A new report from London-based global accounting firm Auxadi, whose client roster numbers 1500 private equity, real estate and multinational corporations in 50 countries, has released the results of a survey it commissioned, which has found a surprisingly high proportion (91 percent) of North American private equity firms say they plan to deploy capital in Latin America over the next five years.
The report, “Recovery to Rediscovery: Capitalizing on a Changed Private Equity Landscape,” was based on interviews with 100 senior-level private equity investors in North America, the U.K., and Continental Europe with average assets under management of EUR 14.4 billion (about $17 billion). While the survey found the largest preponderance of Latin America bulls among North American GPs, the sentiment was consistent across geographies, with 75 percent of U.K.-based private equity investors planning to commit capital in Latin America, and just under half (46 percent) of European investors planning the same.
This made Latin America the most desired investment destination for capital overall (the top choice among an average 70 percent of all respondents), outstripping even Asia-Pacific (62 percent) and the Middle East (60 percent).
Auxadi’s research team attributed the surge in interest to several factors: among them attractive relative valuations and a growing appetite for cross-border deal flow amid the variable global economic recovery from covid-19.
If sentiment is a true leading indicator, the report finds, the region could see a continued spike in private equity deal flow, which already tripled from 133 in 2010 to 400 in 4019.
Capital: Looking for a place to go
“Latin America is a region with great potential for capital-laden U.S. GPs, with its growing middle class and early pension reforms having created a significant pool of assets in which to invest and, a continued interest in investment for improved infrastructure,” Auxadi Senior Vice President Raimundo Diaz said of the report’s findings.
“Considered by many as the emerging market to invest in, U.S. GPs are fully aware that Latin America carries risks and quite a few multiple cultural, legal and regulatory differences that often make it difficult for international firms to operate with confidence. However, proximity to the region, cultural talent and opportunities compensate far beyond risks. We’re currently seeing a dramatic increase in client demand for our services in Latin America thanks to our ability to combine local knowledge with a strict adherence to international best practice,” he added.
One-third of U.S. respondents expect that the volume of international transactions will bounce back to pre-pandemic levels by the end of 2021 and a further 45 percent expect this to happen in 2022. Just 18 percent predict it will take two years or longer (2023), while 3 percent believe it will never fully recover.
Auxadi’s research also pointed to several challenges faced by private equity investors looking to deploy capital in Latin America. Almost half (44 percent) cite jurisdictional differences in law and regulatory frameworks and compliance regimes. One in three flagged cultural differences and the misalignment on valuations between buyer and seller. In response, more than half of Auxadi’s respondents said they already outsource regulatory reporting requirements to third parties, and another 39 percent said they are planning to do so.
From a sector perspective, the most desired industry for investment among Auxadi’s private equity clients is energy, with 93 percent of respondents stating that they’re planning to invest in the energy sector over the coming five years. More than half of respondents (51 percent) said they were ‘extremely likely’ to invest in energy, reflecting the ongoing massive transition toward renewable energy sources and zero carbon emission targets set by governments and regulators.
