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Given Latin America's difficulties, why would anyone risk investing in a private equity fund in the region today?

A: Richard H Frank, Darby Overseas Investments. This is a difficult time for emerging markets in general and certainly one of considerable hardship for some of the prominent economies of Latin America, such as Argentina and Venezuela. But, this is also an outstanding time for prudent medium-term private equity investors.

The time to plan significant investments is precisely when asset prices are under pressure. If you look at Mexico for example, the Mexican stock market trades at price to book valuations that are half those prevailing in the US. Furthermore, the valuations of Brazilian companies are about half of those of Mexican companies. The Mexican stock market in US dollar terms has outperformed the US stock market over the past five-year, three-year and one-year periods. The value proposition is simply quite compelling.

Sophisticated US and Spanish corporate investors have recognised this value proposition, but institutional investors have yet to do so. As a result, annual foreign direct investment has averaged about $60bn over the 1997-2001 period - nearly three times the average of about $20bn per year recorded for the 1992-1996 period. By contrast, volatile foreign portfolio investment, fuelled largely by institutional investors, fell dramatically. The most recent five-year period saw average annual foreign portfolio investment decline to $12bn a year, compared to about $36bn a year for the 1992-1996 period. Clearly, there is an arbitrage opportunity for private equity investors.

Right now, we believe there are outstanding investment prospects in a range of sectors in both Mexico and Brazil. Both of these countries have democratic systems, outstanding political leaders, expert central bank governors and rising numbers of highly sophisticated and effective entrepreneurs conducting business within a large domestic and export-oriented market. Mexico's economy is converging with the economies of the US and Canada as the promise and potential of NAFTA becomes a reality. Brazil's large domestic market and its proven export prowess make the country quite appealing.

The key to prudent investment in the region is not to be overwhelmed by short-term trends and fashion, but to take a long-term view and keep building expertise and partnerships that can lead to unique, highly profitable, deals.

Richard H Frank is CEO of Darby Overseas Investments. Darby is active in Latin America, with $1bn under management across five business lines: private equity, mezzanine finance, fixed income, technology and financial services. At a time when most firms are either retrenching or withdrawing from Latin America, it is aggressively expanding its activities in the region. For more information, please contact: 1133 Connecticut Avenue NW, Suite 400, Washington DC 20036, USA or visit www.darbyoverseas.com

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