CPP Investments Targeting Brazil's Power and Water Sector
After nearly two decades in Latin America, the Canada Pension Plan’s managers still see room to expand in the region and especially Brazil, where they believe a booming clean energy sector and water concessions offer long-term opportunity.
CPP Investments, the public pension plan’s asset manager, has about $36 billion under management in Latin America, or about 5% of its global portfolio, in sectors from electric utilities and sanitation to real estate, telecoms and logistics.
Although the world’s seventh largest pension fund has no geographical targets, chief executive John Graham says he expects the region’s share of the portfolio to hold steady or even rise.
“We look for markets where we believe we can scale assets, develop relationships and partnerships,” Graham said at CPP Investments’ offices in the Sao Paulo financial district on Friday.
Brazil accounts for nearly half of the fund’s investments in Latin America. Among the key assets is Auren Energia, a top power generator and a major player in energy trading that CPP formed in partnership with Brazilian investment holding company Votorantim.
“I would say, globally, the energy transition is probably one of the trends for the past three or four years that we’ve been most excited about,” Graham said.
Abundant hydroelectric resources and wind and solar power potential have made Brazil a regional leader for renewable energy, despite growing pains in some areas where generation has outstripped the national grid’s capacity.
Brazil is also advancing toward universal water and sewage treatment, with many state governments opening public utilities to private investment and control, attracting attention from CPP and others.
“This is a sector that is going through an important transformation, from being state owned to going to the hands of sophisticated private operators,” said Ricardo Szlejf, head of Latin America infrastructure at CPP Investments.
The fund is majority shareholder of water and sewage operator Igua Saneamento and has a stake in Equatorial Energia, the lead investor in the privatization of Sao Paulo’s Sabesp, one of the largest water and sewage utilities in the world.
CPP Investments also made a direct investment in Sabesp, underscoring its interest in the sector, which offers stable and predictable cash flows, crucial for pension funds aiming to generate sustainable returns over decades.
As part of its rapid expansion, the fund has diversified across the globe, motivating its 2006 entry into Latin America, which Graham says has paid off.
CPP Investments recently reported a 10-year annualized net return of 9.1%, and Latin America has performed nearly in line with the global portfolio, in Canadian dollars, he said.
“I think what has gone well is being patient, having flexible capital and a long-term perspective,” Graham said, adding that the fund has also leaned heavily on its local team, currently 36 employees in Sao Paulo.
Finimize also reports CPP Investments bets big on Brazil's power and water sectors:
What’s going on here?
CPP Investments is doubling down on Brazil's energy and water sectors, banking on their long-term growth potential.
What does this mean?
Guided by CEO John Graham, CPP Investments manages approximately C$36 billion ($26.71 billion) in Latin America, about 5% of its global portfolio. Brazil alone takes up nearly half of this share, showing its strategic importance. Major investments include Auren Energia, formed with Votorantim, and Igua Saneamento, where CPP is the majority shareholder. Brazil’s strengths in renewable energy, especially hydroelectric power, and the privatization of its water sector make it an attractive market. CPP’s local team in São Paulo, with 36 employees, ensures it maintains critical local expertise.
Why should I care?
For markets: Brazil - A land of promise.
Brazil is a leader in renewable energy, with vast hydroelectric resources and growing wind and solar capacities. Despite some infrastructural challenges, the shift towards privatized water and sewage management is opening new investment avenues. CPP’s substantial stake illustrates a confident bet on Brazil’s sustainable growth, which can signal opportunities for other investors looking at long-term prospects.
The bigger picture: Scaling new heights.
CPP Investments’ strategy aligns with the global trend towards energy transition and sustainability. Investing in markets with scalable assets and strong local partnerships supports their mission to expand global influence. Reporting a 10-year annualized net return of 9.1%, CPP’s Latin American ventures, especially in Brazil, mirror its global success. The planned steady or increased share in Latin America underscores the region's role in their diversified growth.
A little more information on CPP Investments and Brazil.
As shown below, as at the end of March 31st, 2024 (end of fiscal 2024), CPP Investments had 6% invested in Latin America and nearly half of that is invested in Brazil:
In March 2023, CPP Investments and Votorantim joined together to launch Floen, a new company in Brazil focused on investing in the energy transition.
Floen aims to leverage strategic partnerships to support the scale-up of innovative technologies and business models that are accelerating the pace of the energy transition towards low-carbon energy, not only in Brazil, but globally.
“CPP Investments is actively investing in the energy transition across the globe, and this joint venture will allow us to unlock Brazil’s significant potential to become a green powerhouse. We believe there is significant opportunity to deliver strong long-term risk-adjusted returns for the CPP Fund through Floen,” said Ricardo Szlejf, Managing Director, Head of Latin America Infrastructure, CPP Investments.
A 50-50 partnership, the company’s strategy targets high-growth companies with viable technology that can address the world’s growing demand for affordable, reliable and sustainable energy. This includes areas such as new generation sources and storage, green hydrogen, alternative fuels and materials, mobility solutions, energy efficiency, and carbon management.
“Floen inherits the investment blueprint of its shareholders; with energy industry expertise, a long term approach and patient capital. We are ready to support the company as it seeks to invest in innovative solutions and businesses that will accelerate the energy transition,” said João Schmidt, CEO of Votorantim S.A.
Floen will be led by Chief Executive Officer Raphaella Gomes, who previously served as head of transition investments at major Brazilian energy producer Raízen and as CEO of Raízen Geo Biogas.
“I am excited to lead a company that will support the transition to a lower carbon economy,” Gomes said. “Innovative clean energy solutions are essential for a safe and sustainable transition path. By combining the investment know-how and long-term approach of Floen’s shareholders with our entrepreneurial spirit, we hope to make Floen a global reference in this field.”
About Votorantim
With 105 years of history, Votorantim is a Brazil-based, family-owned holding with a long-term investment orientation. Current portfolio companies have operations in 16 countries, across various sectors, such as building materials, financial services, renewable energy, metals & mining, real estate, infrastructure and agriculture. Votorantim is part of a select group of Brazilian companies with investment grade classification by the three main rating agencies. To learn more, please visit www.votorantim.com.br/en/.
I mention Floen because I believe CPP Investments is definitely targeting the energy transition sector in Brazil and looking for great long-term deals.
Apart from energy transition, however, Brazil is in the midst of a major push to privatize assets.
For example, under the Bolsonaro government, Brazil auctioned off 34 airports since 2019:
Brazil is modernizing the infrastructure of the country's airport sector promoting the longest sequence of auctions in its history. It is strategic for Brazil to transfer control of airports to the private sector in order to increase investments and the quality of services.
Since 2019, Brazil has auctioned 34 airports that have already guaranteed the commitment of approximately R$34 billion in investments.
By the end of 2022,another 16 airports will be auctioned, including Congonhas, in São Paulo, and Santos Dumont, in Rio de Janeiro, two of the main Brazilian cities.
By the end of the government, 50 of the country's most important airports will have been transferred to the private sector. In 2022, the government also hopes to grant more than 12,000 kilometers of highways, in addition to the Port of Santos, the largest in Latin America.
At that time, the state of Sao Paulo insisted in privatization of the Port of Santos.
In short, since 2019, the privatization of state-owned assets is a milestone of the Brazilian government's agenda to liberalize the economy, attract new investors and promote more competition in Brazilian markets.
More recently, President Lula just launched the National Energy Transition Policy which is expected to bring BRL 2 trillion in investment:
On Monday, August 26, President Luiz Inácio Lula da Silva launched the National Energy Transition Policy (Política Nacional de Transição Energética/PNTE), approved at a meeting of the National Energy Policy Council (Conselho Nacional de Política Energética /CNPE) which he led, alongside the Minister of Mines and Energy, Alexandre Silveira, who is Council chair. Brazil could receive an estimated BRL 2 trillion in investments towards the green economy over ten years.
"We are not going to throw away the meaning of the energy transition. This country has already thrown away too many opportunities. We cannot throw away opportunities. We need to bear in mind that we have everything. We have everything that nature has given us. We have skilled labor — we still need more. We have technically qualified people. In the energy sector, we have hundreds of excellent people in this country. We can do whatever we want," said the president.
Lula said that Brazil is already a world leader in clean energy adoption, but there is room for progress. "People respect us, because we can go anywhere and say: 80% of our electricity is renewable and 51% of our total energy matrix is already renewable and we can reach 100%. Who would have thought, 30 years ago, that we'd be talking about biomass, biodiesel, ethanol, that we are going to make the energy transition, that we are going to have wind, solar and green biodiesel?"
NEW ECONOMY — The PNTE will articulate and coordinate the energy transition in Brazil, creating synergy between government policies — such as the National Climate Change Policy and the Ecological Transformation Plan (Política Nacional de Mudança do Clima) and the Ecological Transformation Plan (Plano de Transformação Ecológica) — to strengthen the new global economy with job and income generation in the country, promoting a just and inclusive transition.
"Brazil is going to lead the world in the new economy, the green economy. Wind, solar, hydro, nuclear, biomass, biodiesel, ethanol, green diesel, carbon capture and storage, sustainable aviation fuel, green hydrogen. It is the rebirth of Brazil's industry on a sustainable basis. It is adding value to Brazilian products produced with clean, renewable energy, an opportunity to boost the use of our local content.” emphasized Alexandre Silveira.
Silveira informed that the New PAC already has BRL 700 billion in planned investments in energy transition and recalled that President Lula sanctioned the legal framework for green hydrogen this month. "We already have 27 gigawatts of hydrogen projects registered with the Ministry of Mines and Energy, which will bring in BRL 200 billion in investment. With the projects that we are making feasible and that are not in the PAC, we will increase this number even more and present it to Brazil," he said.
Finance Minister Fernando Haddad stressed the potential of the energy transition to boost national development. "The Ministry of Mines and Energy, together with the Ministry of the Environment and Climate Change, the Staff Office House, and the MCTI, is taking care of the heart that will pump blood to the new Brazil. A new Brazil that will be born from a process of ecological transformation, based on the energy transition, and that will radiate a new energy that will allow the countryside to do better, industry to do better, and in a business environment favored by the reforms that are underway in the National Congress. One of them, the most essential of all, is tax reform, which will change the quality of Brazil's economic growth," he affirmed.
TRADING — On Monday, the CNPE deliberated another six proposals aimed at creating new opportunities for sustainable economic development, mainly in the oil and gas sectors. A resolution was approved that establishes additional guidelines for the Union's oil and natural gas trading policy. The rule creates conditions for the Union's natural gas to reach consumer agents more closely, defining that PPSA, a state-owned company linked to the MME, will now be able to contract the flow and processing of the volume of natural gas that falls to the Union in production sharing contracts.
The aim of this resolution is to optimize the use of inputs from production sharing contracts, boosting industrialization and strengthening security in the national supply of energy, oil inputs, nitrogen fertilizers and other chemical products.
"What we have approved today is the effective result of the efforts of the Gas to Employ Program. We are balancing the national gas market, offering increased availability and moderate prices to the end consumer," said Alexandre Silveira.
DECARBONIZATION — Another measure authorized by the CNPE is the resolution that establishes guidelines aimed at decarbonizing activities of oil and natural gas exploration and production in Brazil. The rules include fostering technological development, minimizing natural gas flaring, maintaining routine zero flaring and promoting the sharing of installed infrastructure, among other points.
FUELS — E In another decision, the CNPE approved a resolution aimed at updating the strategic guidelines for the development of the fuel, biofuel and oil derivatives market in Brazil. The document provides for the strengthening of national processing capacity, which currently faces challenges with significant imports of derivatives. Among the strategic guidelines listed in the resolution are the search for an increase in biofuel production, the expansion and modernization of the refining park and the promotion of the energy transition.
It was also decided to set up a Working Group (WG) to carry out specialized studies on the waterway fuel, aviation fuel and liquefied petroleum gas (LPG) markets. The WG, coordinated by the MME, will be made up of 17 institutions and should establish guidelines of interest to the National Energy Policy on the subject.
PRODUCTION — The CNPE also approved two resolutions on oil and natural gas exploration in new blocks. The first defines Petrobras' expression of interest in the Jaspe block, which will be tendered under the production sharing regime in the next Permanent Offer Cycle. The resolution also establishes that the company must be the mandatory operator of the block, with a minimum stake of 40%. It is estimated that revenues from signature bonuses will generate BRL 401 million.
The second resolution approved the technical and economic parameters of the Rubi and Granada blocks for bidding under the production sharing regime, in the Permanent Offer system. The measure reaffirms the importance of the exploration and production of oil and natural gas in the Pre-Salt Polygon, which is responsible for most of Brazil's production. The parameters for the bidding process estimate signature bonuses that could generate revenue of BRL 118 million. More than BRL 60 billion is expected to be invested, which could generate more than 280,000 direct and indirect jobs, as well as government revenues of around BRL 119 billion over the lifetime of the projects.
As you can read, Brazil is doing its part to attract foreign investors and decarbonize its economy.
CPP Investments has been investing in Brazil since 2006 and knows the country very well.
Others have also invested in Brazil. A long time ago, OTPP courted and invested alongside ex-billionaire Eike Batista and made great returns before his spectacular fall.
Are there risks?
Sure, The Economist notes that under Lula, Brazil is walking on the financial wild side as investors worry about deficits and debt.
According to a Reuters poll, Brazil's economy will continue growing at a steady pace over the medium term thanks to a continuous rise in public spending that is set to keep fiscal deficits uncomfortably high.
But Brazil’s economy grew 2.9 percent in 2023, beating expectations in the first year of the administration of President Luiz Inácio Lula da Silva and so far his economic and environmental policies seem to be working and receiving praise.
However, left-wing Lula is unpredictable and while some praise his return, others are more concerned stating that his government adds political risk to the equation.
Still, CPP Investments and other large Canadian pension funds have been investing in this country for a long time and they will proceed cautiously and opportunistically regardless of who is in power.
Below, some clips on why Lula and Xi are courting each other and how their alliance is changing the geopolitical landscape in Latin America. Take the time to watch both clips.
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