LatinFinance - May/June 2017 - 30

in infrastructure debt.
Most of CDPQ's Latin American infrastructure investments are in equity. It has
made an aggressive play in Mexican infrastructure through equity investments, for
example, taking a 51% stake in a trust that
it formed with local institutional peers in
2015. CDPQ has invested 17.9 billion pesos
($900m) in the vehicle. It has also made a 3
billion peso direct investment in a toll-road
joint venture with local construction firm
ICA.
But recently, CDPQ has started to buy
sovereign and sub-sovereign bonds. The
pension fund is still a year or two away from
buying corporate bonds or providing loans,
though: "It's a gradual transition," Kaldany
told LatinFinance at an infrastructure
forum hosted by the Inter-American Development Bank (IDB) in April.
That transition could be about to take a
big step forward. The Quebec City-based
pension fund was looking to join commercial banks Banco de Crédito del Perú (BCP),
ING and Santander in a 14-year, $250-million syndicated loan led by Brazil's Itaú
BBA for the Pacífico 2 toll road concession
in Colombia, market sources told LatinFinance in February. Local lenders Banco de
Bogotá and Davivienda previously put up
400 billion Colombian pesos ($139 million)
in local-currency financing for the toll road.
Kaldany declined to comment on the
possible loan in Colombia, or on direct debt
financing for PPPs and concessions in Latin
America on the whole. He did, however, tell
a panel at the IDB event that CDPQ does not
even look at transactions where it cannot
put hundreds of millions of dollars.
Bank capital tightens
Canadian pension funds' increased attention on financing Latin American infrastructure comes at an important time. New
banking regulations like the Basel III accord
have pushed up the cost of capital for commercial lenders. As a result, banks have
been forced to reconsider long-term loans
for infrastructure, turning instead to miniperms that can be taken out in the bond
market, says Gema Sacristán, the chief
investment officer of the Inter-American
Investment Corporation (IIC), which is part
of the IDB Group.
That opens the door to other investors -
such as pension funds. Indeed, some in the
market expect US and European pension
funds, including the Dutch and Norwegians, to also pick up their participation in
infrastructure in Latin America

30 L ATINFINA NCE.COM - May/June 2017

HUGH O'REILLY, OPTRUST

"WE TAKE THE
MISTAKES FROM
DEVELOPED
MARKETS AND
LEARN FROM THEM
FOR DEVELOPING
MARKETS"

Sacristán sees three pockets of financing that can fulfill the need for long-term
financing: institutional investors, local
and international debt funds, and high net
worth individuals. "The Canadians are very
interested, and we're working with them,"
she says of institutional investors. "What
are the Europeans doing? Not too much. US
investors are doing a bit more."
Tried and true
Institutional investors, such as pension
funds, investment managers and insurance
companies, have the potential to supply
much-needed financing, concluded a report by the IDB and consulting firm Mercer.
But these investors have trouble assessing
the commercial viability of infrastructure
projects in emerging markets.
That means that while infrastructure
project debt may be a growth area for
Canada's pension fund investors, they are
expected to keep up their direct equity
investments, also.
"There are plenty of opportunities to
invest in existing assets and reap the benefits," says Alejandro Olivo, an analyst at
Moody's, adding that he expects the funds
to continue their M&A strategies in Latin
American infrastructure.
Bribery scandals have tarred many M&A
opportunities in infrastructure, especially
in Brazil. But Canada's pension plans have
steered clear of projects with reputational
risks and they are likely to maintain the
same discipline, despite the allure of higher

returns, Olivo says.
"We still see a number of private participants that are willing to invest [in the distressed assets]," he says.
Such discipline, however, will not leave
the Canadian pension plans out of the M&A
market. They understand what the different markets need in terms of infrastructure
investments and they cultivate fruitful relationships with local partners, Olivo says.
"When you look at their equity investments in the region, they continue to grow
at impressive rates, especially in the current
environment, when strong domestic players
are fewer and fewer," he says.
Even CDPQ's seemingly novel approach
to debt financing is not as risky as it appears.
Colombia's 4G toll road concessions program involves availability payments from
the government called vigencias futuras,
which guarantee a minimum level of revenues, regardless of whether a toll road
meets its traffic projections or not.
Finding partners
Not all Canadian pension investors are
interested in shifting their investment strategies in Latin American infrastructure. One
that has its sights firmly set on equity stakes
is OPTrust, which manages assets from the
OPSEU Pension Plan. The fund, which trails
the big four with a mere $19 billion of assets
under management, prefers to find reliable
partners in the local markets, rather than go
it alone, Hugh O'Reilly, its chief executive,
says.
"We write checks in the $100-million
range. We operate in a different context
than some of our larger peers. We rely on
partners," he tells LatinFinance.
OPTrust holds a stake in the Spanish
infrastructure concessions company Globalvia, which operates toll roads in Mexico,
Chile and Costa Rica. Globalvia's other
shareholders are the Dutch pension fund
PGGM and the Universities Superannuation
Scheme (USS) from the United Kingdom.
"Our model is direct investing, and we
view Globalvia as a direct investment,"
O'Reilly says. "We take the mistakes from
developed markets and learn from them for
developing markets."
As O'Reilly puts it, OPTrust is "not in a
race to get money out the door" but it wants
to be "proactive" and not get bogged down
by examining all the pitfalls in the market,
such as the Odebrecht scandal. "Making a
judgement on an entire region based on one
company is not a good way to go about business," he says. "Bad things happen." LF

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Table of Contents for the Digital Edition of LatinFinance - May/June 2017