PRINT THIS PAGE Private investment continues rising in Latin America25/04/2007. Source: KPMG.
Private equity money continues to increase its hold on corporate deals in Latin America where the investment community has increased its focus on Mexico, rather than Brazil, as a primary destination for their transaction spending, say fund managers and other stakeholders in the region in an annual poll by KPMG. Fund managers also said that European fund investments are on the rise in the region, and emerging economies, such as Columbia, have made some gains, the KPMG survey said.
The 2007 poll found that just 39 percent of managers obtained funding from U.S. institutional investors, compared with 49 percent using that source of money in the 2006 survey. Meanwhile, private investment increased as a funding source, according to 21 percent of those polled, up about a third from 2006, when such funding was cited by just 16 percent of managers in the region.
"U.S. funds, while still very active in the region, apparently have a number of other, less risky investment options that offer a proven higher return," said Jean-Pierre Trouillot, a Miami-based partner in KPMG LLP's Transaction Services practice. "In addition, private investment has become an increasingly dominant force globally for funding deals, and we see these fund managers' views as quite consistent, though it's taking PE a bit longer to gain traction in Latin America."
Trouillot said that the KPMG poll last year identified a turning point for private-equity investment in the region. The poll was taken among 124 private- equity stakeholders at The Economist's Ninth Annual Conference on Latin America Private Equity in Miami on Tuesday, Feb. 6, 2007.
Trouillot said that European institutional investors more than doubled in popularity as a funding source, cited by 13 percent of managers this year and by just 6 percent in 2006. Local pension funds lost ground, meanwhile, down from 24 percent in 2006 to just 16 percent of fund managers this year.
Mexico has outpaced Brazil for the first time as the primary investment focus for fund managers. In fact, only 28 percent of respondents to the KPMG poll said they will put money primarily in Brazil over the next two years, compared with 43 percent in 2006. By contrast, 47 percent of the fund managers cited Mexico as a place where they will invest over the next two years; in 2006, just 34 percent of respondents cited Mexico as their primary investment target.
"Brazil continues to maintain a strong position in the region, but the change in Mexico apparently reflects a deliberate regulatory effort to promote private investment in Mexico, where minority investor protections have been strengthened, income laws have been reformed to make domestic trusts easier to operate and more transparent, and there has been a consolidation in the country's four development banks' funds," said Trouillot.
Infrastructure deals in communications and distribution channels such as ports, airports, pipelines and roads, remain the most attractive investment opportunity for private equity, according to 72 percent of respondents, up dramatically from just 56 percent in 2006. Financial services investments also surged in popularity, from 36 percent in 2006 to 51 percent this year among the respondents. Consumer markets held relatively steady, popular among 51 percent of the managers polled, compared with 52 percent last year. Other focal points for investments were health care, up to 28 percent from 18 percent in 2006, industrial markets (23 percent, off from 28 percent in 2006), and communications (flat at 21 percent, compared with 22 percent last year).
"The emergence of stronger middle-class consumers is helping to drive a need for improved infrastructure," said Trouillot. "And a stronger middle class is demanding improvements in their financial services, from banking to mortgages."
In addition, over the next two years, Colombia has made gains, cited by 9 percent of the fund managers polled, compared with just 4 percent last year.
Increasingly, the funds are being managed locally in Latin America, up from 41 percent of the funds in 2005, to 59 percent last year, to 62 percent this year, while funds managed from the United States contracted from 24 percent of the funds in 2005 to 19 percent in 2006, and down to just 10 percent this year.
Other survey highlights included:
* Due diligence remains an imperative to success with 89 percent of respondents saying it is the main safeguard against failure. Sixty- three percent said "stronger purchase or shareholder agreements" helped keep a project from failing, and 34 percent of fund managers responding said there were "fewer, more strategic deals" available.
* Stakeholders increasingly pointed to ineffective management as the biggest cause for ventures to fail in Latin America, according to 78 percent of respondents, up from 56 percent of respondents in 2006. Unreliable due diligence or incomplete facts also surged as a leading cause of failure, from 35 percent in 2006 to 53 percent this year. Lack of available funding also showed an up tick, from 31 percent last year to 36 percent this year. Devaluation also played a role, down to 36 percent from 40 percent a year ago, and, finally, "inflation" remained relatively unchanged at 11 percent.
* And the horizon for investments in Latin America continues to shrink, with more than 77 percent of fund managers polled saying they expect to realize a return on their investment in less than five years, compared with just 55 percent of those polled in 2006, and 41 percent of those polled two years ago.
KPMG is the global network of professional services firms who provide audit, tax and advisory services. KPMG LLP operates from 22 offices across the UK with 9,000 partners and staff. KPMG recorded a UK fee income of £1,066 million in the year ended September 2004. KPMG LLP, a UK limited liability partnership, is the UK member firm of KPMG International, a Swiss cooperative.
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