Private equity funds focused on Latin American have raised $45 billion since 2008, the second largest pool of capital among emerging markets, according to Preqin.
BDO USA’s Andre Robledo sat down with BDO Global professionals based in Latin America to discuss what opportunities the region holds for private equity. The below conversation features insights from BDO Chile’s Stephen Crozier and Emilio Venegas Valenzuela, BDO Panama’s Igal Marancenbaum, BDO Mexico’s Eugenio Labarthe and Gabriel Llamas and BDO Puerto Rico’s Ryan Marin and Alina Rivera. Here are some highlights from their conversation:
Which industries in Latin America are the most attractive to foreign investors?
BDO Chile: Interest in Chile’s energy industry has substantially increased over the past few years, specifically in metal and non-metal mining, renewable energies such as solar and wind, and the agriculture and agricultural technology industries. In 2016, Chile launched the Energía 2050 campaign to transfer 90 percent of its electricity to renewable sources by the year 2050. Increased investments in green energy infrastructure have significantly lowered electricity prices and accelerated the growth of the country’s energy market. According to a report by the International Renewable Energy Agency, Chile earned a spot among the top 10 renewable energy markets in the world.
BDO Panama: In the last few years, foreign investors have flocked to electric energy deals, most often hydroelectricity and natural gas. The U.S., Italy and Colombia are among the most active foreign countries investing in Panama’s energy industry. One of the nation’s landmark renewable energy projects, a wind energy farm, was developed in 2015 with $430 million in funding, according to the Economic Commission for Latin America and the Caribbean. Education is another attractive sector. In the past, private universities have been sold to international investors. Some retail companies have also changed hands. For example, many drugstores have been sold to supermarkets. In 2017, a company from Guatemala bought a Colombian-owned food company.
BDO Mexico: Since 2000, more than 1,200 private equity investments have been made in Mexico, spanning industries as diverse as consumer services, healthcare, financial services, consumer goods, industrials, telecommunications, oil and gas, technology, real estate and utilities. Energy and telecommunications infrastructure continue to see strong investment interest following the 2013 energy reforms that opened the industry up to foreign investment.
BDO Puerto Rico: Puerto Rico is still dealing with the immediate fallout from Hurricane Maria. While there are likely to be long term negative economic impacts, there are also opportunities that will likely surface as the island rebuilds. Puerto Rico is the most attractive option for investors looking to be under U.S. federal law and work with the U.S. dollar while maximizing incentives under the existing and comprehensive Tax Incentives Act, which covers all major international industries impacting Latin America. Puerto Rico offers an attractive local market, a highly educated workforce and a strategic location within a U.S. jurisdiction from which to provide services throughout Latin America. The island is emerging quickly as an outstanding knowledge services hub both for online monitoring as well as digital content, software development, emerging markets, high-tech, aerospace and telecommunication-related operations like call centers. The investor benefits of operating within a U.S. jurisdiction while offering the tax benefits of a foreign tax jurisdiction have promoted the creation of several tax incentive acts to stimulate economic development and attract foreign direct investment (FDI) in the following sectors: manufacturing, tourism, export services, insurance, financial services, agriculture, hospitality and hotel development, and renewable energy.
What type of capital flow are you seeing coming into your country?
BDO Chile: Chile has seen market entry via acquisitions, with some of the larger deals involving pension funds, insurance companies and private funding to consolidate market participation. Digital transformations across industries have also impacted capital flow. There has been a perceived decrease in flows to more traditional mining players and an increased interest in mining technologies. Capital flows for 2016 were approximately 11 percent of GDP, nearly 10 percent of which was FDI. As seen in many parts of the world, there has been an increase in investments from China.
BDO Panama: Considering that electric energy is a rapidly growing industry, it is possible to expect more investment in businesses related to logistics services around the expansion of the Panama Canal. On the newly expanded canal, tolls for energy carriers have been lowered, allowing for a higher volume of large gas-carrying ships to pass through its waterways. International construction companies will also continue operations because of ongoing infrastructure programs. Many Mexican and British companies already have a significant stake in Panama’s telecommunications industry. As the number of telecom customers increases, it is probable that these companies will continue investing in telecommunications.
BDO Mexico: There’s been a steady stream of investments into Mexico, with accumulated capital commitments reaching more than $42 billion in 2016. Many expect commitments to surpass $60 billion in the coming years. We’ve seen various types of investors enter the market here in Mexico, including public retirement funds, funds of funds, development banks, family offices, sovereign wealth funds, private pension funds, insurance companies, multilateral agencies and university endowments. Mexico’s public Retirement Funds Administrators (AFORES) contribution increased three times from 2011 to 2016. The number of general partners engaged in fundraising and investing for private equity, venture capital, debt, infrastructure and energy, real estate and funds of funds has increased sevenfold from 2005 to 2016. Nearly half (44 percent) of the 168 active general partners in Mexico are foreign.
BDO Puerto Rico: Regarding the benefits of Act 185, The Private Equity Funds Act, corporations and foreign individuals are creating structures in Puerto Rico to receive the benefits under this tax incentive. These funds are funneled mainly from the United States, Dominican Republic, China and Latin American countries. The capital flow is being channeled to Puerto Rico mostly through new corporations, lenders, venture capital, family trusts and individual investors directly injecting capital into their industries of expertise.
Beyond the immediate political uncertainty facing many Latin American economies, what long-term financial potential does the region hold for private equity investors?
BDO Chile: Chile’s long-term financial potential includes the increasing size and buying power of the middle class, in concert with its increased access to technology. As the Internet of Things emerges and expands, investing in Chile’s technological advancement is becoming a priority to keep pace with other Organization for Economic Cooperation and Development or developed countries. This is also an election year in Chile. As a result, all eyes will focus on the campaign promises of both parties, especially in relation to the tax reforms instated by the current administration, led by President Michelle Bachelet. Double taxation and foreign investment incentives are two potential regulations to consider.
BDO Panama: In the country, there are many family-owned companies that grew in the last few years because of the rise of the middle class–notably, 300,000 Panamanians overcame poverty from 2008 through 2014. These family-owned companies are taking steps to become organized, corporate-style businesses, making them interesting targets for international investors and private equity funds. Panama’s economy is growing at one of the fastest rates in the world, with a 5.4 percent year-over-year increase in GDP during Q2 2017. The World Bank’s projections for Panama’s market growth remain at a steady pace of 5.5 percent for 2018.
BDO Mexico: Mexico has one of the highest number of free trade agreements in the world. Additionally, its proximity to the U.S. and its participation in the economic region is certainly a potential positive. Mexico’s growing middle class, along with potential minimum wage increases, should generate stronger purchasing power, thus internal growth. The supply chain integration of the economic block should improve economic growth in Mexico. The entrepreneurial ecosystem and the possibility of disruptive participants in different industries (probably those recently changed by political reforms, such as energy and telecom) will generate more private equity funding.
BDO Puerto Rico: Puerto Rico is under the U.S. regulatory framework, which provides the highest level of stability for investors and provides direct access to U.S. markets. In addition, the Private Equity Fund Act lays a framework for partnerships and limited liability companies, whether domestic or foreign, to elect to be treated as a private equity fund. Partnerships and LLCs can then obtain significant tax benefits for their funds and their investors, including significant initial investment tax deductions. We believe that private equity investments can play a significant role in turning a corner on Puerto Rico’s economy.
Andre Robledo is a managing director and Latin America Transaction Advisory Services leader. He can be reached at arobledo@bdo.com.