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LAVCA in the News

Private Equity Circles Brazilian Projects Amid Petrobras Fallout

21 January 2015

(Financial Times) Brazilian construction groups’ inability to raise finance for large-scale projects, after being caught up in the Petrobras corruption scandal, is creating unprecedented opportunities for private equity investment in oil, gas and infrastructure deals.

Many of the country’s leading construction companies have struggled to access capital markets since state prosecutors alleged that they paid bribes to the state oil company and certain politicians in return for contracts.

But private equity groups are claiming that the companies’ resulting capital shortages could force them to retreat from projects to build oil and gas facilities, airports and hydropower dams.

“There will be a lot of projects for which construction companies simply won’t be able to bid,” suggested Antonio Bonchristiano, executive officer of GP Investments, one of Brazil’s largest private equity funds.

He said GP Investments was planning to raise more than $2bn by the end of the year, for investment in infrastructure, real estate and other general private equity deals.

Fernando Borges, the head of Abvcap, the Brazilian association of private equity and venture capital investors, argued that the withdrawal of construction firms would open up opportunities for all types of financial investors. “This creates a series of dislocations,” he said.

Private equity fundraising in Latin America has remained resilient in spite of a slowdown in the region’s economies and most of the large international buyout firms are represented in Brazil.

They are estimated to have raised about $8bn last year for investment in the region — the highest amount since 2011, according to Cate Ambrose, head of the Latin American Private Equity and Venture Capital Association.

“Last year was a great fundraising year compared with previous years,” Ms Ambrose said.

By contrast, Petrobras has found that corruption allegations have effectively prevented it from raising new money on capital markets.

Petrobras has in turn barred 23 of the Brazil’s largest companies from bidding for project work with it, pending further inquiries into the scandal.

Until now, analysts had regarded the construction firms as power brokers in Brazilian infrastructure: controlling the market for investment, particularly in large government-led projects ranging from soccer stadiums for the World Cup and the Rio Olympics to airport projects, hydropower dams and roads.

However, in the past month, one of the companies, OAS, has missed two debt payments, placing in jeopardy its involvement in an overhaul of São Paulo`s airport and the construction of the world’s third largest dam on the Xingu river in Pará.

GP Investments’ Mr Bonchristiano said construction companies in Brazil had typically acted as investors as well as contractors, which give them control over large projects and reduced opportunities for other potential backers.

“Construction companies were competitors of mine on infrastructure deals,” Mr Bonchristiano explained.

Mr Borges of Abvcap did not think the homegrown private equity industry would have the capacity on its own to take over from construction groups, as many of the biggest infrastructure opportunities were too large. These projects seem more likely to attract larger sovereign wealth and foreign pension funds.

Last year, Canadian Pension Plan Investment Board, a big fund, opened an office in São Paulo to invest in real estate and logistics properties. Singapore’s two investment companies, GIC and Temasek, also have offices in the city.

Nevertheless, with Brazil’s economy stagnating and its currency depreciating against the dollar, some private equity firms see 2015 as a long-awaited opportunity to accumulate assets at more reasonable prices — after years of being frustrated by high valuations.

“I don’t see this as a good time to think about exiting investments in Brazil, but it is a good time to think about investing,” said Mr Bonchristiano.