Mention to a potential LP that you are launching a private equity or venture capital fund targeting Latin American investment opportunities, and you might well start raising more eyebrows than capital. With the possible exceptions of Chile and Brazil, Latin America – whether deserved or not – has the unfortunate reputation of being a volatile investment locale. Investors and many international GPs alike cite the region’s macroeconomic and political risks as reasons to at most watch, but definitely not touch, investment opportunities in the region.
Seeking to set the record straight is the Latin American Venture Capital Association (LAVCA), which has teamed up with the Economist Intelligence Unit and the Inter-American Development Bank’s Multilateral Investment Fund (MIF) to develop a “2005 Scorecard” for assessing the investment environment within the Latin American and Caribbean (LAC) region.
Among the LAC countries covered by the scorecard are Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Jamaica, Mexico, Peru, Trinidad and Tobago, and Uruguay. Israel, Spain, Taiwan and the UK are included on the roster as well to provide a global context for the ratings.
The scorecard findings show a wide variation in business climates for private equity and venture capital across the LAC region, based on legal, tax, corporate governance, and capital market development considerations.
Scoring best overall within the region is Chile (76.5 out of 100), which trails only the UK (92.6) and Israel (79.4). Brazil, Mexico, and Costa Rica are next on the LAC scoreboard, although with respective scores of 58.8, 54.4 and 52.9, there is significant gap between the quality of the business climate in these countries and that of Chile. Interestingly, the overall score for Taiwan is neck to neck with that of Brazil.
As one might expect, the stocks and flows of private equity and VC capital to these countries somewhat mirror each market’s quality of investment climate, with the exception of Chile. There, GPs have noted in recent years that the smaller size of the market, coupled with the relatively higher levels of competition – from both GPs and strategic buyers – and pricing for assets, have generated fewer viable opportunities to invest in the Chilean market.
The scorecard, while providing helpful quantitative indicators for the private equity and VC investment environment in Latin America, still highlights that the region as a whole trails – quite significantly – the markets where investors have historically directed their funds. The average score for the 11 LAC countries included in the score card comes out to be a not-so-impressive 48.8, while the average score for the “comparator” countries is nearly 75.
In a world where most private equity investors are making allocations – if such an allocation exists – to the emerging markets on a regional, rather than country-by-country basis, many Latin American GPs across the region are likely to continue to face a challenging environment for attracting new capital.
The complete scorecard is available online at www.lavca.org.