Fighting Perception Versus Reality in Latin America
Long-held negative beliefs about doing business in Latin America that have been propagated by the media are finally beginning to fade to black, thanks in part to regulation becoming increasingly pro–private equity. While the region continues to work through macroeconomic difficulties, private equity is shining a light on investment opportunities that may be hidden from sight.
“It’s great when we see clients’ reactions when we bring them to a region of Latin America that is not as well-known as some other cities but large enough to boast modern airports, powerful broadband Internet, and other amenities,” says Ricardo Fernandez, a principal at Hamilton Lane who runs the firm’s Brazil office. “Every time we have shown this to international investors, they are impressed.”
Fernandez, who has been on the ground in Brazil and covering all of Latin America for Hamilton Lane since 2011, says the key misconception of many investors from outside the region is one of economic chaos and rampant corruption.
But Cate Ambrose, president of the Latin American Private Equity and Venture Capital Association (LAVCA), points out that most Latin American countries have gotten over these decades-old perceptions. And private equity managers are catching on.
According to the latest Coller Capital/LAVCA Latin American Private Equity Survey, 78 percent of limited partners with exposure to the region plan to either maintain or increase commitments in the next 12 months. The most attractive sectors in Latin America include consumer goods/retail and agriculture.
There are a number of upsides for private equity to invest in Latin America, Ambrose says, including overall ease of doing business, transparency, and the closeness to the American business culture.
Fernandez says the key to successfully investing in Latin America is to have boots on the ground. Many investors from abroad think they can fly in and fly out and be successful. Latin America is somewhat of a “closed” market, he says. It is important to be there physically to understand the specific dynamics of the local government.
“Investors need to feel more comfortable and come to the region,” Fernandez explains. “It is happening, but there is room for improvement.”
To be sure, the region is not without issues. While Brazil, Mexico, Peru, Chile, and Colombia attract between two-thirds and three-quarters of private equity investment, according to Ambrose, there are looming macroeconomic realities. That is particularly true for Brazil, where the overall investor sentiment is that the country’s risk/return ratio is worsening, according to the Coller Capital survey.
Still, Ambrose maintains that while Brazil is working through macroeconomic issues, there are a number of upsides for private equity in the country. She cites a deep pool of talent, an institutional approach to doing business, and the most sophisticated financial services sector in all of Latin America.
Perhaps the strongest sign that private equity sees the tide turning for Latin America’s reputation is found in the following, from the Coller Capital survey: During the next 12 to 18 months, nearly half of all limited partners plan to increase the size of their PE teams that are focused on the region; almost none of the respondents say they are planning to reduce the size of their Latin America–focused teams.