New KPMG Survey Marks Latin American Private-Equity Market As Attractive Despite Global Slowdown

Private equity (PE) investors in Latin America don't expect the region's deal market to begin recovery until possibly 2010, but say it continues to offer greater investment opportunity than many other areas, according to the 2009 Annual Latin America Private

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Private equity (PE) investors in Latin America don’t expect the region’s deal market to begin recovery until possibly 2010, but say it continues to offer greater investment opportunity than many other areas, according to the 2009 Annual Latin America Private Equity Survey of PE stakeholders by KPMG LLP, the audit, tax and advisory firm.

While all of the respondents to the KPMG poll said the global economic crisis had affected Latin America, 67% of them said it had only a moderate negative impact on the region. Further, the executives (45%) said Latin America had actually become more attractive to investors during the world economic crisis, and they expressed measured optimism on world investments in the region for 2010-2012.

According to the KPMG survey, 63% of the PE industry executives said their 2008 return on investment (ROI) had stayed flat or increased, compared with 37% who reported lower ROI.

Therefore, Brazil’s private-equity market remains relatively attractive, according to Jean-Pierre Trouillot, a Miami-based partner in KPMG’s Advisory practice.

While Mexico maintains its strong position among Latin America’s top investment targets, aided by recent regulatory changes that encourage local investment, the economy there has been under more strain than the rest of the region because it has close business ties with the United States.

In addition, survey respondents placed Colombia behind Mexico and Brazil, respectively, as a target for investments in the next two years, followed by Peru.

Meanwhile, the study also found that 45% of respondents said Latin America had become more attractive to PE investment during the economic crisis and 14% said there was no change, while 30% said the region had become less attractive.

58% of the respondents said they expected higher world investment in Latin America during 2010-2012, while 12% said investment would remain steady and just 29% expected lower world investment in the area during that period.

Trouillot pointed out that despite some strength in PE in Latin America, stakeholders looking to make investments there have expressed concerns about exit opportunities, given the current market.

Asked how the 2009 global economy will affect their Latin America investments, 21% of respondents said they will not be able to implement a planned exit strategy and another 21% said they may have going concern issues, while 30% said they will have to turn to organic growth and cost reductions to weather the 2009 economy.

Others said they will be looking for more investments to strengthen a company’s position (14%) and for additional acquisition opportunities prompted by the crisis (14%).

Respondents also ranked the most promising industry sectors, identifying infrastructure (47 %) and energy (26%) as the most attractive for investment, followed by consumer markets (14%), health care (8 percent), financial services (4%) and communications (1%).

Fund-raising, according to 86% of the PE stakeholders polled, was expected to decrease in 2009 compared with 2008, while 9% reported fund-raising at the same levels as last year, and 4% reported increased fund-raising. Likewise, 79% of fund managers expected a decrease in 2009 investment in Latin America, 9% said they expected the rate of investment to remain flat, and just 12% expected a modest increase in the year to come.

“A great deal of confidence exists for long-term PE activity in Brazil, Mexico and Colombia, while countries such as Argentina continue to rank low as investment targets,” says Jean-Pierre Trouillot.

“PE can be a source of capital for healthy businesses, which become even more attractive when those operating units will need few management changes to succeed. But investors must exercise caution as they investigate potential deals, because the region still lacks a consistent track record of transparency,” continues Trouillot.

“We have clearly seen hedge funds pull back compared with the more active years earlier in the decade. However, with the encouragement of government, local private investors and local pension-funds have filled some of those gaps.”

L.D.

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