A bright future for private equity in Latin America
Fund administration companies can play a vital role in delivering PE benefits for the region.
These are exciting times for the global private equity industry, with 2017 set to be a record-breaking year for fundraising, with two of the largest ever funds having closed within the last four months, and with capital available for deal making at record levels. The record pace of fundraising is also remarkable, with Apollo Investment Fund IX raising almost $25bn in seven months, which suggests a new dynamism in the international market which may create new opportunities for fund administration companies. At international level, the US remains the most prominent region for private equity investment, with 926 funds in the market in 2016, targeting $355 bn, followed by Asia and Europe, and over half (55%) of the private equity funds closed in 2016 were primarily focused on North America.
If we look at the picture in Latin America, where are we heading? There is room for much more growth in Brazil, which is in a phase of stabilisation and recovery, which saw $4.7 bn invested in 121 deals. Pro-business reforms and growth in key industries are creating opportunities for private equity firms that wish to diversify into emerging markets, as noted in a recent report by the Boston Consulting Group While investors have experienced turbulence over the past decade in Brazil, economists believe that the country is entering a period of slower growth. This could mean challenges and opportunities for firms that can build the right foundation, understand the local market and adopt a long-term view. The average deal size in Brazil is smaller than that in many other markets, with even large international firms competing for smaller deals, and early-stage or new companies could be offer interesting options for investment.
While Brazil is typically the largest market for investment activity, Mexico saw a 46.5% increase in the number of private equity and venture deals in 2016, to a total of 129 deals, adding up to around US$1.8 bn, which places Mexico in second position after Brazil in terms of capital deployed, according to the Latin American Private Equity and Venture Capital Association. Macro-economic challenges, particularly those arising from the new US administration, could provide some interesting entry points for long term investors in sectors which concern the growing middle class, such as healthcare, education and infrastructure, and the Mexican Government has also stated that it is open to discussing improvements in the regulatory framework, including tax and fiscal rules, to foster investments in the country.
Looking at the region as a whole, more than US$8.3 bn was invested in Latin America in 2016, and in 2017 early deal totals suggest that the region is on a par with last year. In terms of the key sectors, almost half of the region’s investment in 2016 was in infrastructure-related investments, with more than US$3.7 bn deployed in energy, telecoms, transportation and logistics infrastructure. Closer to home, the Colombian Government has made efforts to market infrastructure projects to investors at home and abroad, as has the Government of Peru. A significant number of deals could be seen across the region in 2016 in consumer-focused sectors such as retailing and restaurants, and this year it has become clear that private equity firms are positive about ‘later stage’ tech.
So what does this all mean for the fund administration industry? There are clearly opportunities for firms such as SGG Group, which is a leader in investor services which include administrative and accounting solutions for investment funds, multinational corporations and family offices, and which provides a comprehensive range of value-added services to customers across more than 25 countries, including in Latin America. It is important for fund administrators to provide the right structures for the Latin American region, focusing on established sectors such as infrastructure, real estate and services, and emerging sectors such as FinTech. It may be necessary to use different types of legal entities to hold corporate investments through foreign vehicles, and again it is the role of the fund administrator to find the right solution. Fund administrators also have an important role to play in ensuring independence in fund administration and NAV (Net Asset Value) reporting. Overall, fund administration companies can play a key role in ‘oiling the wheels’ of the private equity industry in Latin America, and SGG is also developing new ‘RegTech’ solutions in compliance to drive further efficiencies. Overall, the fund administration industry can play a vital role in helping to deliver a bright future for private equity in the region.
by Bas Horsten
Managing Director, Market Leader Caribbean & Latin America