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Conduit Capital to Tap $150M from Mexican Pension Funds

7 March 2011

(Dow Jones Newswires) March 7, 2011 – New York-based Conduit Capital Partners LLC will raise $150 million through a Mexican-listed instrument in the second half of the year as U.S. private equity firms continue to tap a two-year-old program for Mexican pension fund capital.

“Raising money for private equity funds is not easy today so we need to look at all high quality sources,” said Conduit Chairman Scott Swensen in an interview.

Certificados de capital de desarrollo, or CKDs, launched in mid-2009 and trade on the Mexican Stock Exchange much like the shares in a publicly listed company, so Mexican pension funds which are heavily invested in local government debt can participate in financing projects like infrastructure, highways, ports and power generation, among others.

They also provide private-equity firms a shortcut to the more than $100 billion managed by Mexican pension funds. Pension-fund regulator Consar has authorized local pension funds, known as Afores, to invest up to MXN140 billion ($11 billion) in CKDs.

So far, Goldman Sachs Infrastructure Partners is the only U.S. private equity firm that has tapped the program, when it joined forces with Mexican construction company Empresas ICA SAB (ICA) to raise capital for a toll-road concession in 2009.

Conduit already has a diverse investor base, with mandates from U.S., Middle Eastern, European and Australian investors. The CKD issue will allow Conduit direct access to Mexican investors and broaden its capital from U.S.-denominated funds to include Mexican peso-denominated ones.

“The Mexican investors gain comfort that investors with much more private equity experience are investing and non-Mexican investors gain comfort from the participation of Mexican investors that know much more about Mexico. Both groups benefit,” Conduit’s Swensen said.

More than 10 funds have participated in the CKD program so far, including the real estate investment subsidiary of Prudential Financial Inc. (PRU) and specialty finance company Navix de Mexico.

Energy infrastructure-focused Conduit’s CKD will help finance projects in Mexico.

“The 5% historical economic growth rate of the region has led to 7% to 8% annual growth rates in the demand for electricity which requires very large capital investments every year,” he said. “While these growth rates are not as high as the growth rates of many Asian countries, there is also much less local capital in Latin America than there is in Asia, so we believe that the resulting rates of return on infrastructure investments in Latin America and the Caribbean are much higher than generally achievable in Asia.”

Launched in 2003, Conduit’s expertise in middle-market energy infrastructure investment and development in Latin America and the Caribbean went far beyond that.

Swensen was a managing director at BNP Paribas SA supervising energy and project finance in North and South America, among others. He joined Scudder, Stevens & Clark in 1993 as lead investment manager for Latin Power I, which was since absorbed into Conduit.

Several of Conduit’s investments are in renewable energy, including a 20 megawatt windpower plant in Moneterrey, Mexico.

“The increase in oil prices has made oil and gas fired plants less competitive than many renewable plants. We always want to have the most economically competitive plant possible,” Swensen said. “Secondly, we have found that the exit opportunities for renewable plants are much more attractive.”

In an initiative set out in 2009, the 27 member states of the European Union aim to cut 20% of their carbon emissions by 2020 compared with 1990 levels and generating a fifth of the E.U.’s power from renewable sources.

As the emission reduction can also be achieved by buying emission reductions in other countries that participate in the agreement, there is a strong demand for renewable energy plants in Latin America, China and India, creating a favorable environment for private equity firms like Conduit, if they want to exit their investments.

For its current fund, Latin Power III, which was launched in 2005 having raised $392 million, Conduit has already made two exits.

By Amy Or