Next week in New York we will be hosting a record number of investors at the 2010 LAVCA Summit, just days after The Economist declared on its cover that Latin America is “Nobody’s Backyard”. Expectations for Latin America have perhaps never been more bullish, and managers with established track records are well positioned to market new funds to an expanding pool of global and regional LPs.

With almost $3.1bn in fresh capital pouring into new investment vehicles in the first half of 2010 and a full pipeline of funds in the market, including multiple funds with targets of $1bn, 2010 fundraising for Latin America PE/VC may be on track to surpass the historical record of $6.39bn set in 2008.

Enthusiasm for Latin America is also reflected in the results of LAVCA’s 2010 survey of over 100 global LPs targeting Latin America, with 52% of respondents indicating they plan to increase their allocations to Latin America within the next 12 months. In contrast, in 2009 only 15% of respondents planned to increase allocations over that period. And there’s a clear indication that LPs, having completed their due diligence, are ready to commit—56% of respondents are currently allocating funds in the region, versus 33% in 2009.

The dynamic fundraising activity is consistent with anecdotal information shared by veterans of the region. “Today LP interest is at an all-time high. I used to meet with half a dozen LatAm funds a year, now it is not unusual for me to meet with six funds a week,” notes Scott Voss of global fund of funds HarbourVest Partners.

Voss points out that not long ago the largest fund in the region was just over $1bn. In spring 2010 Advent International closed on $1.65bn for the largest-ever LatAm-dedicated PE fund, and today there are four to five firms seeking to raise $1bn or more for regional or Brazil-specific funds. Firms currently in the market with a $1bn target include Southern Cross, Vinci Partners and BTG Pactual.

Other firms fundraising in 2010 include Aureos Capital (targeting a close in 1H 2011), Acon Investments, Darby Overseas Investments (joining with BNP Paribas Asset Management to raise a $250m mid-cap growth fund), DLJ SAP, EMX Capital (a Mexico-targeted vehicle), Linzor Capital, and Stratus Group (raising its first fund targeting only international LPs, with a target of $300m).

New investments surge

Deal activity rebounded in the first half of 2010, with $3.8bn in new investments completed, as compared to $3.27bn invested in all of 2009. For some, the resurgent climate can be attributed to the fact that markets are another year removed from the financial crisis of 2008. Brazil’s economy grew by 8.9%  in the first half of 2010 compared with the same period in 2009, Peru grew 8.2%, and Mexico bounced back from a dismal 2009 to grow 5.9%. 

For institutional investors, the region’s economies are generating attractive investment opportunities —78% of the respondents to LAVCA’s LP survey cited deal flow as a positive or very positive factor in their decision to invest, up from 50% in 2009. Latin America has a lower penetration of PE investing than emerging markets such as India or China, which has translated into robust deal flow, particularly for GPs targeting middle market firms seeking growth capital.  

Global asset managers aiming to establish a foot hold in hot markets like Sao Paulo or Bogota are competing to recruit local talent and consolidate partnerships. New entrants to the region, and Brazil in particular, have clearly had an impact on the competitive landscape, with more funds chasing deals. But Alvaro Gonçalves of Stratus Group says the market has evolved at the same time.

“We see local GPs and international GPs working together and we haven’t seen that type of convergence in our market before. Even the most aggressive funds are showing more discipline and we often see funds turning down deals because of high valuations, willing to share deals and co-investing, further showing the maturity of the market.”

Still, some observers speculate that global players such as Apax, Carlyle, TPG and Silver Lake are paying a premium as they compete for a limited number of large cap deals in an overheated Brazilian market.

LatAm VC attracts global players 

Venture capital activity has expanded in tandem with later stage investing in Latin America in 2010, with an incipient network of angel investors, entrepreneurs and VC firms that span the US and the southern cone of South America. There are also new links being formed between the US and Mexico as angels and VC fund managers reach out to their counterparts across the border.

Early stage investors traveling to Argentina, Brazil, Chile and Mexico cite robust deal flow and few competitors as major incentives – they see themselves as ahead of the curve in tapping into markets that have been largely overlooked by their peers. Trend setters include Paul Ahlstrom who launched Alta Ventures in Monterrey Mexico, Steve Burrill who set up funds in Sao Paulo and Santiago for Burrill & Company, and Ted Rogers who is launching Arpex Capital in Rio de Janeiro.

Local VC managers still face a major challenge in attracting institutional LPs from outside of the region. To date they have relied on support from country-specific and regional development banks such as the Multilateral Investment Fund. Mexico’s Latin Idea is one example of a VC firm that is looking to capitalize on the positive regional environment with a new push out to global investors – the firm is targeted $75m-100m for its third venture fund, which it hopes to close in 2011.