This content is from: Local Insights

Private equity funds finance infrastructure

Carlos Fradique MéndezLuis Gabriel Morcillo

Colombia's securities and financial markets have recently become one of the most dynamic and sophisticated in Latin America. Foreign investment and economic growth has been sustained and impressive over the last few years with the resulting objective being to invest in infrastructure to cope with such progress.

Private Equity Funds (Pefs) that raise capital from a wide range of sources, including institutional investors such as the pension funds, have become the most innovative and efficient structure for the financing of infrastructure projects in Colombia. One of the reasons for the growing number of Pefs is the incentive that has been given by the Colombian government through Decree 2555 of 2010, which deeply transformed the way private capital may be deployed into infrastructure financing.

Even though it is usual in other countries to structure Pefs as a limited partnership (LP), in Colombia Pefs are organised as special purpose vehicles and may be administered by trust companies and stock brokers. These entities may delegate the administration of investments by appointing a general partner (GP) to manage the fund's assets and to run the investment committee. GP's must show experience of at least five years in the administration of companies, or in managing private, public, or third party assets and/or portfolios either nationally or internationally. In the case of foreign GP's, they must also demonstrate at least $1 billion assets under management. Pefs would be generally treated as pass-through entities for tax purposes in Colombia and income, costs and expenses would be attributed to LPs for each fiscal year.

Under this scenario, infrastructure Pefs have become an attractive vehicle to draw resources from pension funds as this sector presents a more efficient risk-return relationship than other economy sectors, diversifying, for example, the existent bias towards government bonds. As of July 2010, mandatory pension funds had approximately a $45 billion portfolio under management (approximately 10% of total GDP and growing at approximately a 25% yearly rate). Comparing the quantitative allocation limits (5% of the total value of the pension fund in local Pefs and an additional 5% in foreign Pefs) with the actual capital commitments of investments, there is sufficient margin for the expansion of this industry within pension funds and other potential investors, allowing approximately for $2,250 millions to be invested in local Pefs and also $2,250 millions to invest in foreign Pefs.

As of July 2010, there are 11 Pefs closed, which together raised a total amount of $924 million, 45% of which is to be invested in infrastructure projects. According to figures given by the Ministry of Commerce of Colombia, there are 19 Pefs in the process of raising capital of up to $1.382 millions, two of which are focused on infrastructure projects (Colpatria/Darby Investments and Ashmore Colombia).

On July 22 2010, following a complex process of bidding requests and after an intense adjudication hearing, the partnership between Yuma Concesionaria S.A. and the Pef, Ruta del Sol was successfully awarded with a $2150 million road concession contract. This was the first time that a Pef participated in a public tender for a Public Private Agreement (PPA), thus establishing a precedent in Colombia regarding investment in construction of public infrastructure through Pefs.

Of the 11 Pefs closed, there are another two specialised Pefs in the infrastructure sector, Nexus Infrastructure I and Brookfield Alianza, each of which raised, as of March 2010, an amount of $52 million and $360 million, respectively. They are currently looking for investments, but they have not deployed on any asset yet. Nexus was recently awarded a public concession to build six airports in the northeast region of Colombia for $150/200 millions.

The infrastructure sector's boom in Colombia and the possibility to design business structures that attract the private sector's investment will become determining factors for Pefs consolidation in PPAs such as concessions and other contract structures in the transportation, natural resources, water and sanitation and construction sectors, amongst others.

Carlos Fradique Méndez and Luis Gabriel Morcillo

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