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PE in Latin America hampered by regulations, culture

Participants in the Latin American M&A market cite the regulatory climate and opposition to giving up management control as the top foils to private equity in the region, according to a survey.

As M&A activity in Latin America booms, the regulatory environment and resistance to relinquishing management control top the list of challenges confronting private equity.

According to a recent Latin American M&A survey of investment bankers, private equity practitioners and corporate executives, 63 percent of respondents named the regulatory environment as the principal obstacle to private equity in the region. The report was published by intelligence service mergermarket in conjunction with law firm Greenberg Traurig.

The regulatory environment is of greatest concern in countries such as Venezuela and Ecuador. Brazil, Argentina and Mexico are considered to have less problematic regulatory conditions. Brazil accounted for 44 percent of M&A deal volume in the region in 2007 and half of total deal value, according to the report.

The second-most cited obstacle for private equity, identified by 57 percent of respondents, was resistance to handing over management control to outsiders. “Such aversion is especially prevalent in smaller economies, where many targets continue to be closely held by family groups with several generations of historical family participation in management,” according to the report.

Despite the dominance of Brazil by deal volume and value, more than one quarter of private equity respondents advocated a pan-regional focus when developing an M&A strategy in Latin America. The same number favoured a regional focus while nearly one third preferred a country focus.

Investment bankers heavily favoured a regional focus while corporate executives most commonly advocated a country focus.

In the first half of 2008 alone, nine private equity-backed M&A deals were completed in the region worth a total of nearly $3 billion, said the report.