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Private Equity Lures Pensioners as Bond Yields Sink

The projects are part of President Dilma Rousseff’s plan to build 955 billion reais of infrastructure by 2014. Photographer: Jonathan Ernst/Bloomberg
The projects are part of President Dilma Rousseff’s plan to build 955 billion reais of infrastructure by 2014. Photographer: Jonathan Ernst/Bloomberg

Nov. 7 (Bloomberg) -- Brazil’s top three pension funds are leading a shift by local investors from lower-yielding government debt to private-equity investments in infrastructure as the country prepares to host the 2014 World Cup and 2016 Olympics.

The retirement funds for state-run companies Petroleo Brasileiro SA, Banco do Brasil SA and Caixa Economica Federal, which together manage $131 billion, are buying stakes of as much as 25 percent in companies building dams, roads transmission lines and airports, said Jose de Souza Mendonca, head of Brazil’s pension fund association known as Abrapp. The group is in talks with development bank BNDES to encourage smaller funds to make similar investments, he said.

“Instead of speculating on the stock market, the big funds are participating directly in the companies,” Mendonca said in an interview in Sao Paulo. “Infrastructure investments will grow naturally, but smaller funds don’t have resources to buy those sort of stakes in companies. One of the things we’re doing with BNDES is to see how to structure infrastructure investment funds” to attract smaller funds.

Pension funds holding 60 billion reais ($30 billion) of Brazilian government debt maturing by 2014 are seeking alternative investments after the central bank cut the benchmark Selic rate to a record low of 7.25 percent, Mendonca said. The rate reduction of 5.25 percentage points since August 2011 was the most aggressive of any Group of 20 nation. The benchmark rate exceeded 25 percent less than a decade ago.

Funds will have to take on new risks to boost returns, Mendonca said. Pension funds in Brazil had an average annualized return of 5.42 percent in the first half of this year, below their target of 5.59 percent, according to Abrapp. The Bovespa stock exchange dropped 4.2 percent in the first six months of 2012 and is up 2.8 percent this year to date.


Investimentos e Participacoes em Infra-Estrutura, a holding company known as Invepar in which the top three pension funds each hold 25 percent, is making some of the biggest investments in infrastructure. A group led by Invespar won an auction in February for a 20-year lease of the Sao Paulo international airport for 16.2 billion reais.

Fundacao dos Economiarios Federais, the pension fund for Caixa employees known as Funcef, also bought minority stakes in Norte Energia, which is building the world’s third-largest hydroelectric dam Belo Monte.

Funcef, Petros and Caixa de Previdencia dos Funcionarios do Banco do Brasil, or Previ, account for more than half of the 596 billion reais managed by Brazil’s 265 pension funds, according to Abrapp.

Economic Stimulus

The projects are part of President Dilma Rousseff’s plan to build 955 billion reais of infrastructure by 2014. Projects related to the 2014 World Cup in Brazil and 2016 Olympics in Rio de Janeiro, including the Transolympic highway run by Invepar, will cost at least 80 billion reais, according to Ernani Torres, a former head of research for Brazil’s development bank.

Rousseff’s plan is designed to help boost economic growth, which is slowing to an estimated 1.5 percent in 2012, according to economists surveyed by the central bank, less than Japan or the U.S. The economy will grow 4 percent in 2013, according to the same survey.

Investment Funds

Rousseff said in August that the government will sell licenses to build and operate 7,500 kilometers (4,661 miles) of roads and 10,000 kilometers of railways, requiring as much as 133 billion reais investment over 30 years.

In Chile, private investments became the main financier of infrastructure after reforms in the 1980s and 1990s protected investors and created infrastructure bonds guaranteed by insurance companies or the government, according to an Aug. 13 report by Moody’s Investors Service analyst Alexandre de Almeida Leite.

Smaller pension funds are investing in infrastructure projects through FIPs, or fundos de investimento em participacoes, which are private equity-style funds that allow investors to buy shares, bonds or other securities in companies while participating in decision-making. Bolt Energias, an electricity generator, plans to raise 450 million reais by selling quotas in FIP Atico Geracao de Energia to pay for greenfield projects and new plants, said Gustavo Almeida Magalhaes, a board member of Bolt Energias.

“The interest of pension funds has increased due to the falling Selic as their returns on sovereign debt are falling below actuarial targets,” Magalhaes said in a phone interview from Sao Paulo. “So they’ve sought to understand and invest in these FIPs to try to manage their assets better.”

Legal Security

Pension funds began investing in FIPs in 2009. The investments grew to 13.4 billion reais at the end of the first half of 2012, or 2.3 percent of total investments, compared with 11.9 billion reais in 2011, according to Abrapp. That compares to 372 billion reais invested in sovereign debt. Structured investments including FIPs have paid pension funds an average annualized 11 percent this year, compared to 8 percent for fixed income and a loss of 0.6 percent for stocks, according to Abrapp.

While demand for FIPs is growing, funds are concerned that the government can intervene in infrastructure projects as they are in the public interest, creating risk for investors, said Jose Tarcisio Bezerra, head of pension fund Faelce, which manages 822 million reais of investments for employees of energy distributor Coelce.

Rousseff on Sept. 11 unveiled a plan to force power companies to cut rates by as much as 28 percent to boost competitiveness after manufacturers said the rates are the world’s fourth-highest. The market value of Brazil’s 15 biggest power utilities has declined by about $8.5 billion since.

“To become heavily invested in government infrastructure like Chile, we still need more legal security,” Bezerra said. “Look at the electricity sector. Imagine if we had invested in a company like Cemig. The sector looks great on paper but there came a moment when the government stepped in.”

Rising Demand

The volume of FIPs will outpace last year with seven new funds registered through Nov. 1 for 3.1 billion reais and an eighth fund for 500 million reais in the pipeline, according to Brazil’s regulatory agency. Last year’s registered FIPs totaled 3.2 billion reais.

The pension fund association is in talks with BNDES to create new investment vehicles, including a so-called fund of funds in which the development bank could be involved to encourage pension funds to invest, that would buy stakes in FIPs of infrastructure companies, Mendonca said. A BNDES official in Rio de Janeiro didn’t respond to requests for comment.

“At the end of the day, we need to pay out benefits to our participants,” Mendonca said.

To contact the reporter on this story: Blake Schmidt in Sao Paulo at

To contact the editor responsible for this story: Jessica Brice at

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