Study: LPs to increase LatAm investments

Both domestic and international LPs expect to increase their exposure to the region, particularly investments in Mexico, Colombia and Peru, according to a study from LAVCA and Coller Capital.

More than 70 percent of Latin American limited partners plan to increase their allocation to private equity during the next 12 months, according to a study released by the Latin American Private Equity & Venture Capital Association and Coller Capital. Less than 5 percent of LPs in the region said they expect to decrease their allocation to the asset class during the upcoming year.

In terms of LP interest in Latin America, about 35 percent of investors with exposure to the region plan to increase their allocation to Latin American managers during the next 12 months. While LPs targeting emerging markets favour Latin America’s macroeconomic growth, availability of deal flow and entry valuations compared to other emerging economies, the region continues to pose significant challenges when attracting new investors. 

For instance, more than 70 percent of LPs considering a first investment in Latin America in the next five years cited the region’s limited number of established GPs as their biggest obstacle, while nearly half of LPs are concerned about political risk, according to the study. 

LPs based in Latin America, however, are more determined to invest with domestic managers, even if it means backing first-time-funds, according to Erwin Roex, senior advisor at Coller Capital. 

“These LPs say ‘look if we want to invest in these markets we’re going to have to live with first-time managers,’” he said. New GPs in Mexico stand to benefit from the country’s pension funds that only began investing in private equity relatively recently, Roex added.

While Brazil has been widely viewed as the most attractive country in the region for many years, anti-inflationary measures contributed to a rapid decline in annual gross domestic product growth in 2012, a year in which private equity deal volume in Brazil slipped to pre-2010 levels. At the same time, fundraising in Brazil slumped to $4.6 billion in 2012, down from a peak of $7.9 billion in 2011, according to Private Equity International's Research and Analytics division.

In both 2012 and 2013, 35 percent of investors considering investing in Brazil cited the challenging regulatory environment and tax issues as concerns.

“Brazil is a very tax-heavy country and is by far the largest private equity market in the region,” president of Cate Ambrose told PEI.

Going forward, more than half of LPs surveyed believe Mexico, Peru and Colombia will provide very attractive markets for GP deal making during the next two years, with Mexico “set to boom”, according to the study.

Beyond Brazil
Roughly 15 percent of investors with Latin American exposure have committed to Mexico-focused funds. By 2016, 20 percent of Latin American LPs and half of international LPs expect to have exposure to Mexican vehicles.

Brazil is a very tax-heavy country and is by far the largest private equity market in the region.

Cate Ambrose, president of LAVCA


“There is a lot that is changing in Mexico,” said Ambrose. “There are some very important economic reforms, including energy reforms that will create new opportunities for investors.” 

Today however, Mexican private equity consists primarily of family funds that play important roles. This is expected to change because of legislation and a new political regime, according to Roex.

LAVCA is a non-profit membership organization which focuses on supporting growth of the asset class across Latin America and the Caribbean. The 150 member firms control more than $50 billion of assets. Prior to this study LAVCA produced a more informal review on the region by itself. 

Coller Capital invests in global private equity secondaries. The London, New York and Hong Kong-based firm also publishes its twice-yearly Global Private Equity Barometer, which reviews more than 100 industry investors. 

The collaborative study surveyed 105 private equity fund investors—32 of which were Latin American LPs. The respondents were mostly fund of funds or family offices and private trusts with between $1 billion and $4.9 billion or less than $500 million of assets under management.