Southern persuasion

There is a lot of buzz about the opportunities for capital-raising in South America lately.

In recent conversations, sources have pointed out that countries like Colombia and Chile have been working to open up their national pension systems to alternative investments – positive steps that will help the private equity asset class become more firmly entrenched in the region’s economic landscape.

Chris Witkowsky

This also bodes well for general partners considering raising capital over the next few years, as the traditional wells of institutional capital dry up. In more established markets like the US and Europe, investors hit by a liquidity shock have been forced to reduce or restructure relationships. And even in emerging markets like the Middle East, some LPs are considering scaling back their commitments to the asset class or surpassing fund managers to make their own direct investments.

The emergence of South America as a source of fresh institutional capital – with Brazil and Mexico leading the way – is therefore welcome news.

In Colombia, sources say the regulatory regime is “looser” than some of the other South American countries and more receptive to private equity investments. The country still has rules preventing its public pensions from investing in foreign-based firms, though at least one prominent fund of funds manager has been spending a good amount of time working with Colombian pensions on how to access the asset class. Even if Colombia allowed investments in foreign-based private equity firms, however, some GPs may feel it too risky to accept Colombian money because of their perceptions of issues related to drug trafficking and paramilitary groups in the country, one source said. “Convincing GPs they should consider going to Colombia is kind of difficult,” they said. “They fear they would not be able to discern good capital from laundered capital.”

Chile has been moving at a slower pace than expected in terms of private equity acceptance. One source told PEI that five years ago, he would have thought Chile would have been investing in private equity by now. At one time, the country seemed the most open to moving its pensions into alternative investments, but that hasn’t happened yet. The hang-up with Chile’s legislature is that it requires daily mark-to-market accountings of investments, which “isn’t flattering relative to public equities, where you can actually see a growth of capital. The end user is not necessarily sophisticated enough to [distinguish] between a J-curve movement and real capital loss,” the source said. “Getting a legislative body past the notion that you can’t price this stuff on a daily basis proved to be a herculean task.”

Brazil has become increasingly friendly to private equity over the last decade. The country’s huge pension system is authorised to invest in private equity, but the pensions demand more control than many GPs are comfortable with, including having veto rights over deal decisions. This has kept foreign GPs from targeting Brazil for capital. GPs have expressed concerns that the major Brazilian pensions may end up suffering from backing under-qualified managers, the only managers willing to consent to LP controls. 

Mexico, meanwhile, has made huge steps over the last two years to allow its network of 18 private pensions, dubbed Afores, to invest in the asset class. After closely working with industry participants, the country’s regulators passed measures in 2009 allowing Afores – estimated to have nearly $100 billion in assets under management – to invest in Mexican Stock Exchange- listed private equity and infrastructure vehicles. Industrial-focused mid-market firm WAMEX Private Equity Management was the first private equity fund manager to raise such a vehicle, collecting $55 million for a listed fund that will be invested alongside a traditional closed-ended fund. While the listed vehicles are expected to have the greatest impact on infrastructure investors, it’s still a big first step for the country’s burgeoning private equity industry.

While events are moving faster in some of these countries than others, the signs nonetheless indicate that the amount of South American institutional capital available for private equity investment is due to increase. Fund managers and fundraisers should therefore actively engage with LPs in those countries, keeping track of legislative developments and setting the foundation for the day when South America becomes a paradise of LPs.