Domestic and foreign private equity firms investing in Latin America over the last several years are generating returns above those available in local public equity markets.
These returns have even surpassed what PE firms in developed countries have seen, according to Building vital partnerships: How do private equity investors create value?, a joint study conducted by the Emerging Markets Private Equity Association (EMPEA) and Ernst & Young. The study, now in its second year, examined the results and methods of over 70 PE exits between 2007 and 2012.
Sixty per cent of transactions in the region were sourced through private channels or secondary sales, while just 25 per cent came through corporate or listed markets. Similarly, private routes were favoured as an exit strategy as 53 per cent of PE investments exited through trade or secondary sales, although a small number of the deals were exited via IPO. Almost 95 per cent of all the exits studied reported strong business performance and favourable market circumstances as principal drivers for exit.
"Increased investor interest and economic growth in Latin America has been astounding with region-wide GDP growth averages exceeding four per cent," says Jeffrey Bunder, global private equity leader at Ernst & Young. "Despite a difficult commodity export market and continued challenges generating competitive industries, economies in the region power ahead, buoyed by the rapid growth of the region’s emerging middle class. As we move forward, it will be crucial for PE to continue developing and maturing in the region as it will play a vital role in providing the necessary capital, discipline and expertise required to help the Latin American economy achieve its full potential."
While Latin America’s importance as an investment destination continues to grow — capturing 21 per cent of emerging markets PE investment in 2012 — there remains a sizeable gap in these markets. PE accounts for less than 0.1 per cent of GDP in Latin America, and a large majority of fast-growing companies remain undercapitalised.
"The good news is that investor interest in the region is still climbing," says Jennifer Choi, acting chief executive, Emerging Markets Private Equity Association. "According to EMPEA’s Global Limited Partner Survey, 46 per cent of institutional investors surveyed in 2013 plan to commit more capital to Latin America beyond Brazil."
