Warburg Pincus LLC, the private- equity firm with more than $35 billion in assets, is targeting infrastructure service providers in Brazil as the nation steps up investment in ports and energy ahead of the 2014 World Cup.
“To invest in a company that provides specialized services to large projects is a better way to get exposure to the infrastructure sector in Brazil, which will grow significantly in the coming years”, said Luca Molinari, partner and managing director of Warburg Pincus do Brasil Ltda. “A direct investment in many of the typical large infrastructure projects probably wouldn’t generate the return we want to achieve.”
Warburg Pincus joins BTG Pactual Participations Ltd. and Carlyle Group LP in seeking to profit from an estimated 1 trillion reais ($491 billion) in investments needed to upgrade Brazil’s infrastructure for the World Cup and 2016 Summer Olympic Games. BTG bought a stake in Brasbunker Participacoes SA, an oil-and-gas services firm, in September 2010. Carlyle said last month it acquired 25 percent of Grupo Orguel, which rents equipment such as scaffolding, generators and cranes.
Brazil’s development bank said it plans to finance as much as 80 percent of the infrastructure investment during the next five years. Private investors may have to fund 10 percent to 20 percent of the total, according to Denise Pavarina, president of Brazil’s capital-markets association.
Equipment-rental companies have margins exceeding 30 percent on earnings before interest, taxes, depreciation and amortization, compared with 10 percent to 15 percent for firms that operate infrastructure projects, said Eduardo Centola, a partner and head of investment banking at Banco Modal SA. He cited Greenwich, Connecticut-based United Rentals Inc. (URI:US), which posted Ebitda margins (URI:US) of 36 percent last year.
Some of the infrastructure investments will come from the oil-and-gas industry. State-run Petroleo Brasileiro SA alone is investing $236.5 billion through 2016 to tap newly found energy deposits off the nation’s coast, among the largest discoveries worldwide since 1976. The plan is to double oil output by 2020.
Rental companies that target the energy and transportation infrastructure industry are particularly alluring for private- equity investors because they can borrow to buy the equipment and benefit from steady cash flow, Centola said.
“The private-equity funds are just realizing the opportunity they have investing in renting equipment to wind farms, ports, road, railroads and airport projects,” Centola said. “Those companies take loans to buy the equipment and rent them and operate almost like a financial company.”
Not all of the suppliers to Brazil’s oil industry have benefited from growing investments by Petrobras, which produces more than 90 percent of Brazil’s oil. Lupatech SA, the Caxias do Sul-based supplier of valves and anchor ropes for offshore platforms, has dropped 24 percent in Sao Paulo trading this year after the company sold shares and delayed interest payments on its bonds to compensate for a sales shortfall.
Warburg Pincus has made two investments in Brazil since the New York-based firm opened a Sao Paulo office in January 2010.
Omega Energia Renovavel SA said in September 2010 that funds managed by Warburg Pincus and Tarpon Investimentos SA had invested as much as 350 million reais in the Belo Horizonte- based energy company. Six months later, Brazilian lender Banco Indusval SA (IDVL4) announced the sale of a 150 million-real stake to a Warburg Pincus affiliate. Warburg Pincus said in a regulatory filing that its stake in Indusval may climb to 23 percent.
“There a lot of new companies’ names popping up from private-equity funds that are looking to opportunities in the logistics and equipment rental for projects sectors,” said João Ricardo de Azevedo Ribeiro, a partner at Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados, a Sao Paulo-based law firm that advises on mergers and acquisitions.
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