IG4 Capital has launched its third infrastructure fund – IG4 Infrastructure Value Fund III – with a target of $1 billion.
The vehicle is targeting a gross IRR of 18 percent. It is anticipating a first close in Q3 this year, while eyeing a final close before the end of the year, according to documents seen by Infrastructure Investor.
The fund will seek to make eight to 12 value-add investments across Brazil, Chile, Peru and Colombia, with mid-market equity tickets ranging from $100 million to $150 million.
“A mid-market strategy [is] where we see lower competition, can negotiate opportunities bilaterally and apply our value creation strategy which has been successful in funds I and II,” explained Thiago Silva, managing director and co-head of infrastructure at IG4. Silva joined IG4 last year, having previously been a director in both Toronto and London in the Ontario Teachers’ Pension Plan infrastructure and natural resources unit.
Fund I is an evergreen, single-asset fund holding Igua, a private water company in Brazil. Fund II, by contrast, is a closed-end $250 million fund, and saw its final investment in November 2021, a $57 million investment for 50 percent of Chilean logistics group Adelco. Three other deals from the fund comprise Peruvian infrastructure construction group Aenza, Brazilian logistics company Cli and Brazilian hospital group OPY Health.
Those prior two funds were raised over the past six years, generating an AUM of about $1.2 billion. If reached, a $1 billion vehicle would be of a significant size for the region. The largest private infrastructure fund in the region to date is Patria Infrastructure Fund IV, which closed on $2 billion in August 2020.
Silva chalks success up to local expertise – a common theme when it comes to success in Latin America as an emerging market. “Having a strong local partner like IG4 which has boots on the ground in the most mature countries of LatAm like Brazil, Chile, Peru and Colombia [is key],” he explained. “There are a lot of perceptions and headlines around Latin America that sometimes scare investors. But when compared to other emerging markets, you find well-tested democracies that have historically respected contracts with foreign investors and have an ongoing need for foreign capital to continue to develop infrastructure.”
Paulo Mattos, chief executive of IG4, concurred. “Political noise, that’s common in Latin America. But the maturity of the market for investors is there,” he said. “Political instability that people may perceive is not really affecting the M&As and the transactions on the ground. It’s probably just scaring away the less experienced investors and reducing the availability of capital in the region, which just creates less competition for us to find good investment opportunities.”
He continued: “Today I do see much more political instability in Europe and in Asia than in Latin America. And we cannot discard the worsening of the tensions between China and the United States, affecting deeply markets in North America and in developed economies globally.”
Mattos also highlighted that the dislocations and volatile markets of Latin America result in highly-discounted assets. “If you have a proper structure in terms of the way that you design the deals, you can have higher returns, very well adjusted in terms of the risk,” he said. “I believe it’s not actually as high as the risk that you’d take to invest in other emerging markets like China, India, Southeast Asia, Eastern Europe or Africa in general.”
Mattos claimed this reduced risk stems from the fact that Latin America’s regulatory structures are more similar to those of developed markets, and that the region has a long track record of dealing with macro issues like inflation, which have paralysed other markets in recent months.
“Right now, considering that inflation is high today in Europe and in the US, with low or negative real returns on treasuries and even in infrastructure investments, this is a good time to get into the Latin American infrastructure market. Currencies in Latam are on favourable terms and inflation is lower with indexation protection on tariffs,” Mattos explained.
Indeed, the inflation rate in Brazil and Peru at the end of last month was 5.6 percent and 8.6 percent, respectively, compared to 6 percent and 8.5 percent in the US and Europe, respectively. However, rates are higher in Chile and Colombia at about 12 percent.
“But this is very short term,” Mattos added. “Investors in infrastructure have a long term approach. I think the history has shown that in Latin America, you need to be on the ground to source value investments opportunistically.”