US private equity firms pivoting investment focus towards Latin America, says Auxadi study

An overwhelming majority (91 per cent) of US private equity firms are planning to deploy capital in Latin America over the next five years, according to a new study, fuelled by attractive valuations and a growing appetite for cross-border deal flow as the global economy recovers from the Covid-19 pandemic.

The new study, 'Recovery to Rediscovery: Capitalising on a Changed Private Equity Landscape', was commissioned by Auxadi, a provider of accounting, tax and payroll services to private equity, real estate and multinationals, and was based on interviews with 100 senior-level private equity investors based in North America, the UK, and Continental Europe with average assets under management of EUR14.4 billion.

According to the report, the level of interest among US GPs in Latin America as an investment destination outstripped Asia Pacific (76 per cent), indicating that the trebling of deal flow in the region from 133 in 2010 to 400 in 20192 is set to accelerate sharply following a pandemic-induced lull during 2020. 

Growing interest in Latin America among private equity investors reflects a widely held view that cross-border deal flow will continue to grow in popularity. A third (33 per cent) of US respondents expect that the volume of international transactions will bounce back to pre-pandemic levels by the end of 2021 and a further 45 per cent expect this to happen in 2022. Just 18 per cent predict it will take two years or longer (2023), while 3 per cent believe it will never fully recover.

The research reveals the main challenges faced by private equity investors looking to deploy capital in Latin America. Almost half (44 per cent) cite the myriad jurisdictional differences in law and regulatory frameworks and compliance regimes. One in three (33 per cent) flagged cultural differences and the misalignment on valuations between buyer and seller.

To mitigate the risks involved in cross-border transactions, the study shows that a sizeable proportion of private equity firms have already taken steps to outsource the running of some elements of their fund to third parties, with many more planning to do so in the future. For example, more than half (52 per cent) already outsource regulatory reporting requirements and a further 39 per cent said they will do so going forward.

Raimundo Diaz, Senior Vice President at Auxadi, says: "Latin America is a region with great potential for capital-laden US GPs, with its growing middle class and early pension reforms having created a significant pool of assets in which to invest and, a continued interest in investment for improved infrastructure. 

"Considered by many as the emerging market to invest in, US GPs are fully aware that Latin America carries risks and quite a few multiple cultural, legal and regulatory differences that often make it difficult for international firms to operate with confidence. However, proximity to the region, cultural talent and opportunities compensate far beyond risks. We're currently seeing a dramatic increase in client demand for our services in Latin America thanks to our ability to combine local knowledge with a strict adherence to international best practice."