I Squared Targets Logistics, Energy in Brazil

Infrastructure-focused investment manager with $40bn under management opened unit in São Paulo four months ago

Investment manager I Squared Capital—which manages $40 billion in infrastructure assets globally—opened its São Paulo office four months ago and is planning its first steps in the country. According to Sadek Wahba, the firm’s chairman and managing partner, it would not be surprising to see investments in Brazil reach $5 billion over the next few years. “The key elements we look for when we invest in a country are a solid rule of law, a clear regulatory framework, a system that encourages foreign direct investment, an export-oriented economy that at the same time seeks to increase its productivity, and social and economic stability. And the truth is that we have all these elements in Brazil. This is very encouraging for us,” said the global executive, who spoke to Valor during his visit to São Paulo last week.

“Brazil has had relatively slow economic growth, but from our perspective, there is great potential for the next five, ten years in terms of economic growth and the investments needed to increase the country’s productivity,” Mr. Wahba said.

The company is headquartered in Miami, with offices in London, New Delhi, Singapore, Sydney, Taipei, and São Paulo. It has investments in 71 countries on all continents. Globally, the group’s businesses include transportation, energy, basic sanitation, and digital and social infrastructure. In Brazil, all segments could be targets for investment, but the initial focus will be on digital infrastructure, energy, and logistics, said Gautam Bhandari, managing partner of the company. “We really like the renewable energy sector. The digital transformation business also has a long way to go, with the expansion of the fiber optic network and data centers. Brazil is also a huge exporter. So, the logistics sector, which includes warehousing and ports, is interesting,” he said.

In the past, the management company even studied the privatization of Corsan (Companhia Riograndense de Saneamento), but in the end did not bid for the asset, sources told Valor at the time. When asked about their interest in water utility Sabesp, the executives said that they don’t comment on specific deals, but that they operate globally in the water treatment segment. I Squared Capital has been analyzing assets in Brazil for at least eight years. Local challenges, however, such as currency risk, have delayed its entry into the country, Mr. Wahba said. “In recent years, Brazil has undergone important reforms in terms of regulation and opening up the economy. So, we believe now is the right time to enter the country,” he said.

In terms of the quality of regulation, the situation in Brazil varies greatly depending on the infrastructure segment, but is generally in line with other emerging markets, said Mr. Bhandari. “In some areas, regulation is quite advanced, such as the digital economy. The energy sector has come a long way. Others are just beginning, such as sanitation,” he said. However, Mr. Wahba also highlighted areas that could be improved compared to other developing countries. He mentioned the highway concession market as an example.“The Indian highway market has been in operation for more than 30 years and has generated billions of dollars of investment in the last 15 years, attracting more than 40 institutional investors. It’s a market that works very well, and the reason is that it’s been very stable over that period. Brazil has seen ups and downs in the highway market, and some volatility. What investors want is visibility into what they are not in control. We’re willing to take economic risk, but it’s hard to project political risk. There has to be stability.” When entering emerging markets such as Brazil, the manager’s strategy typically involves structuring new platforms. Of the 81 companies controlled by I Squared, more than half were structured from scratch. However, Mr. Wahba said that acquisitions in the country are not ruled out.