Attractive entry valuations and abundant deal flow relative to other emerging markets are boosting the popularity of Latin American private equity, according to the latest annual Coller Capital/LAVCA Latin American Private Equity Survey.
The survey of 113 global private equity investors was conducted in June and July 2015, and revealed that despite a current backdrop of depreciating currencies, slowing growth and public market volatility, over two thirds (68 percent) of limited partners expected to have direct exposure to the region in three years’ time, compared to just 42 percent at present.
Rising interest in real assets was also a key factor. Today, 41 percent of Latin America-based LPs surveyed had private equity investments in Latin American infrastructure, but 88 percent expected to do so within three years.
Over the same timeframe, at least twice as many international LPs expected to have private equity exposure to real estate, infrastructure, timber and farmland in Latin America as today – though there was markedly less interest in private equity exposure to mining assets from international LPs, compared to local ones.
Around 95 percent of local LPs were planning to increase commitments to the asset class this year, with pension funds from Brazil, Chile, Colombia, Mexico, and Peru already managing roughly $770 billion of assets in the region.
Moreover, there was a willingness to embrace newer GPs in the region, in part reflecting the difficulty of accessing many of the established players.
One third of LPs investing in the region had invested at least once in a debut Latin American fund in the last seven to eight years, according to the research.
President of Coller Capital in the US, Frank Morgan, told Private Equity International: “There is a scarcity of established private equity funds in Latin America, so lots of LPs are investing in first time funds. Most of the established GPs, such as Advent and Patria, are very oversubscribed.”
“There is a desperate thirst for private equity opportunities in Latin America. Compared to Asia, which has been a very popular area for investing in private equity, Latin America has not had the same level of interest [but] attractive valuations are now a key driver of interest.”
LAVCA president Cate Ambrose acknowledged the tough near term outlook for the region, but said LPs looking to invest now would be likely to limit downside risk due to the depressed valuations of many assets.
She told PEI: “The overall perspective on the region is still a net positive one although the outlook is complicated. If you had invested three years ago you would have endured a 30 percent currency valuation, so it would be hard to exit.”
Ambrose also pointed to an increase in activity from large international pensions and sovereign wealth funds in the region as a significant trend.
“There is interest in e-commerce and also energy and infrastructure. Funds like Temasek and OTPP [Ontario Teachers’ Pension Plan] are looking at both direct and fund investments.”
“In Mexico and Brazil, GIC and Temasek have had a presence on the ground for some time [and] CPPIB [Canada Pension Plan Investment Board] opened an office in Brazil last year. We are also seeing some of the largest GPs involved in opportunistic deals in the region. There is interest in taking advantage of distressed opportunities in Brazil,” Ambrose said.