Global investors who have historically concentrated their emerging market portfolios in Asia are expanding their horizons to Latin America – over the last year I’ve met with a who’s who of international GPs, LPs and funds of funds as they set out for due diligence trips to Sao Paulo, Bogota, Lima or Santiago.
Many of those investors have reported back that they are positively impressed with the investor-friendly environment in the region’s major economies, particularly in contrast to the complexity of putting capital to work in China or India.
Pantheon, a global fund of funds which has had an office in Hong Kong since 1992, is among those concentrating new efforts in the Americas. “We understand the importance of developing a deep understanding of the nuances of an emerging market, and are impressed with the infrastructure that is being developed in Latin America to grow a strong venture capital and private equity industry,” comments Maureen Downey, a principal with the firm who recently traveled to Chile.
Many of Latin America’s political leaders are demonstrating that they are committed to attracting long-term development capital to the region, through tax and other regulations and targeted programs. Last year Chile and Colombia elected new presidents with solid private sector credentials, and Peru and Mexico made major advances in the World Bank’s ‘Doing Business’ ranking.
Business and investment gain ground under new presidents
In Brazil, a recent decision to reduce the tax on foreign exchange transactions (IOF) from 6% to 2% for overseas investors into private equity funds (FIPs), and venture capital funds, is an early sign that Brazilian policy makers will continue to favor PE/VC under Dilma’s leadership.
“For international investors, Brazil is the most private equity friendly tax structure in the world. There are no capital gains tax for FIPs, and no tax on dividends,” points out Alvaro Goncalves of Sao Paulo-based Stratus Group. Goncalves is among a group of local Brazilian managers who have actively engaged the country’s regulators over the last decade, often through ABVCAP, the local industry association.
Dilma’s January inaugural pledge to rein in spending and fight inflation appears to have inspired increased confidence among Brazil’s private sector leaders, many of whom have been concerned that fiscal spending would spiral under the new administration
Ettore Biagioni, who recently acquired a stake in a rice bran producer in Rio Grande do Sul for Alothon Group’s Fund II, is holding the new president to her pledge. “The new administration will pursue what it is saying: conservative economic policies which will include measures to reduce inflation and limit as well as somewhat redirect government spending.”
Brazil’s roaring economy is generating growth opportunities for the country’s business owners, but debt financing is likely to remain expensive as policymakers aim to reduce inflation by tightening credit. Authorities who reduced the IOF to 2% for PE appreciate that private equity capital will be a strong alternative to fill this need, particularly for middle market companies with limited access to the international capital markets or public equity markets.
In Chile, voters elected one of the country’s most successful businessmen as president in 2010. Since taking office Sebastian Piñera has set out to make Chile a global hub of innovation and entrepreneurship, expanding on existing programs and resources available through the state development agency, CORFO.
“President Piñera’s administration is taking some encouraging steps to foster entrepreneurship through initiatives at CORFO,” comments Downey of Pantheon. She and her colleagues were impressed with what they saw on their visit to Santiago, where they met with fund managers Linzor Capital, Rohatyn Group and Austral Capital, as well as VC backed entrepreneurs from Atakama Labs, Scopix and Crystal Lagoons.
“As Chilean corporates, particularly family owned enterprises, seek to expand or address succession issues, private equity can play an instrumental role in their development. We see great opportunities in the LatAm region overall and in Chile specifically.”
CORFO has sponsored a fund of funds since 2005 which co-invests alongside local and international GPs and LPs. In 2011 an additional $100m was committed to the program, which can invest up to 40% of the total capital in any fund. The agency is also putting $60m into a mining exploration fund.
The new government’s focus on innovation also inspired the launch of “Start Up Chile”, a program that aims to generate 100,000 new start ups in four years by attracting “world class early stage entrepreneurs to launch their businesses in Chile” – an ambitious goal, especially given that entrepreneurs are being offered a stipend of $40k to move to Chile.
Some international investors point out that under the current regulation the process of getting a venture capital or private equity fund approved by the banking superintendent is slow and costly. Nevertheless, CORFO’s efforts demonstrate the administration’s commitment to making the country attractive to international investors and entrepreneurs.
Another stop over for many investors trekking to Latin America is Colombia, where President Juan Manuel Santos took office last August. Santos has named private sector leaders including Catalina Crane, the former CEO of Procafecol, and Samuel Azout, the former CEO of retail chain Carrulla Vivero (once a portfolio company of Acon Investments) as senior advisors to his administration.
Carlos Gomez of Linzor Capital believes that the Santos government will bring greater institutional clarity and business confidence for foreign investors, and is likely to evaluate measures that would facilitate long term investments.
“The prospects are good for long term investments in Colombia, but caution needs to be considered given the current level of expectations. The country has entered a virtuous cycle of increased foreign investment, rising GDP per capita and improving consumer confidence.”
Regulation has continued to evolve for Colombian pension funds (AFPs) investing in private equity, and today the regulation governing the AFPs is the most forward thinking in Latin America, according to Gomez.
Colombian entrepreneurs also appear to be placing their trust in Santos. Paola Rezk of Bodytech, a chain of health clubs with 37 locations in Colombia and two in Peru, describes the president’s policies as “promoting foreign investment and encouraging private companies to list on the Colombian stock exchange.” Bodytech, which is a portfolio company of SEAF Colombia, has an aggressive expansion process underway and ultimately aims to launch an IPO.