"There are two current PE investment tales to tell in Latin America," said Jean-Pierre Trouillot, a Miami-based partner in KPMG's Advisory practice. "A great deal of confidence exists for long-term PE activity in Brazil, Mexico and Colombia, while countries such as Argentina continue to rank low as investment targets."
According to the KPMG survey, 63 percent of the PE industry executives said their 2008 return on investment (ROI) had stayed flat or increased, compared with 37 percent who reported lower ROI.
"Some continued strength in the region appears to indicate that the Latin American marketplace remained somewhat sheltered from the global market crises. This could be tied to how these countries nurtured organic growth of their own middle classes, thus avoiding the economic imbalance that foreign investment has posed for central and eastern Europe, as well as parts of Asia," Trouillot said.
Therefore, Brazil's private-equity market remains relatively attractive, said Trouillot. He added that while Mexico maintains its strong position among Latin America's top investment targets, aided by recent regulatory changes that encourage local investment, the economy there has been under more strain than the rest of the region because it has close business ties with the United States. In addition, survey respondents placed Colombia behind Mexico and Brazil, respectively, as a target for investments in the next two years, followed by Peru.
Meanwhile, the study also found that 45 percent of respondents said Latin America had become more attractive to PE investment during the economic crisis and 14 percent said there was no change, while 30 percent said the region had become less attractive. In addition, 58 percent of the respondents said they expected higher world investment in Latin America during 2010-2012, while 12 percent said investment would remain steady and just 29 percent expected lower world investment in the area during that period.
Trouillot pointed out that despite some strength in PE in Latin America, stakeholders looking to make investments there have expressed concerns about exit opportunities, given the current market.
Asked how the 2009 global economy will affect their Latin America investments, 21 percent of respondents said they will not be able to implement a planned exit strategy and another 21 percent said they may have going concern issues, while 30 percent said they will have to turn to organic growth and cost reductions to weather the 2009 economy. Others said they will be looking for more investments to strengthen a company's position (14 percent) and for additional acquisition opportunities prompted by the crisis (14 percent).
"Considering the impact of the global economic crisis on M&A activity in general, exit alternatives are more limited. Therefore, 2009 will be a year to focus on existing portfolio companies by making operations more profitable," said Trouillot. "But the down market has also created opportunities."
He said some fund managers have expressed an interest in either healthy companies that may need minority investors or in non-core businesses that organizations may seek to divest as companies look to manage their exposure and raise capital to service large amounts of corporate debt that is expected to come due in 2009.
"PE can be a source of capital for healthy businesses, which become even more attractive when those operating units will need few management changes to succeed. But investors must exercise caution as they investigate potential deals, because the region still lacks a consistent track record of transparency," said Trouillot.
Respondents also ranked the most promising industry sectors, identifying infrastructure (47 percent) and energy (26 percent) as the most attractive for investment, followed by consumer markets (14 percent), health care (8 percent), financial services (4 percent) and communications (1 percent).
Fund-raising, according to 86 percent of the PE stakeholders polled, was expected to decrease in 2009 compared with 2008, while 9 percent reported fund-raising at the same levels as last year, and 4 percent reported increased fund-raising. Likewise, 79 percent of fund managers expected a decrease in 2009 investment in Latin America, 9 percent said they expected the rate of investment to remain flat, and just 12 percent expected a modest increase in the year to come.
"We have clearly seen hedge funds pull back compared with the more active years earlier in the decade. However, with the encouragement of government, local private investors and local pension-funds have filled some of those gaps," said Trouillot.
