Infrastructure is not an area that necessarily springs to mind when you think of private equity. PE investors generally like to put their money into going concerns with proven cash flow.

Infrastructure involves all kinds of political, judicial and regulatory risks, not to mention the need for big up-front investments, often, in the biggest projects, made years before the income streams start flowing.

But Sidney Chameh, head of ABVCAP, the Brazilian PE industry association, takes a different view. “Infrastructure is something we like a lot,” he says. “There’s no daily battle for the market. There are predictable returns and, if you know your market well, the returns will be predictable for many years. So we look at infrastructure with an enormous magnifying glass.”

This does not mean that PE investors will take a role in building the large-scale energy and transport projects the country badly needs to secure sustainable economic growth; nor even, for the foreseeable future, that they alone will make a significant contribution to infrastructure finance in general.

But it does mean they are ready to explore the market for the right opportunities and to start playing one of the main roles of the PE industry worldwide, that of leading the way for other, bigger investors to follow.

Brazil’s private equity industry is not much more than a decade old and remains tiny by global standards: about $34bn is managed by PE funds, of which about $3bn is invested in infrastructure projects.

This, Mr Chameh insists, is just the beginning. Interest among foreign funds, he says, without giving examples, “is very big and growing”. Others familiar with the industry say the likes of Global Infrastructure Partners, a US fund with $5.64bn under management, are looking for opportunities in Brazil.

Qatar Holding, the emirate’s sovereign wealth fund, signed memorandums of understanding in January with Vale, the world’s biggest iron ore miner, Previ, the pension fund for government-controlled Banco do Brasil, and the BNDES, the national development bank, with a view to investing in agribusiness, real estate and energy.

This week, First Reserve, a US private equity group with $19bn under management, committed $500m to an oil and gas start-up, Barra Energia Petróleo e Gas.

As foreign investors prepare to take their first steps, they will pick carefully among the huge array of opportunities open. They must be especially alert to the varying degrees of regulatory risk in different sectors.

Carlos “Pepê” Corrêa runs a R$942m fund, InfraBrasil, at Banco Santander in São Paulo. “If you compare electricity generation with ports, the difference is striking.” In the former, regulations are long-established and well understood, he says, whereas regulations governing the port sector are more recent and still being fine-tuned. “This tends to depress investor interest,” he says.

The energy industry has been particularly attractive to private equity investors, especially renewable fuels projects such as wind power, small hydro-electric plants and “co-generation” by sugar and alcohol mills burning the remains of sugar cane stalks to generate electricity.

One sector in striking need of investment is water and sewage treatment. One problem here is a confusion of responsibilities among the state and municipal levels of government. Another is the lack of legal structures to allow PE funds to take part.

Progress has been slow and, says Mr Corrêa, the political will to solve problems is lacking. If those problems are overcome, he says, PE will be quick to move in. “This is a sector that should really explode. There are huge advances to be made.”

A separate factor that should promote more PE investment is the arrival of Brazil’s pension funds industry. Closed employee pension funds, especially of big public-sector companies, are an important force in Brazilian investment, but their interest in private equity has been curtailed by regulatory uncertainty.

But at the end of last year the CVM, Brazil’s securities commission, without changing any rules, issued a clarification to the effect that pension funds may invest up to 10 per cent of their money in structured vehicles, which include PE funds. “This has helped to get the word out,” says Mr Chameh at ABVCAP.

But, he says, it is still hard for all but the dozen or so biggest funds to invest in private equity because of the J-curve phenomenon, under which returns on a PE fund take a dip early in the vehicle’s life because part of its initial allocations are used to cover management fees and start-up costs.

“The smaller funds aren’t used to that yet – but they will have to get used to it, because interest rates will fall in the medium term and they need to find new ways to meet their targets.”

The bigger pension funds are already taking an active interest in private equity.

Mr Corrêa at Santander says he fields calls almost daily from pension fund managers wanting to know how his individual investments are performing.

“They don’t try to interfere in our day-to-day management,” he says, “but they do want to know what’s going on. It’s a learning curve, and it’s being done in a highly responsible way.”

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