A new global study has found that 70 per cent of private equity firms plan to invest in LatAm in the next five years – ahead of Asia Pacific – while over nine out of ten North American-based GPs are set to commit capital to the region by 2026.
According to the report ‘Recovery to Rediscovery: Capitalizing on a Changed Private Equity Landscape’, commissioned by Auxadi, 90 per cent of US-based private equity firms said they are interested in doing deals in LatAm. Auxadi provides accounting and tax services to private equity, real estate and multinationals.
The research was based on interviews with 100 senior-level private equity investors based in the UK, Continental Europe and North America with average assets under management of EUR14.4 billion. Raimundo Diaz (pictured), Auxadi’s senior VP of International Corporates, says the recent interest in the region is down to a number of factors.
“Right now you have a market situation which is quite stable. American PE firms are looking at opportunities to buy at prices that are affordable and can help them with their multiples, Diaz explained.
He continued: “Second, activity within certain sectors like fintech and renewables has not stopped despite the pandemic. LatAm is much more aggressive than the US or Europe in terms of their commitment to carbon neutrality. It means there are opportunities of investing in solar farms or wind farms that private equity firms are very excited about.”
The backlog that was created in 2020 is starting to come out in 2021, and record levels of deals and capital invested by venture capital is flowing into the region. Echoing the trend of VC funding in Europe, it seems to be experiencing an upward curve unaffected by the crisis caused by Covid-19.
“One of the circumstances going on in LatAm at the moment is that in the past few years there’s been an increase of multilatinas companies, especially among startups in the tech industry that started to operate in the market,” said Victor Salamanca Cuevas, Auxadi’s CEO.
“From there, they’ve started operations in other countries. These are companies that started in Colombia, Chile, or Brasil and from there they move operations into Argentina, Mexico or Peru. That’s attracted the attention of PE houses, especially from the US due to the proximity of the two markets,” he added.
Another factor is that PE houses increasingly tend to hire talent coming from LatinAmerica that are very close to that market, contributing to the market becoming more and more important from PE houses located in the US, in Salamanca’s view. “And again, the multiples are much higher in LatAm than in other regions.”
There are challenges for foreign GPs looking to invest into Latin America though, as -just like in Europe- it is made up of several countries, each with their own culture and jurisdiction, including local compliance issues that, “on some occasions makes it hard for investors to enter the market, and the political environment, or social stability due to political reasons are not always the best,” in Salamanca’s own words.
Diaz added: “The pandemic also proved that the global supply chain is fragile when it comes to external events. LatAm is very close to the States – Mexico is a natural extension of the US from a manufacturing point of view. During the pandemic [US PE groups] realised it might be better not to send production to China, but rather keep it closer to home. That’s another aspect when it comes to investing in manufacturing, and fintech.”
One of the most active sectors in LatAm at the moment are renewables and fintech companies. Transportation infrastructure is an issue, according to Diaz, as there’s currently no road from Argentina to the States, for example. “Telecoms infrastructure in which LatAm was investing in before the pandemic, you’ll see returning in a very short period of time. And energy infrastructure,” he said.
Diaz commented: “So it’s not only about increasing the number of solar farms or wind farms, but how do you convey the energy produced into the market. You can find these sites in northern Chile; in the desert of Atacama and in wind farms in southern Argentina. The challenge is to bring them into the big cities; like Buenos Aires, Santiago and São Paulo.”