For the seventh straight year, Chile has earned the Latin American Venture Capital Association’s distinction of healthiest private equity regulatory environment in Latin America.
Chile, along with second-ranked Brazil, did not see any score change between 2012 and 2011.
LAVCA scores Latin American countries using a variety of criteria that include laws on private equity and venture capital fund formation; tax treatment of funds; protection of minority shareholder rights; restrictions on institutional investors; protection of intellectual property rights; bankruptcy regulation; capital markets and feasibility of exits; registration and reserve requirements; corporate governance; judicial systems; perceived corruption; accounting standards and entrepreneurship.
Two countries with notable upgrades in their scores were Mexico and Peru. Mexico, ranked third, benefitted from improvements to its capital markets structure, which included a relaxation of regulations that permit small and medium-sized companies to list on the public market, easing paths to exit for firms.
“Mexico has attracted increased attention from global investors over the last year, as interest in the Latin American region extends outside of Brazil,” LAVCA president and executive Cate Ambrose said in a statement. “The country’s score on capital markets development now matches that of Chile and Brazil, thanks to ongoing efforts by the Mexican stock exchange to improve access and increased participation from local pension funds.”
Ambrose was unavailable for further comment at press time.
In July, Mexico made a pair of changes to regulations regarding certificados de capital de desarollos (CKDs); public vehicles that allow the country’s pensions (Afores) to invest in private equity. Under new guidelines, Afores’ commitments to CKDs must be 20 percent pre-funded. The remaining 80 percent of a commitment can be met through capital calls. Before, Afores had to provide their commitments in full up front.
Mexico also implemented a second change that allows individual Afores to commit more than 35 percent of a fund.
Peru, which is tied for eighth with Panama, increased its score “due to feedback from fund managers indicating that the delays with new fund approvals have improved”, according to the release. Additional information regarding what had held up fund approvals in the past could not be determined at press time.
Although most countries improved or retained their scores from 2011, El Salvador and Argentina’s declined. Argentina’s score fell because of registration and reserve requirements for inward investments. The country has underperformed compared to its neighbors due to a relatively lackluster regulatory framework for the industry as well as a limited availability of local institutional capital, according to the release.
El Salvador’s score weakened because of tax and local accounting issues, according to the report.
Latin America’s private equity has grown substantially in recent years, with fundraising reaching record highs in 2011. Private equity and venture capital firms raised $10.3 billion last year, surpassing the previous year’s record by $2.2 billion. The bulk of the fundraising was done in Brazil, where the separate marketing efforts from four firms combined to raise $7.3 billion.