Despite laudable government efforts to plug Latin America’s infrastructure gap, corruption issues are derailing many private equity investments, heard delegates at Latin Lawyer’s 8th Annual Private Equity Conference, held in New York a week ago.
There has been “tremendous” competition among Latin American countries for foreign investment in infrastructure, said Latham & Watkins LLP partner Antonio Del Pino, who moderated a session on private equity in energy and infrastructure.
Reforms in Mexico have improved the environment for investors, said Jean Michel Enríquez, a partner at Creel, García-Cuéllar, Aiza y Enriquez SC. He pointed to the opening up of the energy and telecoms sectors and the introduction of new financial vehicles as key for attracting funds to the country.
Liberalising the energy sector has generated downstream, midstream and upstream investment opportunities, while the new financial vehicles have succeeding in bringing in new types of investor.
“We now have four vehicles that are key to driving money into the infrastructure space. One is the CKD, which is designed for Mexican pension funds. We also have the FIBRA, which is essentially a real estate investment trust, and the FIBRA E, which is specifically designed to invest in infrastructure and energy projects,” said Enríquez. A publicly traded instrument focused on energy has also recently come to market, he added.
Colombia, which is implementing a US$70 billion infrastructure programme, has sought to attract the right players too. “We have a fairly robust regime in Colombia for private equity formation and administration, and we have seen the usual names, such as Brookfield and Ashmore coming in,” said Brigard & Urrutia Abogados partner Carlos Fradique Méndez.
In Brazil, Souza, Cescon, Barrieu & Flesch Advogados partner Alexandre Gossn Barreto expects the state’s role in the economy to shrink, leading to sell-offs involving a range of assets, including airports, toll roads, and power infrastructure. “Brazil has a very good framework for private equity investment, so the opportunity is there for the future,” he said.
Barreto added that there are signs the economy and politics have “detached” in Brazil, with growing confidence that the economy will recover despite ongoing political turmoil.
Yet the impact corruption has had on investors’ appetite should not be understated. Enríquez recalled one private equity fund that pulled out of a deal at a late stage because of such worries, which later proved to be justified. “Clients are abandoning deals like I’ve never seen before,” he added.
These corruption concerns are not unique to Mexico. Philippi Prietocarrizosa Ferrero DU & Uría (Peru) partner Guillermo Ferrero said the sale of scandal-ravaged Odebrecht’s shares in a concession to two private equity funds fell through because of a disagreement over an anti-corruption clause. Both buyers were unwilling to risk the government challenging the concession if it found Odebrecht guilty of having engaged in corruption in that particular project.
Growing concerns over corruption has also driven up due diligence requirements in Brazil, especially involving assets that have been caught up in the Car Wash scandal, said Gossn Barreto. “The approach to these transactions is much more intense than a regular M&A.” Potential buyers now pore over leniency agreements, as well as the details of any wrongdoings perpetrated by the company.
Lawyers and auditors usually carry out due diligence, but Creel García Cuéllar Enriquez has noticed an influx of more unconventional advisors. “Now there a lot of ex-CIA or Mossad types, coming in and offering to do a true in-depth due diligence, involving the bank accounts of the CEO’s best friend for instance,” he said. However, there are questions over whether the methods used by these advisors are legal. “Clients should do due diligence on the due diligence,” said Enriquez.
Simpson Thacher & Bartlett LLP's Todd Crider and Francisco Ugarte of Chile’s Carey chaired the conference, which took place in Simpson Thacher’s office.
In a previous panel, delegates heard how long-term and sector-focused private equity investors are flocking to Latin America. Latin Lawyer will continue to report on the private equity conference in the daily news briefing.