Latin American pension funds will want more private equity exposure as falling interest rates force them to consider alternative forms of investments to meet their trustees’ needs, according to players in the region.
“The number one enemy of private equity in Brazil particularly was the high fixed-income rate. Eighteen months ago, when we talked to the pension funds in Brazil, they said they were making 25% a year by purely lending to the government, so why should they invest in private equity for an expected return of 30% with all the extra risks,” says Alexandre Saigh, a partner and head of private equity at Pátria Investimentos. “But now rates have dropped to 10% in Brazil and are dropping across the region. The pension funds need to make 6% to 7% a year to cover costs and this explains why in the coming months a lot more pension funds will look at alternative investments.”
Just one example comes from a joint venture between Darby Overseas and Stratus Group, a São Paulo investment group, which raised $240 million from Brazilian pension funds for a new infrastructure vehicle.
The Latin American Venture Capital Association (Lavca) annual report issued on May 12 highlighted other new trends in the regional private equity industry. In 2008, $6.4 billion was raised for regional funds, a slight increase on 2007 figures. A number of new funds were launched last year, particularly in Brazil, Colombia and Peru, where pension funds are prominent and helped support a decline in international interest as risk aversion played through the markets. The Peruvian government was the most recent to pass laws authorizing pension funds to invest in higher-risk, higher-return strategies.
But these countries continue to receive attention from international investors that want to gain some exposure to the growing middle classes and think the region will emerge from the 2008 market collapse quicker than Europe and the US.
“In Brazil, for example, the mortgage market is pretty non-existent and the local banks are well capitalised. I don’t think any recession will be severe there,” says Ernest Bachrach, co-head of Latin America at Advent International. “The private equity investments that tap into consumer wealth and the service sector are still very attractive.” Only last month, Advent International invested $171 million for a 30% stake in Cetip, the Brazilian fixed-income custodian firm.
For those that raised their funds last year – such as Pátria, which closed a $700 million Fund III – 2009 looks exciting. “I think it will be very good, a vintage year. We are aiming for returns of 35% plus,” says Saigh. Pátria’s last fund closed in 2003, another good year for the industry, and posted returns of 640%.
“Throughout Latin America, companies with healthy business models have been affected by economic slowdown and currency depreciation and need capital to survive, and valuations are generally competitive compared with other emerging markets,” says Lavca.
