda, which currently manages R$191.5 million ($38.76 million; €35.95 million) in assets – and Patria Infraestructura Energia Core, which manages R$800 million in assets.

According to a form 20-F filed by Patria, the latter fund is listed on the Sao Paulo Stock Exchange under the symbol PICE11, providing investors with liquidity through the secondary market.

As for the former fund, the form stated: “In August 2022, we launched the second fund of our infrastructure core family, Patria Infraestrutura Energia Core Renda FIP Infra, or ‘PIER’. PIER raised a total of $36 million and invested in a portfolio of nine small hydro plants that are fully operational, with inflation-indexed long-term contracts and already distributing yield to investors.”

In North America and Europe, core infrastructure has faltered in popularity due to mispriced risks, high interest rates and the comparative draw of treasury bonds. Lower grade treasury bonds combined with decreases in interest rates have created the exact opposite scenario in Latin America. Both Chile and Brazil – two of the largest economies in the region – have begun to reduce their interest rates.

This reduction in interest rates has also had an impact on Latin American LPs, which has made the market more opportune for fundraising.

“In the past, interest rates in Latin America were way higher than those of the developed world. As of now, interest rates are going down, and overall, interest rates in Latin America are way lower than they were in the past. Because of that, corporations, large family offices and financial groups have to look for more accretive or better return profiles versus government bonds. And because of that, they have to run more risk,” Sales explained.

As a result, there’s been a recent draw for LPs towards alternative markets. Patria’s fifth flagship vintage, for example, reached a first close in Q2 2023 on $330 million, with about half of its LPs hailing from the region. Usually, that figure is closer to 20 percent.

Patria’s $2 billion fourth flagship infrastructure vintage has to date generated a net IRR of 16 percent in USD and 12 percent in BRL, according to the firm’s Q2 2023 presentation.

What the West gets wrong

When it comes to Latin America as a growth market, political risk is typically at the forefront of foreign investors’ minds when looking at the region. As aforementioned, the geopolitical risk of the region has been reported to be the lowest in the world. And when it comes to policy change and regime change risk, the worries there may also be outsized – at least in certain countries.

“[The Brazilian government has] had right, conservative, liberal, all types of governments at the federal level here. And still… rules and regulations and contracts were maintained and kept,” Sales said. “It’s a region that combines strong growth with a stable regulatory framework.”

And when these changes in government inevitably happen, Patria has worked out a way to mitigate those risks. “In each country, we select the sectors that are less vulnerable to [these switches in] political orientation. There are some sectors in which, for example, the regulation is done at the municipal level; that is riskier than sectors in which we have a federal regulation,” Sales explained.

He continued: “What we, as investors, have been doing in the past is selecting the sectors that are more connected to the federal level [for regulation] in the three countries [of interest] here: Colombia, Chile and Brazil. When it goes to state level or municipal level, we look to work with states and municipalities that are more advanced and more institutionalized as a form of reducing the political risk.”

Evidently, to succeed in Latin American infrastructure, an understanding of the idiosyncrasies of each country in the region is key. And fortunately for Patria, investors abroad are getting more sophisticated – and they’re ready to learn.

“When we started fundraising 15 years ago, investors were less knowledgeable about some of the risks, challenges, mitigators, upsides, all of that [in Latin American infrastructure]. Now, when we speak to investors, their learning curves and experiences in some [riskier verticals] in the developed world – in digital, in renewables – their interactions with us have been deeper, more profound,” Sales said.

However, Patria’s view is that there’s no amount of learning that an investor abroad can do that will compare with having a genuine local presence. Perhaps that’s why Patria has a thriving co-investment business, having garnered over $1 billion in co-investments as of Q2 2023. One of its latest transactions involves a slew of co-investors – led by Saudi Arabia’s Public Investment Fund – in a highway network in the south of Brazil.

“In order to make money in Latin America, you have to be local. You have to have boots on the ground,” Sales urged. “Our history here shows that there’s no way someone will consistently make money – there can be successes in one or two particular cases – but be consistently successful in investing in Latin America without a local strong presence.”

Patria currently has 80 people working in its offices throughout Latin America – which Sales says is a testament to its success across the entire region, not just its native Brazil.

“Evaluating risks of licensing, permits, land acquisitions, dealing with communities, dealing with local regulatory agencies, financing, dealing with construction companies… For all of those elements, it is one thing is to be on the ground, to speak the same language and have the same mindset of other stakeholders,” he said. “That’s the winning model.”

He continued: “It’s another thing to be sitting at a desk, far away, reading reports and making decisions. We don’t believe in this second way of doing things.”