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Latin America outscores other emerging markets for deal flow and economic growth, say PE investors

Three quarters of private equity investors with Latin American private equity exposure see the region’s potential for economic growth and dealflow as attractive in comparison with other emerging PE markets, according to the first annual Coller Capital/LAVCA Latin American Private Equity Survey.

The region’s entry valuations and political climate are also viewed favourably compared with other emerging PE markets.

In consequence, aggregate new fund commitments by existing investors are expected to accelerate over the next year – 38 per cent of LPs expect the value of their new commitments to be higher in the next 12 months than in the last 12 months (with another 49 per cent of LPs expecting to maintain their pace of new commitments).

Three quarters of Latin American PE investors (both domestic and international) expect net annual returns of 16 per cent+ from Latin American PE outside Brazil. Two thirds of investors expect the same returns from Brazilian PE funds. LPs see revenue growth and margin improvement at portfolio companies as the most important drivers of PE returns in Latin America; multiple arbitrage and debt repayment are viewed as relatively less important.

Coller Capital partner Erwin Roex says: “These findings are very encouraging for private equity in Latin America. Investors’ strong return expectations, combined with their positive view of dealflow in comparison with other emerging private equity markets, implies a further maturing of private equity across the continent. The stimulus provided by private equity to entrepreneurial activity and its stringent requirements for good corporate governance can only benefit economic activity and further inward investment throughout the region.”

LAVCA president Cate Ambrose says: “This survey supports our belief that Latin America has emerged as a leading growth market for private equity, particularly in the eyes of international investors. Perhaps just as promising is the increasing clout of regional LPs. This is creating a virtuous circle of increased capital availability, more managers in the market, and a broader spectrum of deal activity across sectors and deal sizes.”

Latin American and international LPs alike are satisfied with their fund managers’ (GPs’) standards of governance and investor alignment in Latin America, compared with the standards they see in other developed and emerging PE markets.

Investors say that Latin American GPs are weakest in their adherence to international valuation reporting standards and disclosures on environmental, social and governance (ESG) issues – though even here investors are broadly satisfied.

Almost three quarters of investors (both domestic and international) in Latin American PE believe the consumer goods and retail sectors will offer the most attractive investment opportunities for PE funds over the next three years.

When they invest in Latin American PE investments, most domestic LPs commit to both sector-diversified funds (78 per cent of LPs) and sector-specific ones (63 per cent of LPs). International investors, however, tend to prefer sector-diversified funds (71 per cent of LPs) over sector-specific ones (31 per cent of LPs).

Pan-regional Latin American funds are the most popular method of accessing Latin American PE for all LPs (both domestic and international) – more than two thirds of investors are committed to such funds (compared with half of LPs with commitments to country-specific PE funds).

GPs headquartered in Latin America are the most frequent choice for international LPs – 53 per cent of international LPs commit only to locally-based GPs, while 37 per cent of investors are committed to both domestically-based and overseas-headquartered GPs.

Few LPs – just eight per cent – employ consultants or gatekeepers to help them select Latin American PE funds.

International and domestic LPs take different approaches to direct investing in Latin America. When international LPs invest directly into private companies (i.e. not via a PE fund), they favour co-investing alongside GPs (51 per cent of LPs) rather than making proprietary investments (18 per cent of LPs).

Domestic LPs, however, are equally likely to co-invest with GPs (33 per cent of LPs) and make proprietary investments (29 per cent of LPs).

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