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On the Challenges and Opportunities we see in Latin America

By : Ziad K. Abdelnour| 17 May 2010
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Despite previous Venture Capital (VC) and Private Equity (PE) activity in Latin America since the mid 80s, the asset class can still be considered a “new species” in the region. Taking however into account the growth levels the asset class experienced in developed markets during that same time period, the growth potential for VC and PE in Latin America seems enormous.

It is a fact that although the value of investments in emerging markets has been hit hard by the financial crisis, we should keep in mind, that the sources of the crisis were definitely not the emerging countries. These markets did not suffer any severe credit crises. Mortgages – which triggered the crisis – were not and will not be a cause of concern in the region.

The Latin American economies were spared, in large part, because their mortgage systems are completely different from the U.S. system. Most Latin American mortgages are subsidized by the government. As a result, there was none of the speculation of housing prices and method of finance that we experienced here in the U.S. So as the U.S. economy struggles to recover, Latin American banks are enjoying a very stable deposit base and low-risk assets—and very little to do in terms of recovery from the economic downturn.

Some Latin American economies might in fact be better prepared to recover from the crisis than several of the more developed economies and are, in principle, in better economic shape as a number of them have generated stabilization funds to support their respective economies.

While the growth of markets elsewhere in the world such as the Chinese economy has also contributed significantly to Latin America’s rise, a lot of those Western Hemisphere countries are resource-rich to start with, so they have enjoyed significant additional benefits from the economic development in China. We forecast this Latin American-Asian relationship to further strengthen as China’s demands for access to Latin America’s natural resources create an infrastructure in the region that will enable resources to flow back to China. Hence, don’t be surprised to see sooner than later billions of dollars invested in infrastructure for that purpose. For Latin America, this economic boom promises continued political and social stability.

So where do we see the most potential for growth opportunities in Latin America in the years ahead?

Overall, we believe that Brazil, Panama and Colombia along with Chile, Uruguay and Peru have clearly become the stars of Latin America. In contrast, leftist-leaning governments — namely, Argentina, Venezuela and Ecuador — each of them having pursued unorthodox economic policies, still suffer from institutional frailties.

Our winner is without a doubt Brazil. As one of the renowned BRIC (Brazil, Russia, India, and China) countries, Brazil has become a real attractive target for us particularly because of the confidence created by the continuously good economic management of different democratic governments and because we strongly believe it is the “growth driver” for the whole continent. The country’s strong appeal arises from the size of its domestic market, the strength of the industrial sector, and the expected high growth rates among several Brazilian industries. There are though a number of bottlenecks that still need to be addressed to lift productivity and returns on investment. Much still needs to be done for example to improve Brazil’s tax and legal systems, labor markets, infrastructure and above all, education. Given the country’s low savings rate, Brazil will inevitably need also to tap foreign savings to fund more investment in the short to medium term. But given the strong global investor appetite at large for Brazil, we don’t think this should be a problem.

Our first runner up is Chile. The Chilean economy has indeed a very strong foundation built on commodity production, particularly copper. The country’s political leaders have won the trust of the investment community through the consistent economic policy followed by the different democratic governments. One example that highlights successful efforts of Chilean policy makers has been the creation of a “stabilization fund” during the years of strong growth. This fund allows the present government now to soften the impact of the financial crisis. Further, the country has a dynamic, modern entrepreneurial class with a strong focus on growth and exports. Within the region, a large number of leading Chilean companies have embarked upon a significant expansion process with investments in neighboring countries. A difference between night and day as to where Chile was a few decades ago and where it is today.

In fact, we fully recognize the fact that Peru and Chile are two countries that stand to benefit the most from a relationship with the East. Peru’s prominence is often surprising to U.S. investors, mostly because a lot of people don’t realize that Peru has a huge economy—largely tied to Asia—and that the country has investment-grade status.

Our second runner up is Mexico. There are at least two reasons why Mexico is still one of the most promising Latin American countries, in terms of private equity opportunities. First, there has been a continued increase in venture capital investing there now that the country has had investment-grade status for more than a year, and firms today are more comfortable than ever with risk-profile investing there. In addition, Mexico recently passed legislation that allows public listing of venture capital funds and there are now at least eight such funds that are registered or in the registration process with the CNBB, the Mexican equivalent of the SEC. As a result of these two recent developments, there are today a number of large international venture capital firms that are interested in developing in Mexico—or are already closing deals. Further, housing development is a particularly hot industry right now, especially in Brazil and Mexico.

Overall and for 2010, we see much more investment of venture capital and other private equity groups in Latin America, but also more liquidation of portfolio investments. Typically, these investments have to be liquidated over three to five years to provide some return to the fund investors.

Since a lot of firms started investing in Latin America three to five years ago, they’re anxious to begin that liquidation process. However, because of the worldwide economic crisis, capital markets—particularly equity capital markets—have been somewhat inaccessible over the past 12 to 18 months. Hence, we’re just now beginning to see the re-emergence of capital markets in Latin America, particularly high-yield capital markets. This activity usually signals the coming availability of equity. As a result, we should see more liquidity for private equity investors in 2010.

Along with the reopening of the capital markets, there are more international funds that are interested in purchasing on a direct basis. It is hard for VC and PE funds to raise more money today when they haven’t been able to liquidate their investments, but we believe these opportunities should arise within the next six to nine months.

Bottom Line: The only potential hindrances to further expansion of capital markets in Latin America are inflation and political instability. A spike in inflation generally leads to political unrest. However, barring those unlikely complications, we believe the climate will remain hot as we along with our friends in the private equity community worldwide eye the enormous, still not fully tapped possibilities in the region.

As for the sectors we are watching closely..… Energy is and has always been on our high priority list; along with renewable energy – most particularly in Brazil — which have helped develop a world-class ethanol industry on the back of successful public-private partnerships. Food is another sector that we are closely looking at as we expect major Latin food companies to expand abroad, particularly in Asia where competition isn’t as stiff as in the U.S. and Europe.

Now that you know where we stand on this critical part of the world, we are looking forward to doing business with you and to continue being your resource for deals, capital, relationships and advice.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.


By :� Ziad K Abdelnour

Ziad is also the author of the best selling book� Economic Warfare: Secrets of Wealth Creation in the Age of Welfare Politics (Wiley, 2011),

Mr. Ziad Abdelnour continues to be featured in hundreds of media channels and publications every year and is widely seen as one of the top business leaders by millions around the world.

He was also featured as one of the� 500 Most Influential CEOs in the World.