Infrastructure: More on Brazilian PE and Bond Infrastructure Funds

Asset Managers plan funds dedicated to tax-free infrastructure bonds.
Brazil’s largest asset-management firms are brewing a product that promises to soon attract individual investors, be them Brazilian or foreign. Infrastructure bond funds, with returns exempt from income taxes, will emerge as a long-term option. They’ll probably have a similar format to real-estate investment trusts, perhaps even hitching a ride on the success of those portfolios. The asset-management firms of the five largest Brazilian banks – Itaú, Bradesco, Banco do Brasil, Caixa and Santander – are preparing to launch their own funds. Other firms, big and medium-sized such as BNP Paribas, Rio Bravo and BRZ, also plan on launching their own.

Regulation is what still separates those funds from clients. A working group created by the Brazilian Financial and Capital Markets Association (Anbima) has been discussing the structure of the new product since December. The group will present a proposal to the Securities and Exchange Commission of Brazil (CVM). “We would like those funds to become viable in the first half of 2013,” says Ricardo Mizukawa, who coordinates the group and chairs Anbima’s Committee on Credit Receivables Investment Funds (FIDCs).

The working group is reporting to three Anbima committees – of FIDCs, fixed-income funds and Equity Investment Funds (FIPs). The idea is making those infrastructure funds hybrids, with characteristics of the three investment categories, together with some aspects of exchange-traded funds (ETFs) and real-estate funds. “It will be a different type of fund from others on the market today, but we’re trying to seek the best practices for each of those tools,” Mr. Mizukawa says.

Law 12,431, approved in 2011, paved the way for the creation of those funds. The reason is that it exempted Brazilian or foreign individual investors from paying income taxes over bonds to finance infrastructure investments considered priority by the government. The tax cut is valid for direct investors in those bonds, but also for those who invest in funds that buy these securities.

The proposal gathering strength at Anbima is of a closed-end fund, as in one that doesn’t allow withdrawals. The reason is that since those bonds will finance long-term projects, such as hydroelectric plants and highways, they must have limited liquidity. The asset manager could face difficulties to sell them quickly, hurting other shareholders. Besides, the portfolio can’t allow too much available cash. To guarantee the tax exemption, the fund must have at least 67% of its assets invested in the bonds for the first two years, then rising to 85% after that. “We’re seeking a design that, given the asset’s liquidity, takes trading activity into consideration, as in real-estate funds,” Mr. Mizukawa says.

Besides the lack of regulation, some asset managers say there still aren’t enough bonds to complete a fund. “It has to do a bit with who comes first: the egg of the chicken. Until demand is created, there won’t be supply,” Mr. Mizukawa says. He thinks the creation of the funds will foster the launch of those bonds. Brazil needs about R$250 billion a year in infrastructure investments, he says. “Even if funds capture a small share of that, say 5%, it would already be more than R$10 billion.” The government will also create a fund, with initial investment of R$7 billion, to pass on subsidized funds to banks to finance those projects.

Joaquim Levy, superintendent director of Bradesco’s asset-management firm, says that not only the traded securities, but 30 other projects authorized by the government already justify creating such a portfolio. “The fund is ready. Once regulatory issues are clarified, it’s just a matter of pushing the button,” Mr. Levy says. The portfolio model created by the asset-management firm is of a closed-end, exchange-traded fund. The executive says it would be interesting if regulation also allowed the fund to be expanded. That way, even after the fund was closed, new bonds could be included and they could receive additional investors.

BB DTVM’s fund is also in advanced stages, according to Carlos Takahashi, the firm’s president. He says investors would be interested in an exchange-traded fund. “If there were a factor that allowed real-estate funds to go well, that’s exactly it,” he says. The asset manager is currently surveying the interest of foreign investors. Despite Brazil having lost a bit of prestige among international investors lately, Mr. Takahashi says there’s still demand for the fund. “Foreign investors are awaiting the arrival of a differentiated product,” the executive says, noting that those investors are currently orphaned from the fat premiums offered by sovereign bonds and the more obvious stocks in the Brazilian market.

The presence of foreign investors would help to boost the market’s liquidity. Mr. Takahashi considers that individual investors will be the big public of these portfolios. Since pension funds already have the tax benefit, exempting returns doesn’t constitute a differential for them. But there’s the possibility of institutional investors also wishing to invest in these funds as a way of taking advantage of the skill shown by asset managers to pick these bonds.

“Our concern today is not with the investor-demand side, but with the asset side. It’s still a small volume in the face of diversification demand,” says Allan Hadid, general director at BRZ. He says only four bonds issued so far are eligible to join those portfolios. The securities were issued by companies Montes Claros, Rio Canoas, Autoban and Concessionária Raposo Tavares (Cart). The asset manager aims to create an infrastructure fund, but is still seeking projects so it can launch its own bonds.

Rio Bravo also wants to originate its own securities for an infrastructure fund. It already has government approval to a tax-exempt bond for renewable energy. “The securities that have been reaching the market have tighter premiums. Our idea is to try and offer something different,” says Rio Bravo asset manager Bruno Margato.

It could be more a desire than concrete prospects, but the fact is that despite the lack of rules and assets, all managers say they expect to have their fund offerings ready still in the first half.

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