LPs increasingly turn attention to Latin America

The macro-economic story in much of Latin America makes it an especially attractive destination for private equity dollars, and institutional investors who have had appetite for Asia should explore the region, writes TorreyCove Capital Partners, led by David Fann.

Latin America has always been a region that has held great promise, with rich supplies of natural resources, agricultural capacity and attractive demographics.

From an investment point of view, however, the region’s history has been more varied and problematic. After decades of waiting for the promise of the region to translate into attractive investments, and after many disappointments, it appears that much of Latin America has turned the corner.

Forward-thinking governments have enacted more pro-growth, free market oriented policies, established responsible fiscal and monetary policies and promoted political stability. Both infrastructure plays and investments in small- and medium-size business enterprises offer excellent opportunities to tap into the larger trends of the region as it matures. Private equity is a natural way to access these sectors, as it possesses certain attributes that fit well with the region – chiefly its long-term approach to creating value, its focus on improving efficiency and strategic thinking, and its ability to operate in more inefficient markets.

With much of Europe in a rolling crisis mode and US growth prospects uncertain and rather sluggish, institutional investors have aggressively sought out growth in emerging markets over the past few years.

David Fann

For most, this has inevitably meant increasing exposure to the Asia-Pacific region, with Greater China by far garnering the lion’s share of interest. While this trend is not expected to slow, especially as long as China can continue to post GDP growth rates of 7 percent and higher, we think it is time for private equity investors to cast their nets into some other emerging markets. In this regard, we encourage a serious look at Latin America, where the trends in terms of growth, reforms, demographics, and investment climate have been on a decidedly positive trajectory over the past decade.

The confluence of factors described above – middle class growth, above average GDP growth, improved political environments throughout much of the region, and the need for fixed investment – lays the groundwork for a variety of attractive investment opportunities in much of the Latin American region, perhaps more so than at any time in recent history.

We submit that private equity will be one of the most advantageous, and lucrative, means to access the returns available throughout the region for investors that are sophisticated, have deep local knowledge, and a long term view. Latin America is almost certainly under-invested from a private equity perspective when compared to its emerging market peers around the globe. While 2011 was a solid year in terms of growth in private equity dedicated to Latin America (overwhelmingly to Brazil), it paled in comparison to amounts deployed for Asia (particularly China), Europe and North America.

While the fundamentals for private equity investing in Latin America are increasingly in place, investors should keep in mind that the sector is still very much in the emerging stage, and patience in deployment of capital will be necessary. Compared to North America, the universe of credible private equity managers is still quite thin, and even attractive track records are largely unrealised.

However, there are indications that the gap is being filled. As data from the Latin American Private Equity and Venture Capital Association indicates, 2011 saw private equity fundraising increase to $10.3 billion from $8.1 billion in 2010. Latin America-focused fundraising is still very small in relation to Asia, but the gap looks to narrow over the next few years.

Private equity in Latin America is in the early stages of what should be a period of strong growth over the next several years, buoyed by the increasing formation of local funds, intensifying interest from established outside private equity managers (for instance, Blackstone’s partnership with Patria), and the return to market of several established private equity investors that closed large funds relatively recently (Advent, Southern Cross).

As is the case with any private equity market, most of these managers will not be likely to generate sufficient returns to justify the risk of investment; however, a solid group of top-tier managers has begun to coalesce, and should warrant strong consideration by institutional investors in the coming years.

TorreyCove Capital Partners is a global private equity investment advisory and consulting firm.