(Bloomberg) April 16, 2010 – Banco Modal SA, the Brazilian bank that helps finance mid-cap companies, will create a 1.8 billion reais ($1.02 billion) private equity fund to invest in energy assets.

The fund may start in the next three months and will be open to local and international investors, said Eduardo de Abreu Borges, a managing director at the bank, in an interview at Bloomberg’s offices in New York. Borges expects consolidation in the electricity industry in Brazil as distributors buy stakes in generators to compete in the spot market.

Private equity funds may raise three times the $5 billion they lured last year as the global economy recovers, Sidney Chameh, president of the nation’s private equity association, said in an April 13 interview. Brazilian pension funds are seeking to increase investments in private equity to diversify their holdings and maintain returns, Borges said.

“Brazilian pension funds have discovered that they can no longer thrive on receiving interest rates from debt instruments only,” Borges said. “The pension funds are at last focusing in risk opportunities.”

Supply Chain Company

The new fund will follow the model of the bank’s 1.3 billion reais FIP Coliseu fund, said Borges. Coliseu and Cia. Energetica de Minas Gerais, Brazil’s second-largest electricity generator and distributor, paid 2.15 billion reais for a 66 percent stake at Terna Participacoes SA in November.

Banco Modal also expects to make the first acquisition with its 500 million reais FIP Oil & Gas fund by the end of this month, said Borges, who oversees private equity, investment banking and the commercial department at Banco Modal.

The Oil & Gas fund “is the first to target the supply chain of Petrobras,” said Borges, referring to Petroleo Brasileiro SA, Brazil’s state-controlled oil producer.

“Historically, those companies are very small ones and they cannot take up the type of demand that this new pre-salt frontier is going to demand,” Borges said.

Buyout firms may lure $10 billion to $15 billion from January through the first half of 2011 for private equity investments, mostly in electric utilities, airports, water sanitation and urban transportation, said Chameh at a conference in Rio de Janeiro. 

Cemig fell 1.6 percent, to 29.49 reais in the Sao Paulo trade at 1:01 p.m. New York time. Petrobras fell 2 percent to 32.92 reais, while the Bovespa benchmark index dropped 1.6 percent, to 69,385.18.

By Fabiola Moura

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