(Bloomberg) -- SulAmerica Investimentos, the asset-management arm of one of Brazil’s largest insurance companies, is planning its first private-credit fund focused on project financing as spreads for plain-vanilla local bonds shrink, squeezing returns for more traditional funds.
“Our two major fronts today are more structured products, both in the real estate and infrastructure worlds,” Daniela Gamboa, head of private credit at SulAmerica Investimentos, said in an interview. “A lot of people are getting into project finance; it’s a hot spot and there is a lot to be done there.”
Private-credit funds are booming in Brazil with interest rates set to remain higher for longer than many analysts predicted, persuading many investors to shift from underperforming hedge and equity funds. With tax regulation changes adding to the pressure, the industry raised a net 163.5 billion reais ($29 billion) during the first six months of this year, according to SulAmerica calculations. That boosted demand for local bonds and narrowed spreads over the interbank interest rate known as DI to 155 basis points from 260 basis points on average in the second half of last year.
“Inflows won’t stop,” Gamboa said.
Since only a few firms are dedicated to taking on the credit risk of a project, those types of assets can still deliver a risk-adjusted return higher than corporate bonds, she said. While they are riskier than SulAmerica’s general strategy focused on high-grade credits, project financing can provide sufficient collateral protections by using receivables or even equity, according to Gamboa.
A project-financing fund is “super complex and demands specialization,” she said, and because of that SulAmerica hired credit analyst Pedro Nirschl, a former senior project-finance analyst at Banco BV, to examine project details.
SulAmerica’s private-credit funds rose to 23 billion reais in assets under management from 18 billion reais at the end of last year. The firm’s total assets under management in all of its strategies reached 76.2 billion reais.
Globally, the private-credit market has expanded since the 2008 financial crisis, emerging as an alternative to banks at a time when regulators have been scrutinizing risky lending by deposit-taking institutions. In the US, the market hit $1.5 trillion this year, compared to $1 trillion in 2020, according to a June Morgan Stanley report.
While average credit spreads narrowed, some sectors in Brazil, such as the retail industry, are still struggling with increasing leverage and persistently high interest rates.
“There was a great expectation that the retail sector would improve this year, that falling rates would boost credit and people would consume more intensely,” Gamboa said. “That didn’t happen.” Health-care and construction companies also face challenges, Gamboa said.
SulAmerica doesn’t have exposure to the agriculture sector, which is facing a wave of recent bankruptcy filings.
“We remain really selective, increasing our cash positions, since there are still many fragile companies,” Gamboa said.
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