BTG Pactual’s Renato Mazzola talks infrastructure in Brazil and warns against leverage in high-rate markets
BTG Pactual’s Renato Mazzola talks infrastructure in Brazil and warns against leverage in high-rate markets
While inflation in Brazil has come down significantly from a year ago, it remains well above target and the central bank has kept rates high. How do you expect to manage this high-rate environment in Brazil?
Unlike investors in North America or Europe, in Latin America, we are used to working amid high inflation and, consequently, high interest rates. Therefore, the current macroeconomic scenario is not as challenging for local GPs as it is for those from other regions looking to invest in Latin America.
That said, I believe the current high-rate environment is an opportunity to invest in infrastructure assets. They typically have inflation-linked contracts that will benefit from yield compression upon exit. In 2017, we invested in a greenfield transmission line, when Brazil’s baseline interest rate (SELIC) was near 13%, and fully exited the asset when the rate was near 2% in 2021. The asset’s multiple of invested capital was almost 3x in US dollar terms, while the Brazilian real to US dollar exchange rate depreciated by approximately 40% during the period.
Even though we are used to operating in these macroeconomic conditions, it is important to highlight the common mistake GPs make of overleveraging when investing in this environment. Every time there is a sharp depreciation of local currencies, central banks are quick to hike interest rates. In turn, these hikes attract capital and ultimately bring about a rebound of the currency. Eventually, this high leverage translates into higher debt servicing costs, which is more dangerous than the devaluation of the currency itself.
Which infrastructure assets are you targeting in your latest strategy?
We are currently fundraising for an infrastructure strategy. The strategy will invest across assets in sectors such as energy, logistics, transportation, ports, sanitation, and telecommunications, among others. We believe there are opportunities in these industries that have been able to successfully navigate political and macroeconomic volatility, and will continue to do so.
Our team believes that companies with predictable, recurring, and stable margins and long-term cash flow will fit in with the strategy. We also seek investments with revenues that have low exposure to government-related parties, minimizing the risk of government interference.
Brazil has historically been an energy and commodities-driven economy. What is your approach regarding this sector?
There is no doubt that the commodities market in Brazil will continue to be one of the largest sectors, and the country will remain one of the major global producers and exporters of commodities. Despite this, our approach is to be less exposed to this industry given the price volatility, which can make managing the asset less controllable.
Regarding energy, here at the BTG Pactual Private Capital group we manage the third-largest conglomerate of energy-generation assets in Brazil. We like the sector for its stable framework and revenues. Even with government changes, we continue to see lots of opportunities in the industry, with constant auctions and new projects coming into the market. It is important to highlight that Brazil’s energy is composed mostly of renewables, especially hydro, solar, and wind power, which sets it apart from other countries.
What is the draw for foreign infrastructure investment in Brazil, and more broadly in Latin America?
We believe the region has many opportunities. In one case, the government’s privatization agenda has been accelerated in recent years and has been positively received by investors. Even with the presidential change, we believe the privatization agenda will be kept by state governors. In 2022, Brazil had the largest portfolio of auctions and concessions available in the world according to Infrastructure Investor, a huge step for tackling the country’s historical inefficiencies and increasing its economic growth. These auctions consider a wide range of infrastructure sectors, such as airports, highways, water and sanitation, port terminals, energy, highways, railways, and urban mobility.
Within the energy sector, the government intends to have three transmission line auctions this year, with a total projected investment of $7.3bn. This will be divided across various parts of the transmission line throughout the country, which will be key to enabling the connection of unlinked energy plants to the system.
Regarding ports, we believe the sector may be lucrative through an extensive and reliable network of local entrepreneurs, which is one of the advantages our Investment Team has to offer. Specific opportunities, concentrated in the northeast of Brazil could help the country get a better inflow of goods to the mainland, developing the national economy and achieving valuable return to investors.
Finally, toll roads could bring great investment opportunities in Brazil and Latin America since a relevant pipeline is expected in the next couple of years. This may create a high competition environment in the tenders, but, with patience, a large amount of assets should come to market within the next decade. The equity requirements for these concessions would leave room for new players and better returns, when studied on an opportunistic approach.
Given this scenario of increasing investment opportunities, we believe that GPs with a strong track record and good relationships with market participants are going to be able to fundraise from foreign investors in Brazil, and more broadly in Latin America. Our private capital division has been one of the most active GPs in the region. For instance, we acquired a majority stake of the largest fiber company in Latin America and second-largest in the world. To conclude the transaction, we raised and invested $3bn with both local and foreign investors, demonstrating that investors have appetite for great opportunities in the region. We hope to continue to see a similar scenario in the next few months.
About
Renato Mazzola is Managing Partner of BTG Pactual, member of the BTG Operating Committee, and Head of Private Capital Division, being responsible for the Infrastructure, Private Equity, Venture Capital, and Impact Investing strategies. Renato joined BTG Pactual in June 2011 and has more than 20 years of experience in the investment industry. He spent five years as Senior Investment Officer at the Inter-American Development Bank (IDB) and five years at JP Morgan. Renato holds a BA in Economics, an MBA in Capital Markets, and a Master’s in International Relations.
BTG Pactual is the largest investment bank from Latin America, operating in Investment Banking, Corporate Lending, Sales & Trading, Wealth Management, Asset Management, Private Capital, SME, Digital Investments and Banking. The BTG Pactual Private Capital division is comprised of the Infrastructure, Private Equity, Impact Investing and Venture Capital franchises with approximately US$6 billion in assets under management. Since its inception, in 1983, the Bank has been run based on a meritocratic partnership culture, focused on clients, excellence and a long-term vision. We have cemented our status as one of the most innovative sector players and have won numerous national and international awards. We currently have almost 6,000 employees in offices across Brazil, as well as in Chile, Argentina, Colombia, Peru, Mexico, the US, Portugal, and England