Category: Funds

The IDB is preparing a novel vehicle to target investments in the biofuels and renewable energy space. The multilateral is teaming up with private equity (PE) funds to raise up to $500m in debt and equity to help finance emerging companies in countries like Brazil, Mexico and Colombia, Daniela Carrera-Marquis, head of the financial markets division at the IDB, tells LatinFinance. The fund, which has a 10-year lifespan, is expected to be ready within a few months and the IDB has already identified projects it expects to finance. The vehicle will be composed of roughly equal portions of IDB debt capital destined for long term loans to borrowers and equity capital from PE managers and their investors. The debt financing will accompany equity provided by the fund to emerging companies in the sector, which will be subject to the IDB’s sustainable development criteria. The IDB has used a similar fund structure to allocate capital for trade finance on two separate projects, but it is entering new waters by approaching the highly sought after biofuels and sugar sector. Brazil in particular is a recipient of an aggressive flow of funds from an array of investors ranging from offshore hedge funds to local PE, as well as corporates in the energy and agriculture sectors.

EM bond fund flows in Q1 were characterized by strong outflows from hard currency funds countered by inflows into local currency funds, according EPFR Global. “Flows in EM bond funds continued to be a tale of two currency groups,” observes the data tracker. EM domestic bond funds took in $2.4bn in the quarter, while euro, yen and dollar-denominated EM bond funds lost $1.8bn. By returns, EM funds gained 0.02% in the week ending March 27, according to Lipper. Global income funds and international income funds gained 0.09% and 0.47%, respectively. High yield funds had the strongest gain of the week with 0.92%, while target maturity funds experienced the week’s most significant loss at 2.13%.

Peru has sold PES273m ($99m) in sol-denominated 2026 bonds with a coupon of 6.90%. The retap of the 2026 notes had been planned for PES300m. The average price at auction was 113.58, reflecting a demand of PES559m. Proceeds will go toward the repayment of $1.1bn in multilateral debt this year.

EM debt funds saw an outflow of $65m in the week ended March 26, according to ING which quotes EPFR Global and JPMorgan data. The drain marks an increase over the previous week’s outflow of $34m. Flows into local funds, which have been keeping EM debt from seeing much larger outflows, fell sharply to $32m from $253m in the previous week, says ING. So far this year, EM debt funds have seen inflows of $734m.

Peru’s Finance Ministry plans to offer up to PES300m bonds on the local market today in an auction, it said. The issue will be a reopening of the 8.2% 2026 bond. Peru announced plans last week to prepay about $1.1bn of World Bank and IDB debt, using both treasury funds and proceeds from new sol-denominated issues.

LatAm equity funds were less harmed than other EM investors by an exodus from the asset class, according to data from EPFR Global. LatAm lost around 0.1% of assets in the second week of March, much less than most EM, where investors fretted about the loss of export competitiveness in the face of a slumping dollar. “Russia was the only one of the four BRICs (Brazil, Russia, India and China) markets to post inflows and BRIC equity Funds recorded outflows for the third time in four weeks,” says EPFR. “Flows out of Brazil country and Latin America regional funds were a minimal 0.01% and 0.02% of assets under management, reflecting the region’s close correlation with commodity prices,” it adds.

LatAm Equity funds drew in $360.5m in new money in the week ended March 5, according to EPFR. That brought total AUM to $48.8bn. Brazil Country Funds took in $112.8m of those flows into the region during the period. The positive movement follows an even stronger inflow of $482.0m in the previous week, with Brazil accounting for only $91.3m of that movement. “Enthusiasm for Brazil’s commodity story helped Latin America Equity Funds post a third straight week on inflows and enabled Brazil Country Funds to record their best week since mid-December,” says EPFR. “But inflows for three of the four fund groups geared to (Brazil, Russia, India and China) markets did not translate to a good week for BRIC Equity Funds, which saw outflows of over $900 million.”

As Brazil’s public equity market offers increasingly scant relief for cash hungry issuers, bankers and lawyers are considering ways to introduce PIPE (private investment in public equity) as an alternative to a traditional follow-on. In a PIPE transaction, a publicly listed company raises cash by placing shares privately with a small group of investors on privately arranged terms. The benefit for the issuer is access to capital markets without the risk associated with public exposure. Willing investors, on the other hand, get shares at a discount in exchange for low liquidity and some restrictions on selling. “It’s an ideal instrument for this type of environment,” says a Sao Paulo-based banker at a top equity house. A banker at a competing shop notes his group has spent a lot of time in dialogue with lawyers and the CVM to alter legislation to permit PIPEs. “Today, if you issue shares privately you have to offer shares at the same price to existing shareholders,” says the banker. That defeats the purpose of raising cash quickly and privately. While a surge of PIPEs is unlikely any time soon, the need is definitely there, say bankers. Brazilian issuers will continue to consider non-traditional capital raising techniques as market volatility hampers new issuance.

LatAm experienced a surge in fresh capital for private equity in 2007 and the outlook is positive for this year, says the Emerging Markets Private Equity Association (EMPEA). The region received $4.419bn in fundraising last year, says the association, up from $2.66bn in 2006. Notable 2007 closes include three $1bn+ country dedicated funds in Brazil, China and India. Tribeca Capital raised $230m for Colombia, while Carlyle got $134m for Mexico, according to EMPEA. Aureos has meanwhile raised $140m of a proposed $300m for investment in LatAm ex-Brazil. “There is still room to grow in Latin America,” in terms of investment opportunities, Jennifer Choi, director of research at EMPEA tells LatinFinance. “It is a question of how far and how fast.” Even as investors wait and see if growth is sustainable and consistent, a drop in the flow of capital towards LatAm looks unlikely. “We may see a small decrease in fundraising; it is very possible, but not sudden and dramatic. We are not going to see a pullback, we are not going to see negative growth,” says Choi of LatAm. Emerging Asia continued to be the preferred destination for capital commitments in 2007, with $28.668bn, up 48% from 2006. Central and Eastern Europe saw totals surge by more than 300%, EMPEA says, due to two record-breaking multi-billion dollar closes. Capital raising for the Middle East meanwhile surged 71%.

The next several months will be challenging for investors, says Arminio Fraga, head of Brazilian hedge fund Gavea Investimentos, and a former head of Brazil’s central bank. “I’m expecting we’ll see a substantial amount of volatility over the next few quarters,” Fraga tells LatinFinance, noting he’s already taken more cautious positions in his portfolio. “Staying liquid and paying attention to value makes a lot of sense now,” he adds. Fraga notes that bull markets allow investors to take more aggressive positions and count on favorable conditions to bail them out when those bets fail. He does not believe in the decoupling theory in any significant way, though there are always certain sectors and companies that do better while the rest are having a hard time, Fraga says. “This is a tricky year and it will stay that way for awhile,” says Fraga. Rio de Janeiro-based asset manager Gavea is looking to raise its third private equity fund later this year, following an $840m pool raised in March 2007 and a $350m vehicle amassed in 2006. The size of the new fund has yet to be determined, though Fraga says it will not necessarily be larger than the last.