Article published by BVCA Quarterly, February 2010. By Cate Ambrose, President and Executive Director, Latin American Venture Capital Association.
An increasing number of private equity investors are assessing opportunities in Latin America, where key economies such as Brazil, Colombia, Peru and Chile have proved resilient to the global economic downturn. China and India have traditionally attracted the majority of capital available for emerging markets, therefore competition for deals is less intense in Latin America, where internal demand from an expanding class of middle income consumers is driving rapid growth in sectors such as education, healthcare, consumer goods and consumer finance. Many global investors are targeting the region as a source of commodities, with strategies focused on agribusiness, mining, or energy. Asian and Mid-East sovereign wealth funds such as Temasek and ADIA have made new commitments to Latin American funds, and Wellcome Trust completed a due diligence trip to Colombia in November.
Regulatory and investment environment
Over the last decade, pragmatic political leaders in Brazil, Mexico, Colombia, Peru and Chile have recognised private equity and venture capital as tools to build a more competitive private sector and create jobs. These countries have launched campaigns to cultivate domestic fund industries through targeted programs, public funding and regulatory initiatives. Since 2005, the LAVCA has been tracking the investment environment in 12 Latin American countries with its annual Scorecard on the PE/VC Environment, produced in collaboration with the Economist Intelligence Unit. The Scorecard establishes benchmarks on indicators including laws governing fund formation and operation, tax treatment, minority shareholder rights, restrictions on institutional investors and bankruptcy rules. Chile has consistently ranked first due to low corruption levels, judicial transparency and strong intellectual property rights.The Scorecard also found that Brazil has been the most successful country in putting in place specific rules and incentives for PE and VC investors. Since 2004 over 100 investment funds have been set up as FIPs, a vehicle created by the Brazilian securities regulator with favorable tax treatment to encourage firms to establish funds onshore. Now the Brazilian PE/VC association, ABVCAP, has teamed up with the country’s banking and capital markets association ANBIMA on an ambitious Code of Regulation and Best Practices, which was submitted for a public hearing in November. The Code includes a monitoring and compliance mechanism to be executed by an oversight board, comprised of GPs, institutional investors and legal and accounting service providers.
A new Source of Capital: Latin American Pension funds
Pension funds have been a critical driver of private equity and venture capital fund formation in Brazil, with large pension funds such as Previ, Petros and FUNCEF backing local firms over the last decade. Elsewhere in the region, managers raising funds in Colombia and Peru have secured commitments from the countries’ pension funds since enabling regulation went into effect in 2004, spurring the development of domestic private capital industries in both markets in the space of five years. In Mexico, traditionally the country’s private pension funds, Afores, were restricted to investing in publicly-listed securities, without access to private companies or partnerships. But in July 2009, regulators issued new rules for a publicly-listed vehicle, the Development Capital Certificate, which is structured to allow Mexican private equity firms to raise capital from the Afores. A local PE fund announced the first closing with backing from Afores in November. In 2009 global private equity firms such as KKR, Blackstone and Carlyle also sought to raise funds in Latin America for the first time. Regulations in Colombia, Peru and Chile permit pension funds to allocate to firms outside their domestic markets, which proved to be a magnet for GPs and US and European funds of funds seeking new sources of capital. Global private equity firms are also monitoring developments in Brazil, where there is an effort to approve regulation that would allow pension funds responsible for over $200bn to expand their portfolios to firms investing outside the country. In all of these markets there is an ongoing debate as to what rules and incentives will best serve the interests of both fund managers and institutional investors. Some industry participants see risks in markets like Mexico where pension funds are keen to get exposure to private equity, but are only able to allocate to a relatively limited pool of local managers. In Peru, the banking superintendency approved rules in December 2008 that allowed local pension funds to invest up to 20% of their portfolios offshore, but a year later proposed capping that percentage at 2.5%. In addition to monitoring and evaluating regulation through the annual Scorecard, LAVCA has targeted investor education as a key area of focus for 2010. The first technical seminar for Colombian pension funds allocating to private equity and venture capital was hosted in Bogota last November, and additional seminars are in development for Brazil and Chile.