After having an office in Mexico for about a decade, Brookfield Asset Management’s infrastructure arm recently made its first investment ever there — snapping up a 50-per-cent stake in two pipelines that transports natural gas from Texas to south of the U.S.-Mexico border.
The Los Ramones pipeline transaction closed in October and came after pursuing “tens and tens” of deals over the years, says Bahir Manios, Brookfield Infrastructure Partners’ chief financial officer.
“Up until now, we have not seen opportunities to acquire assets at appropriate risk-adjusted returns. We view Mexico as a business-friendly country with good market fundamentals and we see the value of investing in the country over the long-term. Institutional investor interest recently moderated in the country, which created an opportunity for us to enter the market and acquire a low-risk, high-quality asset within our target return range,” Manios said in an interview at Brookfield’s Toronto offices. “Sometimes short-term noise and dislocation and negative sentiment can lead to interesting opportunities.”
While BIP is new to Mexico, it has been a long-time investor in Latin America, with significant investments in renewable power, real estate and infrastructure in countries including Chile, Colombia, Peru and Brazil. The underlying market dynamics in those countries — where it uses Scotiabank as a key lender and advisor on mergers and acquisitions — include a burgeoning middle class, strong rule of law and respect for foreign capital, he said. Those make the region especially attractive to investors.
“We’d love to own more investments in those countries,” Manios said. “But they’re very highly competitive at the time being, as there’s a lot of foreign capital that goes into those countries.”
Brookfield’s infrastructure arm has roughly $65 billion USD in assets with nearly 85% of this coming from outside Canada. Thirty per cent of its cash flows come from Latin America, most of that from Brazil but also from the Pacific Alliance countries of Chile, Colombia and Peru, said Manios. (The Pacific Alliance also includes Mexico.)
Deep regional roots
The hefty proportion in Brazil stems from its long roots in the country, where it has had a presence for more than 120 years. Before it changed its name to Brookfield in 2005, the company was called Brascan, for “Brasil” and “Canada.” Brookfield now has some $26 billion USD in assets under management across 20 states in Brazil, including a concession of nine toll roads and a 2,000-kilometre gas distribution operator.
Even as Brazil grappled with economic uncertainty, BIP continued to put down roots. In 2017, it acquired a 90% controlling stake in Nova Transportadora do Sudeste S.A., a system of natural gas transmission assets in the southeast of Brazil, through a Brookfield-led consortium.
“We made some really material investments in the country when it was going through recession and financial crisis in 2016,” Manios said. “We’re contrarian investors. As long as we think a country has solid long-term fundamentals, but is going through some near-term issues, we look through those issues and invest.”
While final 2019 economic growth metrics are not yet out, Colombia was expected to have among the best growth rates in the world last year, according to the International Monetary Fund. The IMF projected Colombia would see 3.4% real GDP growth in 2019, while Peru and Chile were expected to see 2.6% and 2.5% respectively (protests in Chile have hit the country’s economic activity in recent months, and government officials have revised their forecast downward for the year). For comparison, the U.S. was expected to see real GDP growth of 2.5% while Canada was slated for 0.7%. The IMF will put out its updated 2020 forecasts later this month.
Brookfield’s infrastructure arm seeks to invest in countries with the potential to see its middle-classes grow. For Brookfield, which has roughly 4,200 kilometres of toll roads in Brazil, Chile, Peru as well as India — one key metric driving its interest in these markets is “motorization rate,” or the proportion of people who own a car, an indicator of the upside in a market which should materialize as economies grow and middle classes expand. He noted that in Chile, only 261 out of 1,000 habitants own a car. The numbers are even lower in Colombia and Peru, at 119 and 87, respectively.
”As countries grow, income increases, the number of people with capacity to buy a car increases, and consequently the number of cars increase,” Manios said.
Long-term thesis remains
That growth potential remains strong even as some countries grapple with political disruptions, Manios said.
The recent demonstrations in Chile, for example, have not changed BIP’s long-term thesis for its economy. He points to Chile’s falling poverty rate (from 40% in 1990 to less than 10%), growing educational levels for those 25 years and older and the country’s GDP per capita, which is the highest in the region.
Before the protests – which began in October as a student demonstration against transit fare hikes but has since expanded to address broader economic issues – BIP was eyeing several deals in the utilities and data infrastructure sectors, Manios said. BIP continues to look at opportunities in the country, he said, but the company is certainly not rooting for volatility.
“People lost their lives,” he said. “That’s a tragedy, and we want nothing but the best for the country and its people.
“Chile, from our perspective, has been a huge success story, and we just mustn’t forget that in the middle of a crisis.”
In Peru, President Martin Vizcarra recently dissolved Congress and called for new legislative elections after a standoff with other lawmakers. BIP continues to monitor the situation, Manios said, but remains confident that the country will remain stable and continue to grow.
“It’s our job as value investors and stewards of investor and client capital, to analyze whether the short-term dislocation causes a change in our thesis,” he said. “And as of today, Peru is a focus of our investment strategy in the region.”