Spotlight on Latin America

A recent KPMG survey shows that GPs in Latin America identify “ineffective management” as the most widespread cause for sub-par investment performance in the past. By Judy Kuan.

At a time of intense fund marketing activity in Latin America – with Carlyle Mexico, Baring Latin America and Conduit Capital Partners amongst the groups currently seeking to raise fresh capital for investment – limited partners remain skeptical towards private equity in the region.

Many investors – particularly large institutions – have expressed reluctance at entering or re-entering the market, and both LPs and GPs attribute much of this sentiment to the worse-than-expected investment performance of previous funds invested in the region.

Turning point: Latin American GPs are bullish on the region.

However, most of the GPs still active in Latin America seem to have learned their lesson on how to manage the region’s volatile investment environment, according to an audience poll conducted by KPMG at an industry gathering last week.

The poll came during the wrap-up of the 8th Annual Conference on Latin American Private Equity in Miami, organised by The Economist. The 101 survey respondents consisted primarily of GPs, as well as some private equity service providers and LPs.

Of those polled, 56 percent identified “ineffective management” at portfolio company level as a key reason for the failure of private equity investments in Latin America. 40 percent pointed to currency issues as a major cause of problems. Other reasons for non-performing investments highlighted in the survey were imperfect information (35 percent), lack of available funding (31 percent) and inflation (13 percent).

The respondents also said that adopting safeguards against failure are imperative. 77 percent recognised the importance of quality due diligence, and 62 percent stated that tighter purchase and shareholder agreements are needed to avoid disaster.

Commenting on the significance of the results, Jean-Pierre Trouillot, a Miami-based partner in KPMG’s transaction services group, said: “[General partners] see 2006 as a turning point for Latin American private equity. The optimism this year apparently stems from investors’ ability to understand and manage risk regarding deals in the region, and there continues to be a greater emphasis on due diligence.”

In terms of geography, 43 percent of the survey participants said Brazil was attractive at the moment, and 34 percent identified Mexico as an interesting market. This is not surprising. Not only are both countries considered economically stable, but their respective governments are committed to providing a viable backdrop to private equity investing through capital market reforms and the formation of government-sponsored funds of funds to support local private equity and venture capital groups.

What those bullish on Latin America’s potential for generating compelling investment performance have to do next is to persuade the buy side that now is the time to put capital into regional private equity funds. For unless limited partners shore up their support, Latin American GPs will not have much chance to put their newly developed risk mitigation strategies to the test.