These are exciting times for the global private equity (PE) industry, with 2017 set to be a record-breaking year for fundraising. Two of the largest ever funds closed within the last four months, while capital is available for deal-making at record levels.
The current pace of fundraising is also remarkable, with Apollo Investment Fund IX raising almost US$25 billion in seven months. This suggests a new dynamism in the international market, which may create new opportunities for fund managers and administrators alike.
At an international level, the US remains the most prominent region for PE investment, with 926 funds in the market in 2016 targeting a total of US$355 billion. Over half (55%) of the PE funds closed in 2016 were primarily focused on North America.
If we look at the picture in Latin America, where are we heading? There is room for significant growth, particularly in Brazil, which saw US$4.7 billion invested in 121 deals during 2016 and is currently in a phase of stabilisation and recovery. Pro-business reforms and growth in key industries are creating opportunities for PE firms that wish to diversify into emerging markets, as noted in a recent report by the Boston Consulting Group. While investors have experienced turbulence over the past decade in Brazil, economists believe that the country is entering a period of more steady growth.
This could mean challenges and opportunities for firms that are able to build the right foundation, understand the local market and adopt a long-term view. The average deal size in Brazil is smaller than that in many other markets, with even large international firms competing for smaller deals, and early-stage or new companies could offer interesting options for investment.
While Brazil is typically the largest market for investment activity, Mexico saw a 46.5% increase in the number of PE and venture deals in 2016, to a total of 129, adding up to around US$1.8 billion. This places Mexico in second position after Brazil in terms of capital deployed, according to the Latin American Private Equity and Venture Capital Association.
Macro-economic challenges, particularly those arising from the new US administration, could provide some interesting entry points for long-term investors in sectors of concern to the growing middle class, such as healthcare, education and infrastructure. The Mexican government has also stated that it is open to discussing improvements to the regulatory framework, including tax and fiscal rules, to foster investments in the country.
Looking at the region as a whole, more than US$8.3 billion was invested in Latin America in 2016, and in 2017 early deal totals suggest that the region is performing on a par with last year. In terms of key sectors, almost half of the region’s investment activity in 2016 related to infrastructure, with more than US$3.7 billion deployed in energy, telecoms, transportation and logistics infrastructure.
The Colombian government has made notable efforts to market infrastructure projects to investors at home and abroad, as has the Government of Peru. A significant number of deals could be seen across the region in 2016 in consumer-focused sectors such as retail and hospitality, and this year it has become clear that PE firms are feeling positive about ‘later stage’ tech.
So where does fund administration come in to all of this? There are clearly opportunities for firms such as ours, who are active in the Latin American market. It is important for fund administrators to provide the right structures to the region, focusing on established sectors such as infrastructure and real estate as well as emerging sectors like FinTech. It may be necessary to use different types of legal entities to hold corporate investments through foreign vehicles, and again it is the role of the fund administrator to find the right solution.
Fund administrators additionally have an important part to play in ensuring independence in fund administration and net asset value (NAV) reporting. At IQ-EQ we’ve also been developing new RegTech compliance solutions to drive further efficiencies for our clients. Overall, fund administration providers can play a key role in ‘oiling the wheels’ of Latin America’s PE industry and, in turn, helping deliver a bright future for private equity in the region.