12 September 2012

Coller Capital/LAVCA Latin American Private Equity Survey – 2012

Latin America outscores other emerging markets for dealflow and economic growth, say private equity investors

Click here to download the Survey

  • Investors are accelerating their pace of new commitments to Latin American PE
  • Three quarters of them expect returns of 16%+ from Latin American PE
  • Governance and alignment in Latin American PE compare well with PE overall
  • Consumer goods and retail will be most attractive sectors over the next three years, LPs say

Three quarters of private equity investors (LPs) with Latin American private equity (PE) 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% 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% 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%+ 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.

Commenting on the Survey, Coller Capital partner Erwin Roex said: “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.” Commenting on the Survey, LAVCA president Cate Ambrose said: “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.”

Governance and LP/GP alignment in Latin American PE

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.

Promising industry sectors in Latin American PE

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% of LPs) and sector-specific ones (63% of LPs). International investors, however, tend to prefer sector-diversified funds (71% of LPs) over sector-specific ones (31% of LPs).

How investors access Latin American PE

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% of international LPs commit only to locally-based GPs, while 37% of investors are committed to both domestically-based and overseas-headquartered GPs. Few LPs – just 8% – employ consultants or gatekeepers to help them select Latin American PE funds.

Direct investments by LPs into Latin American private companies

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

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

Additional Survey findings:

The 2012 edition of the Survey also charts investors’ views and opinions on:

  • The challenges facing LPs considering a first PE investment in the region
  • The risk premiums LPs require for Latin American PE
  • The importance of ESG in Latin American fund selection
  • The likelihood of LPs investing in a GP’s first Latin American fund

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