Latin America's Untapped Infrastructure Potential

Executive Summary:

In this Q&A, Hamilton Lane's global leaders discuss the future of private infrastructure with distinguished private markets panellists, identifying compelling investment opportunities and emerging trends across the Americas. Key topics include:

• Trade and tariffs: Why renewed trade discussions around the U.S.-Mexico-Canada Agreement are spurring greater investment certainty amidst tariff volatility. 
• Power and energy infrastructure: How U.S.-Mexico energy exchange fortifies current and future growth opportunities. 
• Digital and telecom infrastructure: Why country-specific telecoms are becoming more efficient duopolies and the long-term implications of digital regionalization. 
• The investment opportunity: Why many private Latin American infrastructure companies are undervalued and ripe for institutional investment. 

Trade and tariffs

Salvador Almeida, Head of LatAm, Hamilton Lane: It was recently announced that discussions to renew the USMCA will start one year ahead of schedule. Then tariffs hit. At a high level, what impact do you think this will have on the infrastructure landscape and investment opportunities? 

Brent Burnett, Head of Infrastructure and Real Assets, Hamilton Lane: The recent volatility of tariffs levied against Canada and Mexico, including the back and forth on the U.S.-Mexico-Canada Agreement (USMCA) goods being exempt or not, has inserted a lot of uncertainty into the markets, which immediately causes investors to go pencils down.  

The USMCA is a cross-border trade agreement that was struck in 2020. It superseded the North American Free Trade Agreement (NAFTA), effectively maintaining the same premises of NAFTA while updating it for modern trade issues, such as intellectual property protections, trade in digital assets and some sector-specific elements like auto manufacturing and dairy provisions for Canada. This was one of the hallmarks of Trump's first presidency, and it was one of the policy initiatives that had the most bilateral support.  

One of the things that the USMCA did and which we expect to be preserved is, like NAFTA, it removed many tariffs related to energy commodity trade between the U.S. and Mexico. This contributed to more investment in pipelines and power infrastructure between the two countries. The USMCA both preserved a tariff-free environment for energy commodities and discouraged involvement from state-owned enterprises interfering in the power markets. The premise of the UMSCA is to keep the energy and power manufacturing sectors very interrelated between the U.S. and Mexico.  

We view the acceleration of the renewal discussions around the USMCA as positive. To deploy capital, investors want more certainty, so any time certainty around policy initiatives accelerates, it can improve the investment environment. As updates to the USMCA are discussed, we will continue to monitor its progression alongside broader tariffs.  

Power and energy infrastructure 

Salvador: Marcelo and Brent, let's dig in a bit on the energy and power markets across the U.S. and Mexico. How are they related?  

Marcelo Sada Zuazua, Managing Director, Arroyo Investors: We see two big trends supporting this relationship. First, Mexico already purchases most of its gas from the U.S., so we're married for the foreseeable future. We also import a lot of raw material for our power plants in Mexico, which is only going to continue as more infrastructure opportunities come to Mexico. Both new power plants and more gas are needed to support this initiative, so the whole supply chain is likely going to see an uptick in investment, specifically in infrastructure. 

Second, we are experiencing positive momentum in the energy infrastructure space that aims to increase investment in the sector. The government has also changed up some caps in the self-supply regime, which we believe will increase the demand for megawatts and, therefore, increase the demand for gas and, ultimately, the import of gas from the U.S. This dynamic creates positive ripple effects. The combination of the massive growth that Mexico is experiencing as well as the effects of nearshoring presents a lot of opportunity for private infrastructure investors.  

Brent: To Marcelo's point about the growth drivers, it's all centered around the nearshoring theme. Although this has been underway for a long time, it really accelerated in the post-Covid environment, as the U.S. has tried to diversify its supply chain away from China.  

The result of that, though, has been an increased interdependency in cross-border power markets. We think about power in two ways: In terms of actual electrons that move between markets, or the fuel supply for that power. As it relates to the U.S. and Mexico, the number of electrons that move between those markets is quite small, but the fuel supply exchanges are very large. So, we expect this exchange to drive generation and transmission opportunities in Mexico proper, while midstream pipeline and storage assets could become more cross-border. We recently released our annual Infrastructure Market Overview, which highlights dynamics in the U.S. power markets, which can provide a deeper dive into the issues here.  

Digital and telecommunications infrastructure  

Salvador: Now, José Antonio, I’m turning to your sector of expertise. We have noticed an uptick in attractive digital and telecom opportunities in the region. From your perspective, which factors are driving this growth? 

José Antonio Ríos, Board of Directors, Cirion Technologies: There are three main factors. To start, large, country-specific telecoms are transforming into duopolies in most of the countries in Latin America. Obviously, this transformation is not going to happen overnight, and it is not going to happen in all Latin American countries. But there is a need for consolidation and increased efficiency for all of the telecoms.  

This trend has been seen across Latin America, including in Central America where there is almost a duopoly everywhere. Colombia is working towards that, and I think Brazil has been reduced from four to six telecoms down to two and a half, depending on how you count it. Argentina also just had a major tentative step forward with the acquisition of personnel from Telefonica, which hasn't been approved by the government yet, but supports the trend. In terms of telecom growth, there are better levels of profitability in Latin America than in the United States, and that is likely going to continue for the next few years. 

Second, there is a gigantic amount of digital investment that continues to grow. What the digital world can and will eventually do is simplify, solve and manage people's financial challenges directly. We believe that high-quality content distribution will also be impacted in a major way. 

Lastly, there is going to be a lot more development of business between Latin American countries for the first time in many years where, historically, the directionality of investments has only been one way: between each Latin American country and the United States. There's going to be a lot of adjustment, but we believe there is an incredible amount of opportunity to regionalize highly profitable investments country by country. 

The LatAm investment opportunity 

Salvador: Most institutional investors are either underweight or have zero exposure to infrastructure in LatAm. Why should they consider deploying capital into the region? 

José Antonio: There is a major opportunity in Latin America because there is a lot to be done. Latin America is crying for electricity. When you're planning to put a data center in a Latin American country, often the biggest problem you face is getting enough electricity. So, there will need to be investment in energy infrastructure.  

I also think that Latin America is going to have a more stable decade ahead because the turmoil among the big three global blocks is going to help Latin America find better ways of operating, including acquiring more foreign investment. That includes U.S., European and Asian investors allocating capital into Latin America, as a “more neutral” growth territory. Even if they apply just 5-10% of their investment pool, I think the return could be at least equal, if not better, than in other areas of the world. 

Marcelo: From a macro point of view, the most important thing is the growth that Latin America presents itself vis-à-vis the rest of the world or the U.S. Specifically, if you look at Mexico, you have a very young population concentration, which continues to grow. That population is consuming more and more gas, energy and data, which is growing in parallel with the hundreds of new businesses that are coming into the country because of the nearshoring opportunity. When you have this stable population growth in and of itself, plus new industries coming in, it's a very clear indication that there is a need for more infrastructure, especially for more gas, energy and data centers.  

Brent: From a portfolio construction perspective, last year LatAm made up 10% of the global infrastructure transaction market, and yet most institutions have almost zero exposure to it. With ~5.2% of discretionary commitments, or approximately 6.3% invested1 in LatAm, our infrastructure funds are ahead of the curve. While the U.S., Canada and Europe account for about 80-85% of the transaction market, LatAm remains sizable. So, I think institutions are underallocated relative to the market opportunity.  

The Latin American growth profile is compelling. There are developed market economies in LatAm that are growing as fast as or faster than the U.S., and there is strong rule of law in many  investable countries there. We see opportunities to access assets at valuations that are nearly half of comparable assets in the U.S. even though they have similar credit risk profiles.  

While currency risk has been a key concern in LatAm for some time, we are seeing more assets with USD-denominated contract and cost structures. So, we believe LatAm selectively offers opportunities with lower entry point valuations, more compelling growth profiles and the potential to mitigate currency risk through hedging or contract structure. We do not believe investors should be massively overweight to the region because there are still risks, but selective exposure that mirrors the opportunity set in the transaction market is a prudent approach.  

Building the future of Latin American infrastructure 

Despite increased global uncertainty, private infrastructure remains a robust investment opportunity across Latin America. From strong trade provisions built into the USMCA to the power, energy, digital and telecommunications infrastructure needed to support a young and expanding population, LatAm infrastructure investments are poised to accelerate. Strategically allocating capital to this rising asset class can help develop Latin America's economic and social future and help investors achieve their private markets portfolio objectives.