This article is sponsored by BTG Pactual

Demand for infrastructure in Latin America and the Caribbean today is vast. The Inter-American Development Bank estimates that the region has attracted more than $760 billion in private capital over the past 30 years, yet still requires in excess of $250 billion annually.

According to the Global Infrastructure Hub, a G20 initiative, last year Latin America spent 2.2 percent of its GDP on infrastructure, while investment needs to be widened to 3.5 percent of GDP.

Brazil and Chile are among the region’s market leaders. Both countries boast enormous renewable resources, while Brazil’s high internet penetration rate, well above 80 percent, is attracting interest in both data centres and transmission.

Elsewhere, logistics and utilities are in urgent need of modernisation throughout Latin American markets. Renato Mazzola, managing partner and head of infrastructure at Brazilian bank BTG Pactual, identifies which subsectors particularly stand out and the key trends and themes driving investment opportunities.

What opportunities does the current high interest rate environment present, and how has the economic downturn impacted dealflow and valuations across Latin America?
Peter Corsell

In the current high interest rate environment, infrastructure investing presents notable opportunities. The elevated cost of capital and debt is compressing valuations, while also pushing many strategic companies, most of which are highly leveraged, to adopt more conservative pricing strategies. This dynamic is creating a favourable landscape for those well-capitalised players and funds that can exploit reduced competition and less aggressive bidding.

Market participants have become more cautious since the global economic downturn, further tempering competition. Against this backdrop, well-capitalised managers are well-positioned to take advantage of these shifts, securing projects at more attractive valuations.

Should interest rates decline, these funds could see even greater upside. A lower cost of capital would not only improve project economics and valuation multiples but also potentially boost returns on assets acquired during this high-rate cycle.

Furthermore, while a rate cut could spur renewed competition, those already entrenched in the market with strong capital backing would have a clear advantage in capturing additional growth as conditions become more favourable. Lastly, in terms of dealflow, the region has seen a considerable increase in recent years for both public and private markets – there are more participants and consequently, more activity.

Which macro trends are shaping investment opportunities in Latin America’s infrastructure sector?

I would particularly highlight the need for diversified energy sources that include a mix of sustainable and back-up generation assets. There will be an acceleration of investments in renewable energy – including wind, solar and hydropower – as energy demand in the region rises and governments look to align with global decarbonisation targets.

Additionally, for the same reason, enhancing transmission capacity in Brazil is critical, since energy is predominantly generated in the northeastern region yet consumed in the southeast. This will require significant investment in transmission infrastructure.

As a case in point, we recently participated in and won three lots (2,000km) in a recent tender organised by the Brazilian Electric Regulatory Agency (ANEEL). The project totals $1.3 billion in capex and will be allocated through our Infrastructure III Fund and co-investment vehicles.

Along with that, digital infrastructure is increasingly crucial in Latin America, driven by the rapid adoption of new technologies and growing demand for connectivity. As businesses and consumers deepen their reliance on digital solutions, there will be a heightened need for robust telecommunications networks, fibre optics and data centres to support this technological evolution. Investments in these areas are essential not only for enhancing connectivity but also for fostering innovation and economic
growth.

With extreme drought affecting many Latin American countries this year, how will this impact demand for energy infrastructure?

Countries such as Brazil and Colombia, which rely heavily on hydropower, may see reduced electricity generation due to lower water levels caused by extreme drought. As hydropower output declines, the need for more diversified energy sources becomes more critical. This situation is likely to accelerate investments in renewable energy infrastructure, such as solar, wind and biomass, which are less affected by water shortages.

Additionally, I believe there should be a wider focus on improving transmission networks to ensure these renewable resources can be efficiently connected to major consumption centres to enhance energy security. The current drought conditions underscore the importance of building a more resilient and diversified energy infrastructure able to adapt to climate variability and maintain reliability. Brazil, in particular, has already been working on diversifying its energy matrix to address these challenges.

As global demand for digital infrastructure grows, what unique opportunities and challenges does Latin America present?

I believe the region’s increasing internet penetration, coupled with the expanding availability of energy, is creating significant potential for investment in telecommunications, data centres and fibre optic networks. This potential was showcased by our investment in the biggest fibre optic network in Latin America – V.tal – in 2022, which was also the largest deal of the year in the region.

However, challenges remain. There is a need for substantial capital investment to develop and expand critical infrastructure projects that are essential for sustaining economic growth and meeting rising demand for digital services in Brazil’s rapidly evolving digital landscape.

From our point of view, experienced local managers are well-equipped to help manoeuvre through the market complexities. Deep understanding of the regional landscape and relationships with regulatory bodies can facilitate smoother project execution and address these challenges while leveraging the vast opportunities that will be crucial to advancing digital infrastructure in the region.

What does the future of Latin American infrastructure investment look like?

The future of infrastructure investment in Latin America looks exceptionally promising, driven by a combination of factors that position the region as an attractive destination for investors. With robust natural resources, rising demand for digital services, and the need for development of basic infrastructure and a strong push for diverse energy sources, the opportunities are simply vast.

Additionally, growing demand for substantial capital investment presents a unique opportunity for investors to engage in transformative projects that can drive significant returns. As the region continues to embrace innovation and prioritise infrastructure development, it will not only enhance connectivity and energy security but also create a favourable environment for sustainable economic growth.

As a key player in the Latin American infrastructure landscape, we are well-positioned to capitalise on these trends, particularly in Brazil, where the need for robust telecommunications and energy solutions is critical.

Latin America’s push for renewable energy cannot be sustained without greater transmission capacity. How much of an opportunity is this for infrastructure investors?

Latin America’s transition to renewable energy significantly depends on enhancing transmission capacity. As the share of renewables continues to grow, robust transmission networks will be essential to effectively deliver electricity from generation sites to consumption centres. What catches investor interest the most is that Brazil’s transmission lines contracts are long-term, adjusted yearly for inflation, with a very low risk of default and a liquid market for exits.

Chile also stands out for its focus on solar energy in the north and a commitment to expanding transmission infrastructure that links remote generation sites with urban areas. Additionally, Mexico is undergoing reforms aimed at increasing renewable generation.

The Mexican government believes investments in transmission will be crucial for integrating these resources into the existing grid. This urgent need for enhanced transmission capacity not only supports the growth of renewable energy, but also offers infrastructure investors promising avenues for development with attractive returns.

A standout recent investment made by our private capital team was the bid, construction, operation and eventual divestment of the Tropicalia transmission line in Brazil. This project yielded exceptional returns for our investors, primarily due to two key factors: operational excellence and strategic timing. We entered the bid phase and committed to the project in October 2016, when interest rates in Brazil were over 14 percent. In only four years, we were able to successfully divest at a rate of 2 percent, benefiting from significant yield compression that enhanced returns for our investors.

What truly sets this investment apart are the additional upsides we achieved through the team’s diligent efforts to exceed initial expectations. We secured tax benefits not originally accounted for in the project’s financial projections, negotiated favourable financing terms and, crucially, obtained licences and commenced civil works months ahead of schedule. These accomplishments allowed us not only to anticipate all deadlines but also to surpass our initial performance targets, culminating in a 2.8x MOIC and over 40 percent IRR in US dollars.