Money bags: Peru's institutional investors line up to finance big projects.

There's money to spend in Peru. Interest rates are low and confidence in the region is back. Overseas demand for Peruvian commodities such as fishmeal, metals and natural gas has soared, a shot in the arm to the economy. But the domestic stock market is largely void of serious money, making it difficult for companies to raise money through equity. Institutional investors such as pension funds and insurance companies have come to the rescue, racing to finance Peruvian companies. The financial tools of choice have been fixed-income instruments, mainly bonds, and terms have never been better. Maturities on bonds are longer than they have ever been, and demand for these instruments is skyrocketing over the amount available for financing.

"Investment funds like these are going to help push up the economy," says Reynaldo Roisenvit, assistant general manager of Centura SAB, the brokerage unit of Interbank, one of Peru's largest banks. "There is still much room to grow." When an instrument does hit the market, demand soars, Roisenvit says.

Such was the case of Transportadora de Gas del Peru (TGP), a pipeline consortium of seven companies that sold US$270 million in bonds in August 2004. TGP is building a pipeline that will link the multibillion dollar Camisea gas plant to Lima. "The initial offering was going to be somewhere between $100 and $150 million, but along the way we realized that the demand was much greater. We ended up practically doubling the value of the issue," says Gianfranco Ferrari, general manager of corporate banking for Banco de Credito del Peru (BCP), the financial institution that structured the deal, which was carried out in both dollars and in Peruvian sols.

TGP's 25-year placement was Peru's largest bond issue ever. "Ten years ago, issues were plain vanilla, $3 million at three years, and that was it," says Ferrari. "The amounts, tenors and complexity of the issues you see today are an entirely different story.... Although a comparatively small market, it can handle large deals."

Investors note that while organizations have traditionally turned to bank loans for money, bigger companies are increasingly turning to the country's bond market for financing, given the attractive financing rates and terms. "This sends out an important message to companies and investors because it shows that large projects like this one--over $200 million--can be financed in Peru," says Jean Paul Chabaneix, a partner and corporate-finance specialist at the Rodrigo, Elias y Medrano law firm. Bonds give companies freedom to avoid going to the bank for loans at potentially less-attractive terms. The trend is starting to reflect in balance sheets here. Ferreryros, the country's top distributor of industrial machinery, has over the past few years increased its presence in the bond market. In 2003, 23% of its total liabilities were bonds as opposed to 15% in 2000, says Mariela Garcia, assistant general manager of Ferreyros.

"Without a doubt, today the country's most important players are seeking financing in the local capital markets," Garcia says. "This includes those companies that never would have even considered doing so just a few years ago."

Some Peruvian companies are opting to raise money domestically to invest internationally. Cementos Pacasmayo, one of the country's largest cement producers, did just that. In 2003, it sold $80 million in bonds in the domestic market to finance its purchase of the Zemex Corporation, a U.S. producer of industrial minerals with operations in the United States and Canada.

Unlike the country's bond market, Peru's equity market is practically non-existent. Only a handful of large equity issues has ever been carried out, none of them during the last seven years. "Peru suffers from a severe absence of equity culture and, because of this, its equity-investor universe is extremely small," says Omar E. Goyenechea, managing partner at Equitas Partners, a Peruvian investment advisory boutique specializing in mergers and acquisitions and private equity.

Driving the Peruvian markets are the country's private pension-fund managers, known as AFPs. With well over 3 million individual investors, AFPs have more than $7 billion in funds under management, 11% of Peru's gross domestic product.

"This represents a source of funding of extremely high potential for the growth and development of both the capital markets and the economy in general," says Goyenechea. "In fact, the most significant factor behind the local capital-markets growth has been the presence of the AFPs."

Taking a stake. Peru's pension funds take in about $30 million a month--money that they need to invest, yet regulators limit their market choices. In the meantime, they're on the lookout for alternatives, and Belgian energy company Tractebel gave them one. Tractebel needed to raise money to bid on completing the Yuncan power project in February 2004. AFPs saw it as a safe yet profitable transaction. They lent Tractebel $48 million to win the government concession to finish Yuncan. In return for their capital, the AFPs took equity stakes in Enersur, Tractebel's Peruvian subsidiary. It was the first time that Peru's AFPs took on project risk, and they want to do it again.

"Going hand-in-hand with a qualified operator and sharing the risk in an investment is a winning formula wherever you are," says Jorge Ramos, investment manager of AFP Integra. "For us it represents a new investment alternative in which we feel comfortable, and for them it's an opportunity to improve the value of their position in the country." AFP Integra is evaluating similar transactions since the Tractebel deal should end up being one of the most profitable in recent years, Ramos says.

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Even the banks say that AFPs are likely to become an attractive financing option for companies. "It's a sigh of relief for a potential investor to know that they are going to have a local partner that is going to invest with them and, at the same time, it's an enormous opportunity for AFPs to participate in key developments in Peru," says Ricardo Aguirre, manager of corporate banking at BBVA Banco Continental.

That's good news for larger companies. But what about smaller ones? Financing venues for small companies are traditionally limited in Peru and that's not going to change, says Alfredo Sillau, general manager of Compass Group, an investment fund. "How many Yuncans are we going to see? Although they are very positive for the market, I think what capital markets really need is to become more available to small and medium-sized companies, to be completely honest," Sillau says.

Sillau is not alone in his concern for the little guy. New investment instruments are out there that could help small businesses. At the top of the list is a $50 million fund administered by AC Capitales, which invests as a minority shareholder in government concessions and privatizations, specifically those related to infrastructure, public services and natural resources. Another oft-mentioned vehicle is a $15 million private equity fund administered by SEAF Peru, which invests in small and medium-sized businesses with exporting capabilities. Both of these funds receive financial backing from AFPs.

LISA K. WING--LIMA