Significantly, about 55 percent of Latin America fund managers expect some impact of tighter credit criteria in the United States, but only 21 percent said they expect the impact to be significant. Meanwhile, 8 percent of survey respondents predict little or no impact from U.S. credit issues, and 16 percent said it was too early to tell.
"Latin America PE investors remain wary, but apparently are not overly concerned about the effect of the U.S. market, mainly because there is still good availability of funding for the small- and medium-sized deals that comprise the bulk of their portfolios, and because sub-prime debt is not a factor in the region," said Jean-Pierre Trouillot, a Miami-based partner in KPMG's Transaction Services practice. "Of course, if a U.S. recession materialized, the outlook could change."
Of the respondents whose funds are based in Latin America, 17 percent said they expected the U.S. credit issue to have little or no impact, 61 percent expected some impact, just 6 percent said they expected significant impact, and another 17 percent said it was too early to tell. "Fund managers operating in Latin America are a somewhat resilient group, since they've seen their share of major economic and political upheavals locally, and any effect of the present U.S. market conditions tends to pale by comparison," Trouillot said.
Brazil is, again, the overall investment favorite, named by 42 percent of survey respondents as their focus for spending over the next two years, compared with Mexico, which was cited by 34 percent of respondents as their primary target for deals during the same period. Colombia, where fund managers traditionally showed little interest in recent years, surged in popularity in the 2008 survey, and was cited by 30 percent of respondents as their primary target for spending in 2008-2009.
Funding sources remain largely U.S.-based, although there's been a steady rise in European investors since 2004. In the 2008 survey, more than 41 percent of respondents to the KPMG survey said U.S. Institutional investors comprised their primary source of funds, compared with 49 percent in 2004. European institutional investors have steadily gained a foothold in Latin America, growing from no presence in 2004 to more than 13 percent of fund sources in 2008.
"Funding origination continues to change as the marketplace becomes more global in nature, and because U.S. investors - skittish from their own domestic woes - are seeking more-established marketplaces to make investments," said Trouillot. Fund-raising may level off a bit in 2008, after two years of activity not seen since the 1990s, with just 39 percent of survey respondents saying that fund-raising will exceed prior year levels, compared with 61 percent saying it would not be higher than 2007.
"After an extremely busy period of raising capital not seen in the region since the record-setting 1990, fund managers now must look to putting their capital to work," said Trouillot. "Investment activity should experience an uptick in 2008 as a result." In the next 2-3 years, infrastructure deals in communications and distribution channels such as ports, airports, pipelines, water treatment plants and roads comprise the most attractive investment opportunity for private equity, according to 69 percent of respondents, while 66 percent of the fund managers polled said energy and natural resources held the most opportunity in the period. Of the other sectors showing the most opportunity, consumer markets was cited by 55 percent of respondents, financial services was named by 50 percent, and 35 percent said they saw the most opportunity in health care in 2008-2010. Communications and industrial markets were cited by 23 percent and 21 percent, respectively.
"As economic and political stability takes hold in the region, demands by an emerging middle class of workers for infrastructure and energy have spurred significant investment by governments and PE funds," said Trouillot. "And with this added prosperity comes additional needs for increased banking, mortgages and other financial services."
Other findings include:
- When a deal fails, 74 percent of fund managers point to ineffective management as a primary reason;
- And 71 percent of respondents to the KPMG survey said they continue to be challenged by incomplete or unreliable findings from due diligence, resulting in deal failure.
"Fully understanding the target with a high confidence level in the information presented for a potential deal and a strong team to manage an acquisition through the important early stages remain critical to long-term success," Trouillot said.
