More than a thesis, investing in infrastructure in Brazil requires context

All infrastructure in Brazil is regulated. Transport, energy, sanitation, telecommunications - there is no relevant asset in this class that operates outside any regulatory framework. This is an observation, not a criticism. The difficulty arises when the regulation that should provide stability to long-term investment becomes sensitive to the political cycle. In Brazil, this sensitivity exists and needs to be priced by those who decide to enter this class.

This does not mean that Brazil does not offer opportunities in infrastructure. Offer. They require, however, a specific type of capital, a well-defined entry thesis and an honest reading of the risks that the local environment poses.

Real demand, uncertain execution
The Brazilian infrastructure gap is documented and persistent. We've made progress, of course. Incentivized infrastructure debentures, which provide income tax exemption for individual investors, created a relevant source of financing and made projects viable that would otherwise not have come to fruition. If voted on and approved by the Senate, the bill that establishes the new legal framework for concessions and PPPs and which has more sophisticated instruments should attract private capital.

What still escapes the most optimistic financial models, however, is the operational risk that arises after capital has already been committed. A concrete case helps to illustrate. In recent years, many investors have allocated capital to renewable energy in Brazil with solid theses: there was growing demand, the cost of generation was falling and the regulatory framework appeared to be stable.

What was not sufficiently priced was curtailment, a practice that consists of interrupting power generation in plants when the transmission network cannot support the load produced. This is a measure of a technical nature that, in the perception of sector managers, began to carry a worrying degree of discretion, creating uncertainty for those who already had committed capital and harming well-structured projects. Industry estimates point to billion-dollar losses for agents in the last two years, and cuts continue to rise. This is the type of variable that does not appear in the feasibility spreadsheet, but that has a strong impact on the investor's life.

Opportunistic or structural, the distinction that defines the strategy
There are two very different ways of investing in infrastructure, and confusing them is the main mistake that investors make in this class.

Structural investment is one in which capital comes in to stay for decades, capturing the predictable cash flow of a granted asset. This model works well in environments where legal security is consolidated and regulation resists alternations of power. There are countries that consistently offer this environment, and for this allocation profile, they compete with a real advantage.

Opportunistic investment follows another logic. Capital comes in to resolve a specific situation, be it an underpriced asset, a structure that needs to be reorganized or a project that has stalled for non-operational reasons. The risk premium compensates for the uncertainty, and the exit horizon is more defined from the beginning. This format has already worked in Brazil and can work again. We ourselves, at Jera, have already participated in situations like this, investing in roads and distributed energy. When the input thesis is well calibrated, the results tend to be quite positive.

To evaluate the potential of these assets, the correct questions should never be generic, but specific. What is the nature of the capital at stake? What is the entry thesis? And what does the asset in question require in terms of regulatory stability for the projected returns to actually be realized?

What the global perspective offers
Internationally, infrastructure has a strong historical correlation with inflation. Transportation, energy and logistics assets in markets with stable regulation deliver predictable and defensive cash flow, with low correlation to equity markets. For a family that thinks about preserving purchasing power over generations, this combination has value that goes beyond the nominal return.

Renewable energy in Europe, leveraged by the urgency of energy security that the conflict in Ukraine provoked, was one of these windows. Data centers in the United States, supported by growing demand for computing capacity, are another. Infrastructure linked to artificial intelligence today represents one of the largest vectors of long-term capital allocation in the developed world.

However, it's worth a warning here: when a thesis seems too obvious, the price has already captured part of the upside before you enter. This is exactly why more rigor is needed in input analysis, not less.

What would change the domestic equation
The long-term capital that family offices allocate to infrastructure needs a basic certainty: that the contract signed today will be honored in 25 years, regardless of who is in power. This is something that demands consistency, and consistency is built over decades.

Brazil has better instruments than it did ten years ago. The concessions framework has evolved and the capital market has developed suitable products to channel domestic investors into this class. There are serious projects underway in different segments.

What is still being built is the history of contractual respect that transforms intention into conviction for the longer-term investor. While this history is consolidated, the most judicious capital will calibrate its exposure selectively, entering where the risk-return relationship justifies the investment and with more demanding criteria than it would apply in markets with a more predictable regulatory trajectory.

Anyone who manages assets responsibly reads the context before signing any commitment.

* Felipe Nobre is co-founder and CEO of Jera Capital, a manager that currently has more than R$7 billion under management and serves more than 50 families. Jera Capital has or has previously held positions in infrastructure assets mentioned in this article, in Brazil and abroad

The articles published by CNN Infra seek to stimulate debate, reflection and shed light on views on the main challenges, problems and solutions faced by Brazil and other countries in the world. The texts published in this space do not necessarily reflect the opinion of CNN Brasil.

Source: CNN