By Jason Mitchell
March 15, 2011— Brazil is far from alone in benefiting from an influx of private equity investment. Countries across Latin America and the Caribbean are experiencing a big increase in investment by players looking to profit from the region’s economic dynamism.
Private equity fundraising in Latin America and the Caribbean soared 149 percent last year to a record $5.6 billion, up from $2.2 billion in 2009, according to the Emerging Markets Private Equity Association. Capital invested rose by an even more dramatic 405 percent, to $6.6 billion from $1.3 billion. Nine of the ten biggest deals in Latin America — and the five largest investments in Brazil — were made by global funds rather than vehicles dedicated to investing in the region.
“I’m not surprised at the surging interest in Latin America and particularly Brazil at this moment,” says Empea CEO Sarah Alexander. “While there was interest in the 2006 to 2008 period, Latin America was somewhat of an afterthought for many LPs and funds. Now investors recognize the region’s favorable political and economic fundamentals that will continue to drive opportunities in the long run.”
Latin America saw its share of total fundraising in the emerging markets rise to 24 percent from 10 percent in 2009, as overall emerging-markets fundraising edged up just a bit, to $23.5 billion from $22.6 billion a year earlier. Global fundraising amounted to $225 billion last year, the lowest level since 2004, according to Preqin, a provider of alternative assets data. Latin America accounted for two of the three biggest emerging-markets funds globally in 2010.
In September, Southern Cross Group, a Buenos Aires–based private equity manager, closed its fourth buyout fund, Southern Cross Latin America Private Equity Fund IV, at $1.68 billion, a record amount for Latin America. The fund, which will invest in Argentina, Brazil, Chile and Mexico, eclipsed the mark set just five months earlier when Advent International Corp. closed its fifth Latin America–focused fund, Latin American Private Equity Fund V, at $1.65 billion. That fund, which was more than 25 percent larger than Advent’s previous Latin fund, launched in 2007, will invest mainly in Brazil, Mexico and Argentina and target high-growth sectors such as financial services, airport services, business services, retailing and consumer companies and education.
“So many global private equity players are moving back into Latin America for the first time in a decade,” says Cate Ambrose, president of the Latin American Venture Capital Association in New York. “All of the region’s main economies are of interest. In particular, Mexico and Argentina are seen as contrarian plays because real asset values in those markets have not risen as fast as in Peru and Colombia during the past few years.”
Chile offers the most favorable environment for private equity investing, according to a recent Lavca survey of its members; the country has topped the ranking for five consecutive years. Chile boasts the continent’s strongest laws for fund formation (Brazil is catching up fast) and relatively strong capital markets. It performs well in the categories of intellectual-property protection, judicial transparency and perceived corruption.
Since 2005, Chile’s state development agency, Corfo, has sponsored a fund of funds that coinvests alongside local and international general and limited partners. This year the agency committed an additional $100 million to the program, which can invest up to 40 percent of its total capital in any fund. It is putting $60 million into a mining exploration fund.
On the negative side, Chilean pension funds continue to make relatively small commitments to domestic private equity funds, and there is growing demand for them to increase their exposure to local managers.
Brazil trails Chile, followed by Mexico in third place. Mexico’s ranking has been improving because of an easing of restrictions on institutional investors and beefed-up bankruptcy procedures. The country has also benefited from reforms implemented in 2009 that allow state pension funds to gain access to local private equity funds through vehicles known as development capital certificates. Mexico also offers good protection of minority shareholder rights.
Colombia ranks fourth on Lavca’s scorecard. Superintendencia Financiera de Colombia, the country’s securities regulator, is changing its rules to make it easier for pension funds to invest in private equity and venture capital funds.
In contrast to the improving environment in the leading countries, Argentina lags badly on the scorecard, in joint tenth place with El Salvador, despite having the region’s third-largest economy after Brazil and Mexico. The government’s 2008 nationalization of domestic pension funds has removed them as a source of funding for private equity firms, offsetting the country’s entrepreneurial vibrancy and high accounting standards, which are among the best in the region.
Some investors appear to regard Argentina’s poor ranking as a buying opportunity. DLJ South American Partners, a subsidiary of Credit Suisse, and Pampa Capital Management, an Argentinian private equity manager, this year plan to raise funds of up to $600 million and $500 million, respectively. DLJSAP’s fund will invest mainly in Argentina, Brazil and Chile, as did a previous, $700 million, fund the firm launched in 2008. Pampa Capital invests in agribusiness companies, primarily in Argentina and Brazil and selectively in Chile, Peru and Uruguay.