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Latin American private equity: Rate fall favours venture capital

Funds reassess investment strategy; Positive outlook for private equity

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.

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