Asian LPs join Latin America’s PE carnival

They may be headquartered more than 1,000 miles away, but that hasn't stopped Singapore's sovereign wealth funds from bulking up their presence in Latin America over the past few years.

Temasek Holdings fund first established an office in Sao Paolo, Brazil, in 2008, where it now employs 14 people, and it recently added to this a six-strong base in Bogota, Colombia. Meanwhile, Government of Singapore Investment Corp's (GIC) legacy funds in the region have included GIC Investimentos in Brazil, and it previously invested a substantial amount into Advent International, which is currently investing its fifth Latin America vehicle.

Though the two sovereign funds are said to prefer to invest directly rather than via local fund managers at present, their mounting efforts to tap the Latin American growth story are now being emulated by other Asian LPs.

A report by the Emerging Markets Private Equity Association (EMPEA) recently found that Latin America was viewed as relatively more attractive by Asia-based LPs than local markets such as Australia, India and South Korea. Indeed, nearly 40% of Asia-based LPs intend to increase their commitments to Latin America and the Caribbean over the next two years.

What is causing an increased desire to fund GPs focused on this distant continent? And what are the implications for Asian private equity?

Asia's sweet spot

"The appetite for Latin America has definitely increased, particularly from our institutional LPs, sovereign wealth funds, and also family offices," says Suneel Kaji, a senior portfolio manager at TRG Management, which manages a Latin America mid-cap fund and a pan-Asia fund from offices in Buenos Aires and Sao Paulo and Hong Kong and Singapore. "For the family offices, in places like Hong Kong, Singapore and Taiwan, the focus tends to be very heavily on Brazil because for them it looks like a China - a large market which has a robust export dynamic and a very large domestic market."

When it comes to the sovereign wealth funds and the large pension funds, they're more willing to seek opportunities across the region. While many will invest in Brazilian country funds, there's also an appetite for markets where they see growth and more attractive valuations, such as in Colombia, Peru, Chile and Mexico. Southern Cross and Patria, two of the region's largest funds, are among the Latin American GPs with a significant number of Asian investors.

The two main sectors which have curried favor among Asian LPs are alternative energy (biodiesel and other biofuels) and resources, driven by the efforts by China to enhance various parts of their resource supply chain. Although Asia has always been strong in this area, some niche segments of manufacturing and consumer-oriented infrastructure development have also become a focus. The same applies to aircraft components investments, due to the region's breadth of experience in this sector and its links to European and US supply chains.

"Some energy-focused and infrastructure funds have come through Asia and seen interest largely from institutions in Japan or Australia with a particular aptitude or affinity towards these types of investments," adds Maninder Saluja, a Hong Kong-based partner at Quilvest, a global fund-of-funds and direct investor.

A private equity carnival

For the past 18 months, Brazil - the China of Latin America - has been frequently described as one of the world's most appealing destinations for private equity, so it's perhaps unsurprising that LPs have far afield as Asia want to participate. Other factors which have led to heightened interest include the private and public sector reform in countries like Peru and Colombia, and the sluggish development of the region's capital markets - an array of companies need to raise capital in the region but are forced to rely on private sources of financing.

From the Latin American GPs' perspective, the goal is to go where capital is at a greater surplus. While the deepest LP base for the region is still primarily in the US, a lot of investors are looking to reduce their exposure to certain regions and are becoming more selective about where they put their capital. "A lot of GPs foresee Asia as a region where there's currently increased appetite in Latin America but the historical level of deployment is low, so there's a richer opportunity set," says TRG's Kaji.

Not all Asian LPs greet Latin American fundraisers with such a warm reception however. "I don't think that the Asia-based LPs we have been speaking to are really excited specifically about Latin America so much," says Zack Kembar, a director at Pacific Agri Capital, a Singapore-based GP which invests in agribusinesses in Latin America as well as Southeast Asia.

"When you mention Colombia and Peru, or even Brazil or Mexico, to people in Southeast Asia, they take a step back and start talking about political risk and violence, so I think there's a reasonable amount of skepticism over investor security issues."

The consensus still seems to be that many LPs have gained their exposure to Latin America through blue chip global emerging market funds, which tend to focus on Brazil, where the sense of political risk is negligible compared to that of some of its contiguous countries.

Traversing emerging markets

Of course, Asian LPs aren't the only investor set seeking opportunities on the other side of the Pacific Ocean. Latin American LPs are in turn looking east, leveraging their home turf background to make the jump into another emerging market with an ease rarely displayed by institutions from more developed economies.

While a sizable chunk of capital hails from Latino pension funds, this is mostly via fund-of-funds because the national pension funds don't yet have deep enough teams to enable them to source Asian GPs directly. A number of large family offices from the region - many of which have had strategic interests in Southeast Asia and China for some time - are backing GPs directly, although the disorganized nature and lack of PE experience of this category precludes it from being an easy funding source to tap.

"Many family businesses, whether it's in resources, or manufacturing, might already have direct economic exposure to Asia, but what they are seeking to do is broaden that exposure beyond what they simply get from their industry sector. Private equity is a good way to be able to do that," says Quilvest's Saluja.

Despite the novelty that is Latino LPs' foray into Asia, Latin America itself is the more nascent market of the two, which makes the recent influx of Asian LPs there the more interesting trend to observe. With Asia having always seen the lion's share of emerging markets dollars, the concern for Asian GPs could be Latin America giving emerging Asia a run for its PE money in the mid-term.

"If you were to cluster the entire region together, it's less likely that Latin America could overtake for the foreseeable future, simply because the GDP in the Pacific Rim right now is still sizably more than that represented in Latin America and that translates to the opportunities there," says Kaji.

Brazil however could tell a different story, he admits: "There comes a time when the interest there could overtake interest in China or India."

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• Topics
• North America
• LPs
• Southeast Asia
• LPs
• Fundraising
• LatinAmerica
• Temasek Holdings
• GIC Private