Until recently, wary pessimists in the Brazilian business community would sometimes add a punchline to the declaration that “Brazil is the country of the future”, sighing, “and it always will be”.
Today, Brazilians increasingly believe the future will be bright indeed. A country that was for years plagued by sky-high interest rates and paltry growth is finally taking off. Brazil’s benign economy is even more noticeable with the more developed North American and Western European markets in shambles.
Brazil: Finally hosting
Eduardo Sa, head of funds development at state-backed bank BNDES, says that “the upcoming World Cup and Olympic games here will require many investments. . . This is a big challenge for us. Business services, telecommunications, real estate, airports, oil and gas services – we are trying to focus private equity towards these things. We have only a few years to accomplish this.”
Luckily, Brazil’s need to attract infrastructure investment comes at a time when investing in Brazil has never been more attractive to foreign and local institutions alike.
Describing a macroeconomic and actuarial trend that is perhaps the most talked-about phenomenon in the Brazilian financial industry, NSG Capital's Luiz Eduardo Franco de Abreau says: “We are now seeing a sustainable decrease in interest rates, and that will permit long-term investments. Many local LPs that previously invested in government bonds need to go to the stock market or private equity investments.”
Indeed, the importance of declining interest rates to the Brazilian investment opportunity cannot be overstated. As recently as 2003, interest rates were above 25 percent. They now hover near 8.75 percent – still fairly high by US standards, but for Brazil this represents a bargain basement.
BNDES is one of several state-affiliated entities that is charged with encouraging long-term investment in Brazil. Another important group in this regard is Caixa’s Gerencia Nacional do Fundos Especial (GeFeS). Caixa is the fourth-largest bank in Brazil and a major manager of retirement funds. Its GeFeS division is designed to invest alongside “special funds” including infrastructure, real estate and private equity. According to an official from GeFeS, the division defines “infrastructure” as including energy, rail, waterways, waste, highways, ports and port services, but not airports. The projects can be both greenfield and brownfield.
GeFeS is never a majority investor in a project – its goal is to draw capital to projects and help local and international groups structure projects, but not to control the project. The division can acquire up to 30 percent of equity, debt and mezzanine debt in a project alongside private investors.
According to a person close to Caixa, the bank “sees 99 percent of big projects” related to Brazilian infrastructure.
The resources available to GeFeS look set to expand. It currently manages some R$17 billion ($9.4 billion; €6.8 billion) in assets provided by the government, and, pending legislative approval, that number could climb to R$50 billion within two years.
International investors looking for “passive” investment capital from Brazilian institutions, however, will find a fundraising market with limited partners who are not as readily accepting of being “limited” as is the case in more mature alternative investment markets. Many Brazilian pensions are indeed warming to the alternative investment asset class, especially funds that are targeting local investing. But for a variety of reasons most today want to negotiate terms that North American and European fund managers would find invasive, such as the ability to veto deals and play a much closer role in the investment process. Some Brazilian private equity fund managers are willing to accept these terms in the interest of raising capital, and some have even found that having the counsel of major local institutions is positive. But a number of well-known local managers do not fundraise locally because of the demands of local LPs.
Once alternative investment funds in Brazil begin producing some very visible and positive results, local GPs predict that LPs may begin to require fewer controls when committing to a fund.
Brazil’s private equity market is growing and is by far the largest such market in Latin America. It also has a healthy collection of private equity real estate fund managers. But unless you stretch the definition of infrastructure a bit, there aren’t many groups that specialise in Brazilian infrastructure.
The country’s huge ethanol industry has led to the creation of a number of agribusiness funds. For example, Brookfield, which has enjoyed a long presence in Brazil, is raising a $500 million fund that will acquire “clusters” of farms, many of them sugar-cane producers. Beyond ethanol, the growing demand for energy has launched several vehicles targeting that sector. For example, NSG Capital is currently working on power plant financings.
That said, there are signs that capital targeting infrastructure is being formed. Late last year an executive from influential local investment bank BTG Pactual disclosed the launch of a Brazilian infrastructure fund. If BTG is successful at raising capital you can be sure others will follow. In addition, Eike Batista’s EBX launched fundraising last year for a major infrastructure vehicle (see boxed item) although it is unclear how much capital has been raised to date.
Clearly, the staggering size of Brazil’s infrastructure needs has not yet been matched by an inflow of funds. According to the Banco do Brasil, infrastructure improvements and construction may require someR$160 billion over the next ten years.
Arminio Fraga, co-founder of local investment firm Gavea Investimentos and the former president of Brazil’s central bank, reportedly said at a New York conference earlier this year: “We still have serious barriers to growth. I have a particular concern with infrastructure, which is in terrible shape. We’ve not been keeping up with new needs, not even with maintenance.”
A large portion of the capital to improve Brazil’s infrastructure will come from the Brazilian government, and whatever remaining portion that comes from private sources will stand as a testament to Brazil’s success at convincing investors that the country of the future can deliver on its promises.