IFC: Latin America opens up for pension investment in infrastructure

Gabriel Goldschmidt, the IFC’s manager for infrastructure investments in Latin America said the regulatory trend toward enabling Latin American institutional investors to participate in private equity-style funds is ‘a train that has left the station’ and will increasingly channel more money into infrastructure.

Convinced that institutional investors should be able to diversify their portfolios, Latin American countries are implementing new regulations to allow their pension funds to invest in private equity-style funds, a trend that augurs well for infrastructure managers interested region.

“This is a train that has left the station,” Gabriel Goldschmidt, manager for infrastructure investments in Latin America and the Caribbean at the International Finance Corporation (IFC), said of the trend. 

Traditionally, Latin American institutional investors, such as pension funds, have only been allowed to make very conservative investments, such as government bonds and corporate fixed income investments. 

But in the last three years, as the global financial crisis has roiled markets and cut off the flow of capital to many developing countries in Latin America, regulators began to re-think these restrictions, which largely barred local capital from investing in local projects and businesses. In Colombia, for example, a regulatory change – decree 2175 of 2007 – allowed Colombian pensions for the first time to invest in local private equity-style funds.

“There was a realization by different countries in the region that it makes sense for institutional investors to diversify,” Goldschmidt said. “I would say that all the major markets – Mexico, Colombia, Argentina, Chile, Peru – with similar regulation will facilitate the development of these vehicles and quickly thereafter interest on the part of private investors to create these types of vehicles and to make investments.”

Brookfield, the Canadian asset manager, has already taken advantage of the trend by setting up a Colombia-focused infrastructure fund, which held a first close on $320 million in September. Brookfield is also working on a similar fund for Peru. And in Mexico, Macquarie raised approximately $270 million from local pensions for a peso-denominated infrastructure fund after a regulatory change there allowed Mexican institutional investors to participate in private equity-style funds.

And Ashmore, the emerging market-focused private equity firm, won a competitive bidding process in 2009 to manage a Colombian government-sponsored infrastructure fund. The fund, Colombia Infrastructure Fund Ashmore I FCP, is targeting $500 million for investments in infrastructure projects in sectors such as transportation, power, water, telecommunications, waste management and logistics, according to the IFC website. 

The IFC, which selectively commits capital to funds that fit its mandate of poverty reduction and promoting private sector development, is analyzing the possibility of making a $20 million commitment to the fund, Goldschmidt said. He expects that IFC’s Boardwill consider the investment in the coming months.

The IFC, however, is not considering single country infrastructure fund investments beyond the Ashmore-managed fund in Latin America. “We don’t want to displace private investors but to complement [them] when there is a need,” Goldschmidt said, adding that other funds like those managed by Brookfield are able to attract private sector interest without the need for multilateral assistance.

The IFC hopes its commitment will attract international investors to the fund, which Ashmore estimates will top out at between $300 million and $500 million in total commitments.

However, the fund also hopes to attract Colombian pensions by developing “new vehicles to channel local pension fund liquidity into infrastructure projects”, according to the IFC website: a strategy made possible by the 2007 regulatory decree.