Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP) see what others don’t. Right now it sees opportunity where others see distress. The global collapse in commodity prices over the past year is causing financial distress in a number of areas, and Brazil has been hit particularly hard. That distress, however, is opening up the door for Brookfield to explore opportunities in that country that don’t come around that often.
Brazil hits a rough patch
A combination of falling oil and iron ore prices (due in part to a strengthening U.S. dollar and a slowing Chinese economy) has hit Brazil’s economy hard. It’s in a deepening recession that’s grown worse due to a number of extraordinary issues, including the corruption scandal at oil giant Petrobras as well as the recent health scare of the Zika virus.
These issues aren’t just weakening the economy, but investors’ appetites to invest in the country. That’s leaving Brazil without the capital it needs to meet its growing requirements.
In a lot of ways, Brazil is experiencing a crisis of confidence. That said, while the short-term outlook is very uncertain, the longer-term fundamentals are still pretty compelling. That’s opening up the door for investors, like Brookfield, with a long-term mindset to step up and fill in the gap.
Opportunities of a lifetime
Brookfield has a long history of operating in Brazil and has always been on the lookout to build its asset base in the country. Currently, the bulk of the company’s assets are transportation assets. Brookfield owns stakes in both a large rail network as well as several toll roads. However, it would love to grow its portfolio because it firmly believes in the long-term growth of Brazil’s economy.
That’s why the company is really excited by what lies ahead, because it sees a huge opportunity potentially coming to the market in the very near term. In fact, the company noted in its fourth-quarter report that it is “currently evaluating a number of ‘once in lifetime’ opportunities across several sectors in Brazil, including gas and electricity transmission, roads and rail.”
In particular, it said that it is “enthusiastic about gas and electricity transmission opportunities,” in part because these assets provide fairly stable revenue and growth.
Transmission is an area of particular interest because Brookfield has already had success investing in this area, having owned transmission assets in the country from 2005 to 2009 and selling them at a very strong rate of return.
The company has already started on its next transmission venture, having partnered with a Spanish construction company to develop 1,600 km of transmission assets in Brazil over the next few years.
However, it’s not planning to stop there; Brookfield is open to acquire brownfield systems from other construction companies as well as participate in new-build opportunities. It’s that new-build potential that’s particularly compelling because the country is estimated to need to build 7,000 km of transmission lines per year over the next decade.
Needless to say, Brookfield would love to take advantage of the country’s current rough patch and make investments that have the potential to generate strong returns for years to come.
Investor takeaway
Times are currently pretty tough in Brazil, and this has scared off a lot of investors. Brookfield Infrastructure Partners, however, sees the current tough times as an opportunity to build its presence in a country that it really likes for the long term.
