Patria on a new dawn in Latin America

This article is sponsored by Patria

In the volatile macroeconomic and geopolitical environment we are currently experiencing, what makes Latin America an attractive infrastructure investment proposition?

Despite the tense global geopolitical environment that has emerged as a result of the Ukraine-Russia conflict, Latin American countries have had significantly lower geopolitical risk exposure, according to the US Federal Reserve’s GPR (Geopolitical Risk) index. In fact, the current geopolitical crisis highlighted how Latin America could be a safe haven within this broader volatile environment, especially within the context of emerging markets. The Latin American economy has also been growing faster than developed markets after the pandemic hit that caused a dramatic economic collapse across the globe.

Secondly, and very importantly, I would point to the spike in commodity prices, which started in 2020 and accelerated with the crisis that disrupted supply chains. This boom benefits most countries within Latin America that are the major exporters of commodities, having a diversified export base and strong internal markets.

Finally, Latin American markets have typically offered low correlation to assets from developed markets, being an important destination for investors looking to diversify their exposure.

Which markets within Latin America do you deem to be particularly interesting?

We are open to investing in most countries within Latin America. Our three primary markets of interest at the moment are Colombia, Chile and Brazil, but we have also increasingly been investing in and researching other Latin American markets, including Mexico.

And what sectors represent the most attractive opportunities within those countries?

We focus on four main sectors. The first is power and energy, which primarily means renewable projects and energy transition-related opportunities. Our track record in that area covers wind, solar and small hydro plants. Indeed, our existing fund invested in all three of those renewable power sources.

The second sector where we are active is logistics and transportation. Within that space, we focus on subsectors, including brownfield toll roads across Latin America, commodity logistics opportunities, port privatisations, and urban mobility projects. A prime example would be the two toll road concessions that we currently hold in Colombia. That is a segment with a very stable regulatory environment, and the country is currently in its fifth wave of concessions. We have invested more than $1 billion in that area.

The third sector I would point to is data infrastructure, mainly driven by the deployment of 5G networks and data centre-related opportunities.

The fourth sector is environmental services, which covers a number of subsectors including the privatisation of sanitation assets in Brazil, water desalination opportunities in Chile and Peru and waste management investment opportunities across the region.

What are some of the challenges that investment in Latin America can present and what sorts of experience or skillsets are required to overcome those?

The most significant challenges that stand out involve the need for investors to interact with multiple local stakeholders.

An example that demonstrates complexities and challenges with different stakeholders would be a relevant transmission line project that we built in Brazil. Most of the major energy sources in Brazil are in the north and consumption is concentrated in the south of the country. The construction of transmission lines was critical to balance out the energy matrix.

In that context, we won an auction and successfully built 1,500km of transmission lines, involving the acquisition and right-of-way negotiation through 2,000 properties in 42 different municipalities. There were intense and close interactions with local communities, environmental authorities and regulatory agencies in order to execute on that project on time. In fact, we delivered two years ahead of regulatory schedule.

In terms of the skills required to overcome those challenges, I would say, first and foremost, that being successful in Latin America involves strong local expertise and on-the-ground presence. Patria has therefore taken the decision to build relevant and experienced local teams in each of the countries where we operate.

What role would you say that ESG plays in Latin American infrastructure and what is your own approach as a firm?

Latin America, as a region, has one of the cleanest energy matrixes globally, and so, from an environmental perspective, it has clear advantages. Indeed, more than 50 percent of the energy consumed in the region already comes from renewable sources and Latin American countries have set a collective target of 70 percent renewable energy use by 2030, more than double what the EU is planning.

With respect to Patria, ESG has been a foundational part of our ethos since the firm was founded more than 30 years ago. It is a crucial component of our investment and execution strategy. We are signatories to the UN PRI and we incorporate ESG considerations into every investment decision and value creation processes. We also track the impact of ESG KPIs throughout the life of our investments and we do that based on the UN’s Sustainable Development Goals.

How would you describe LP appetite for Latin America infrastructure and is
it changing?

I would describe it as strong and growing, primarily as Latin America has proved to be an important and strategic region providing geographic diversification and attractive returns with low correlation to developed countries.

What are your thoughts on what the future holds for the Latin American infrastructure market?

I think the timing is right for Latin America. The region has structural bottlenecks that will take considerable time to address, becoming the source of sizeable and attractive infrastructure investment opportunities. Also, the encouraging long-term growth prospects of the region’s domestic markets will generate further demand for infrastructure that will boost the attractiveness of the investment environment for private capital. Finally, certain Latin American countries, such as Colombia, Chile and Brazil, have stable regulatory environments, which have been in place for decades, and can provide superior returns with a solid downside protection.

Latin America is being heralded as a new leader in renewable energy. Can you talk more about some of your experiences in that sector?

Certainly. In 2021, we began operations at the Sol do Sertão Solar Power Plant in Bahia state in Brazil, 300 miles from the state capital, Salvador. With an investment of $250 million in capex and a capacity of 475MW, the project was developed by Essentia Energia, which is a renewable energy platform Patria established in 2019.

This latest addition to Essentia is now the second largest solar energy complex in Brazil and the third largest in Latin America. It is expected to serve 580,000 households, saving approximately 465,000 tons of carbon dioxide emissions per year by generating power from a clean, sustainable source. It is also a state-of-the-art project, with more than one million bifacial solar panels covering an area equivalent to 1,000 soccer fields.

We are proud of this project, with construction completed on schedule in just 19 months, despite beginning in March 2020, coinciding with the outbreak of the pandemic in Brazil. Meanwhile, Essentia’s wind power project, also being built in the northeast of Brazil, is expected to be completed early next year, with a capacity of 465MW, and we are also developing a pipeline of additional projects across both wind and solar technologies.

When it comes to hydroelectricity, meanwhile, we have very recently announced the acquisition of nine small run-of-the-river plants, which do not have reservoirs. These plants are diversified geographically and have a combined installed capacity of 167MW, providing clean energy through long-term inflation protected contracts.