The world’s largest ethanol market, the U.S., may be hurting, but investors interested in the fuel see opportunity in Brazil. Companies such as energy giant British Petroleum and agricultural behemoth Archer Daniel Midland have invested in ethanol in the South American country.

Now private equity has made its move. An international consortium of investors led by private equity firm Paladin Capital Group announced on Monday that it will invest more than $1 billion in Brazilian ethanol and energy markets through their holding company, Vital Renewable Energy. Other investors in Vital Renewable include Leaf Clean Energy Company, Petercam Asset Management, and PCG Clean Energy & Technology Fund.

Ken Pentimonti, of Paladin Capital, said Vital Renewable will focus its investments in Brazilian ethanol production, but the company is considering opportunities in such ethanol infrastructure as roads and ports.

“We think there is a huge growing market [for ethanol] in Brazil and that it will be a low-cost leader for ethanol production into the future,” Mr. Pentimonti said.

Vital Renewable’s first move is a joint venture with sugarcane and ethanol producer Grupo Farias. The venture, called Taquarituba, after its location in the state of Sao Paulo, will raise about $200 million in debt and equity and will produce sugarcane and ethanol from a facility that is already under construction. It should produce ethanol by early 2010 with an annual capacity of about 30 million gallons.

Mr. Pentimonti said Grupo Farias would be Vital Renewable’s primary partner in Brazil, but the private equity-backed company might invest in projects with other partners or alone.

The announcement comes as Brazil’s ethanol industry is rapidly growing, led by national powerhouses like Cosan and São Martinho. Sugarcane, the main feedstock for ethanol in Brazil, is widely and cheaply available. And tax incentives and government mandates requiring ethanol blends of more than 20 percent in transportation fuel have spurred the industry.

Will Thurmond, managing principal of Emerging Markets Online, said Brazil is on course to become the biggest ethanol producer in the world. “They produce cheaper ethanol than the U.S., they have more landmass to produce it, and the greenhouse-gas lifecycle of emissions of sugarcane ethanol is across the board the best of all the alternatives commercially viable today,” he said.

Besides Brazil’s growing domestic market, Mr. Thurmond said the U.S. and Europe likely would rely on Brazilian ethanol exports in coming years in order to meet government biofuels mandates. “That’s why we’re seeing more investment in Brazil,” he said.

Brazil will produce about 8 billion gallons of ethanol by 2013, up from about 4 billion gallons last year, according to a Bloomberg report. And by 2015, flex-fuel cars, which can run on high blends of ethanol and gasoline, will represent 70 percent of the nation’s light vehicles.

But DTN analyst Rick Kment said that because Brazil’s ethanol market is mature it has additional barriers to entry not found in emerging ethanol markets.

“It will be difficult for someone new to the market to step in and get up to speed,” he said.

Analysts also cite Brazil’s complex system of ownership and congestion problems at main ports as barriers to success.

This might help explain why the Vital Renewable deal marks only the second large U.S. private equity investment into the Brazilian ethanol market, according to a PE Week Wire report.

Paladin Capital’s Mr. Pentimonti said there are regions of Brazil where the established ethanol companies have limited reach. He said the industry may be mature, but demand is growing dramatically.