Latin America-China Investment Guide - 62

compete with global utilities for assets, and
not just construction contracts.
"The Chinese authorities are working
hard to promote value-added industries,"
says Euan Rellie, managing partner
of advisory firm BDA Partners in New
York. "Chinese demand for raw materials is
inexorably decreasing, and the government
is encouraging the private sector leaders
to become global players and to invest in
consumer-focused businesses abroad."
Looking for an entry
Brazil offers a huge, and unprecedented,
opportunity to Chinese investors, Banco
Modal's Centola said. The corruption
scandals surrounding the country's largest
construction firms have left these companies with weakened balance sheets, and
in many cases barred them from receiving
government contracts or financing.
"For many years, Brazil had a defined
and very stable landscape, with a handful of
established major construction companies
that benefited from high barriers to entry.
Those companies are now caught up in
corruption investigations," notes Centola.
Interest from US and European infrastructure developers is scant, and listed developers will struggle to justify an expansion into
a market with huge potential risks.
"China is acting as a white knight for
Brazil," BDA's Rellie says.
"The challenge in executing acquisitions will be working out how to define the
residual liabilities attached to some of these
targets, but Chinese buyers are no more or
less sensitive to these risks than any other
buyer," says Centola.
Brazil's government said in June that it
wanted to attract 198.4 billion reais ($58
billion) in infrastructure spending. But
this latest plan followed a 2012 initiative to
attract 210 billion reais in infrastructure
spending that barely hit 20% of its target,
during the much more buoyant construction and financing market that preceded
the Petrobras scandal.
"This government plan is very aggressive
and is likely to reduce the availability of
local financing, so the plan will have to be
funded from abroad. Asia is the most obvious source," says Centola.
Modal formed a joint venture with
Macquarie and China Communication
Construction Company (CCCC) to invest
in development-stage infrastructure projects in Latin America. The new venture,
Macquarie Development Corporation, is
funded with the three institutions' own

62 L ATINFINA NCE.COM - September/October 2015

BOSWORTH MONCK, IFC

"CHINESE INVESTORS
HAVE BEEN ACTIVE IN
GENERAL, AND SEEM
TO HAVE SHIFTED
FROM POLICY-BASED
INVESTING TOWARDS
MORE COMMERCIALLYDRIVEN APPROACHES"
capital and will likely sell any projects at, or
shortly after, financial close.
"CCCC wants to acquire information
about key countries, among them Brazil,
find out about early stage opportunities,
and understand these markets better," says
Modal's Centola. The venture would provide the Chinese investor with knowledge
transfer, contracting opportunities and
valuable assets.
The developers of early-stage infrastructure projects in Latin America have struggled to raise cost-effective financing to take
them through the protracted permitting
and contracting process. This inefficiency,
Centola says, creates an opportunity.
Earlier attempts to harness the interest of
Chinese funding in Latin America have had
mixed success. The IFC's pilot phase of its
managed co-lending partnerships program
attracted a $3 billion commitment from
China's State Administration for Foreign
Exchange (SAFE). The People's Bank of
China, SAFE's parent, has committed $2
billion to the China Co-financing Fund for
Latin America and the Caribbean under the
Inter-American Development Bank (IDB).
The IDB launched three equity funds in
2012 - the Macquarie-managed LAC-China
Infrastructure Fund, the Darby-managed
LAC-China Mid Cap Corporate Fund, and
the EMP/SinoLatin Capital-managed LACChina Natural Resources Fund. But these
funds have yet to begin operating, and a
spokesperson for the IDB says "the investment platform for equity investments in
various sectors in Latin America has been
undergoing some design changes and is not
yet active. The IDB continues to work with
its Chinese counterparts in the effort to set
it up."
Chinese investors are present in funds
with a wider remit looking at the region,
LatinFinance understands. The IFC Global

Infrastructure Fund was among a group of
investors that paid $320 million for 43% of
Pacific Rubiales' power transmission and
oil pipeline unit in Colombia, Pacific Midstream. Some of its equity funding is understood to come from Asia.
But BDA's Rellie suggests that Chinese
banks are better vehicles for Chinese
investors. "Investments through multilateral-sponsored funds, such as the IDB, are
subject to political, financial, and environmental requirements, rendering them less
attractive to Chinese buyers."
The funds managed by AMC typically
feature commitments from sovereign wealth
funds and large institutional investors.
Monck argues that the thoroughness of the
IFC's due diligence processes give investors
comfort, and may encourage them to look at
a greater range of asset types as a result.
Broadening the spectrum
Haitong Securities' acquisition of Novo
Banco's BESI points to a new way for Chinese
corporates to finance their activities in Latin
America.
Novo Banco, the successor to stricken
Portuguese bank Espírito Santo, agreed to
sell its investment banking unit, BESI, to the
Chinese brokerage for €379 million ($465
million) in December 2014. The acquisition,
which requires approval from multiple regulators, was still waiting to close in August.
Haitong, a state-owned firm and the
second-largest broker in its home market,
had no presence outside China before the
BESI purchase. The acquisition would give
Haitong control of existing investment banking operations in London, New York and
Lisbon, as well as 80% of BES Investimento
do Brasil. Haitong said in June that it wants to
triple BESI's capital, and promised to inject
€1.1 billion ($1.2 billion) into the operation.
Chinese firms acquiring commodities assets with dollar revenues will not lack support
from banks at home. But any construction
firms looking to acquire infrastructure assets
with local currency revenues may need to
cultivate new sources of debt financing and
the combination of Haitong and BESI would
be in a position to open up those markets.
BESI, by being able to offer capital
markets products, would allow Chinese
investors to supplement their relationships
with Chinese banks, which tend to avoid
making local currency loans. According to
one adviser active in LatAm M&A, however,
Chinese banks are primarily interested in
building a local presence to facilitate Chinese
exports.

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