Brookfield Bets on Wind With $7 Billion Fund

Brookfield Asset Management Inc. plans to invest in South American wind farms and hydroelectric plants to benefit from a burgeoning middle class after raising $7 billion in the world’s second-biggest infrastructure fund.

Canada’s biggest manager of alternative assets completed fundraising last week for its closed-end infrastructure pool, raising 40 percent more than targeted from more than 60 pension-fund managers, insurance companies and institutions, including Sun Life Financial Inc.

“We like the investment attributes in South America,” Sam Pollock, chief executive officer of Brookfield’s infrastructure group, said in an Oct. 30 telephone interview. Brazil’s renewable-energy industry is “one we know well and in which we can make future investments.”

The Toronto-based company, which has invested in infrastructure for at least a century, will allocate 40 percent of the Brookfield Infrastructure Fund II to projects in North America. A portion of the remaining funds will be used for hydroelectric power plants and wind farms in South American countries including Brazil, Peru, Colombia and Chile.

Infrastructure assets are “very long-term, have very steady cash flows -- the perfect asset for a pension fund or an institutional investor,” said Jim Hall, chief investment officer of Calgary-based Mawer Investment Management Ltd., which oversees more than C$16 billion ($15.4 billion), including Brookfield shares. “Why Brazil? Because there’s big demand.”

Largest Economy

Brazil’s gross domestic product will expand 2.45 percent this year and in 2014, according to the average estimate of 38 economists surveyed by Bloomberg. The largest economy in South America recorded its slowest two-year pace of growth in more than a decade in 2011 and 2012. Policy makers have raised the country’s key interest rate more than any other country tracked by Bloomberg this year as an annual inflation rate of 5.75 percent in mid-October undercuts consumer confidence and threatens business spending.

Even with those headwinds, demand for energy investments has ballooned. A record 929 power projects registered last month to participate in a Dec. 13 auction for contracts to sell electricity. Wind farms made up 47 percent of the projects, and natural-gas plants 22 percent, according to energy-research agency Empresa de Pesquisa Energetica. Other projects include solar and hydro plants.

“As the economy grows, electricity demand grows, and the companies need to supply that,” Hall said. “And these supply companies need a bunch of capital. Brookfield and its partners are providing that capital.”

Hydro Market

Electricity consumption in the country jumped 42 percent between 2000 and 2010, according to the U.S. Energy Information Administration.

Brazil “tends to be a hydroelectric market and that’s where most of our focus has been,” Pollock said. The country is “looking to broaden the load to be spread across different technologies, not just hydro, so we’ve started to look at wind in that market.”

Brookfield’s Brazilian unit is also in exclusive talks with Vale SA, the world’s third-largest mining company, to buy about 26 percent of Vale’s VLI SA, a cargo logistics operator. Vale owns railways, ports and terminals that span the country, transporting commodities from wheat to steel.

“We’re currently looking at Vale’s logistics business in Brazil, which is a large rail and port opportunity,” Pollock said. Any infrastructure transaction Brookfield makes would be for the new fund, he said. The fund is the largest infrastructure-investment vehicle after Global Infrastructure Partners, which raised $8.25 billion last year, according to London-based research firm Preqin Ltd.

Rising Income

Brookfield’s net income rose to $802 million in the second quarter, up 112 percent from a year earlier. Asset-management fees, which the company charges clients to manage funds such as the new one, rose 72 percent. The firm’s shares have gained more than 100 percent in the past five years, outpacing the 47 percent advance for the 46-company Standard & Poor’s/TSX Financials Index. Brookfield was little changed at C$41.69 at 10:24 a.m. today in Toronto.

“Once fully invested, the fund will increase Brookfield’s annual third-party fees by over $50 million annually,” Michael Goldberg, an analyst at Desjardins Securities Inc. in Toronto, said in an Oct. 30 phone interview. “That’s a big increase. On top of that, they get incentive fees. These are the numerical impacts. The other impact is the increased profile that it gives Brookfield as an asset manager.”

Brookfield’s Global Listed Infrastructure Income Fund, a closed-end fund with total assets of $238 million, had a 23 percent return last year, compared with 19 percent for its peers.

Two Acquisitions

Brookfield, which received a quarter of its revenue from asset-management services last year, has already made two purchases, worth $600 million, for its fund: Entergy Solutions District Energy Ltd., a company that provides heating-and-cooling services to businesses in New Orleans and Houston, and White Pine Hydro LLC, a portfolio of hydroelectric facilities in Maine and New Hampshire.

Infrastructure assets may lure fewer investors, such as Canada’s pension funds and insurers, as interest rates increase. The high yield offered by infrastructure may not be as attractive once other investments start offering similar returns.

“What’s the demand for this type of product four or five years from now, when interest rates have normalized?” said Hall of Mawer Investments. “Is it still the same? That’s an open question.”

Regulatory Changes

Investing in any emerging market also carries the risk of the country nationalizing assets or changing regulations in way that hurts companies, Hall said. Buying renewable-energy assets in Brazil also has logistical challenges.

“With wind projects, you tend to have data that tends to be spotty and the technology around turbines continues to evolve,” Pollock said. “It’s been an industry that’s been maturing and, whenever you go into new regions, it just takes some time for people to get it right. This is a continuation of our progress as an asset manager.”

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