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Latin American private equity “remains strong amid global crisis”

Private equity investors in Latin America do not expect the region’s deal market to begin recovery until 2010, but say it continues to offer greater investment opportunity than many oth

Private equity investors in Latin America do not expect the region’s deal market to begin recovery until 2010, but say it continues to offer greater investment opportunity than many other areas, according to a survey by KPMG.

While all of the respondents to the KPMG poll said the global economic crisis had affected Latin America, 67 per cent of them said it had only a moderate negative impact on the region.

Further, the executives (45 per cent) said Latin America had actually become more attractive to investors during the world economic crisis, and they expressed measured optimism on world investments in the region for 2010-12.

"There are two current private equity investment tales to tell in Latin America," says Jean-Pierre Trouillot, a Miami-based partner in KPMG’s advisory practice. "A great deal of confidence exists for long-term private equity activity in Brazil, Mexico and Colombia, while countries such as Argentina continue to rank low as investment targets."

According to the KPMG survey, 63 per cent of the private equity industry executives said their 2008 return on investment had stayed flat or increased, compared with 37 per cent who reported lower returns.

"Some continued strength in the region appears to indicate that the Latin American marketplace remained somewhat sheltered from the global market crises. This could be tied to how these countries nurtured organic growth of their own middle classes, thus avoiding the economic imbalance that foreign investment has posed for central and eastern Europe, as well as parts of Asia," Trouillot says.

Brazil’s private-equity market remains relatively attractive, says Trouillot. He adds that while Mexico maintains its strong position among Latin America’s top investment targets, aided by recent regulatory changes that encourage local investment, the economy there has been under more strain than the rest of the region because it has close business ties with the US.

In addition, survey respondents placed Colombia behind Mexico and Brazil, respectively, as a target for investments in the next two years, followed by Peru.

Meanwhile, the study also found that 45 per cent of respondents said Latin America had become more attractive to private equity investment during the economic crisis and 14 per cent said there was no change, while 30 per cent said the region had become less attractive.

In addition, 58 per cent of the respondents said they expected higher world investment in Latin America during 2010-12, while 12 per cent said investment would remain steady and just 29 per cent expected lower world investment in the area during that period.

Trouillot points out that despite some strength in private equity in Latin America, stakeholders looking to make investments there have expressed concerns about exit opportunities, given the current market.

Asked how the 2009 global economy will affect their Latin America investments, 21 per cent of respondents said they will not be able to implement a planned exit strategy and another 21 per cent said they may have going concern issues, while 30 per cent said they will have to turn to organic growth and cost reductions to weather the 2009 economy.

Others said they will be looking for more investments to strengthen a company’s position (14 per cent) and for additional acquisition opportunities prompted by the crisis (14 per cent).

"Considering the impact of the global economic crisis on M&A activity in general, exit alternatives are more limited. Therefore, 2009 will be a year to focus on existing portfolio companies by making operations more profitable," says Trouillot. "But the down market has also created opportunities."

He says some fund managers have expressed an interest in either healthy companies that may need minority investors or in non-core businesses that organisations may seek to divest as companies look to manage their exposure and raise capital to service large amounts of corporate debt that is expected to come due in 2009.

Respondents also ranked the most promising industry sectors, identifying infrastructure (47 per cent) and energy (26 per cent) as the most attractive for investment, followed by consumer markets (14 per cent), healthcare (eight per cent), financial services (four per cent) and communications (one per cent).

Fundraising, according to 86 per cent of the PE stakeholders polled, was expected to decrease in 2009 compared with 2008, while nine per cent reported fundraising at the same levels as last year, and four per cent reported increased fund-raising.

Likewise, 79 per cent of fund managers expected a decrease in 2009 investment in Latin America, nine per cent said they expected the rate of investment to remain flat, and just 12 per cent expected a modest increase in the year to come.

"We have clearly seen hedge funds pull back compared with the more active years earlier in the decade. However, with the encouragement of government, local private investors and local pension-funds have filled some of those gaps," says Trouillot.

KPMG polled more than 110 private-equity stakeholders attending The Economist’s 11th Annual Conference on Latin America Private Equity in Miami on 11 February.

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