(WSJ) Limited partners, both inside and outside of Latin America, are still bullish about private equity opportunities in the region despite anxiety in the public equities market, according to a new survey from Coller Capital and the Latin American Private Equity and Venture Capital Association.
The survey of 105 limited partners found that among limited partners with exposure to Latin America, 35% said they will increase their allocation to PE funds in the region, while around 50% said they would maintain their pace of investing.
Latin American limited partners are also keen to increase their exposure to the asset class domestically and abroad. More than 70% of Latin American LPs said they plan to increase their allocations to private equity, compared with just over 30% of international LPs.
“There’s a core bet on the idea that there is significant growth potential,” said LAVCA President Cate Ambrose. “There’s an expanding middle class, infrastructure, real estate, education, health care and availability of consumer credit, all of which are fundamental drivers of growth.”
According to the survey, LPs are still optimistic about the macroeconomic growth opportunities in the region, and nearly half of those polled said deal flow in Latin America remains attractive, though that represents a drop from more than 70% with positive sentiment toward Latin American deal flow in 2012.
This optimism comes as investor sentiment has cooled in some other emerging markets. “In China, we’re seeing things go the other way, [and] the demographics are headed in the wrong direction,” said Ms. Ambrose. “In Latin America, there is still a really solid generation of young consumers.”
International and local limited partners continued to look favorably on the asset class in Latin America, even as they pull away from other alternatives such as hedge funds, according to the survey results. Many investors have been shying away from equities in emerging markets amid concerns over possible changes at the U.S. Federal Reserve. “A shift in Fed policy isn’t something to turn private equity investors away from emerging markets overnight,” said Ms. Ambrose. “They are long-term investors.”
Although Fed policy may not be enough to spook investors, the threat of political upheaval isn’t far from investors’ mind, according to the survey. Both Ms. Ambrose and Erwin Roex, a Coller Capital senior adviser, said that the results from the survey were likely reflective of the demonstrations going on across Brazil and the sweeping regulatory changes undertaken by the Mexican government during the summer, when the survey was conducted.
Even countries in the region that aren’t major private equity destinations, like Argentina and Venezuela, where the question of Hugo Chavez’s succession is still being considered, play a role in the way investors view the region as well, said Mr. Roex.
Apart from the political climate, LPs are also concerned about the exit environment and the overall maturity of the industry, according to the survey.
Ms. Ambrose said that of emerging markets, Latin American has the longest history of private equity investment. However, this new generation of “home-grown managers” differs from multinational firms, which she said “parachuted in” during the nineties, and subsequently lost billions of dollars.
Limited partners, even those that got burned during the nineties, are “extremely determined, have done their homework and are now there with a plan,” said Mr. Roex.
Of those limited partners considering making a first commitment to Latin America in the next five years, their primary concern is the lack of established general partners and political risk.
The survey also found that Brazil, host to the dominant and most developed market in the region, appears to be losing some of its luster. More than half of LPs surveyed believe Mexico, Peru and Colombia will provide very attractive markets for GP deal making, compared with 30% that said Brazil would be very attractive in the next two years, though Mexico proves divisive. Two-thirds of Latin American LPs see Mexico as an attractive market, while just under 40% of international LPs see it as attractive.