By Sabrina Willmer

The Wall Street Journal, Private Equity Beat

May 20, 2011— Chile, Brazil and Mexico still stand as the most investor-friendly environments for venture capital and private equity in Latin America, according to an annual scorecard published by the Latin American Venture Capital Association.

Each year, the LAVCA Scorecard ranks the business environments for private equity and venture capital of 12 countries in Latin America on a scale of 1 to 100. Scores are based on criteria that include taxation, restrictions on institutional investors, minority shareholder rights, entrepreneurship and capital markets development.

Chile continues to be the most conducive environment for private equity investing helped by its intellectual property protection, judicial transparency and lack of perceived corruption compared to other countries in the region, according to LAVCA. That said, its score fell by one point from last year in part due to the slow and costly process firms must go through to establish private equity funds.

Brazil, which held onto its second place ranking, also witnessed a decrease in its score by three points from 2010. Restrictions on local institutional investors dragged down the score. Brazilian pension funds must serve on the investment committees of funds in which they are investors, leading to a governance conflict, according to the scorecard. On the other hand, the country has encouraged private equity investment through a recent reduction in the tax on foreign-exchange transactions for portfolio investments to 2% from 6%.

Meanwhile, Mexico retained its third place ranking as the regulatory environment in the country continues to improve. In 2009, the country let state pension funds invest in local private equity funds through publicly-traded development capital certificates, or CKDs. Since then, it has become easier for firms to raise CKDs, according to the scorecard. Concerns over the country include inefficient bankruptcy procedures as well as a weak judicial system. Perceptions of corruption and the ongoing drug trade are also worrying.