How to Better Attract LatAm Investor Capital
Latin America has become an increasingly important region for global private equity and venture capital funds seeking new limited partner investors (LPs). As the region’s economy grows and wealth concentrates among local high-net-worth individuals and family offices, international general partners (GPs) are looking for ways to attract this Latin American capital to their firms. Understanding the unique aspects of this investor market and developing relationships through local connections are key.
The Growing Importance of LatAm Investor Capital
Macroeconomic Tailwinds
Latin American economies are benefiting from global supply chain shifts and nearshoring trends that are attracting more foreign direct investment. Countries like Mexico, Brazil, and Chile are undertaking regulatory reforms to create business-friendly environments, enhance competitiveness, and facilitate trade.
With its strategic location, trade agreements, and economic policies, Mexico is well-positioned to capture manufacturing investments relocating from Asia. Meanwhile, Brazil is advancing open banking, fintech innovation, and policy support for credit to power economic growth.
As the global economy pivots towards sustainable solutions, LatAm’s strengths in agriculture, renewable energy, critical minerals, and human capital are becoming crucial assets. Financial institutions like Santander Bank have a longstanding regional presence and are bullish on LatAm’s prospects given its large population, resources, and growing innovation capabilities across multiple industries.
Surging Investment Activity
Fueled by robust macroeconomic trends, Latin America has emerged as a major destination for international investors and venture capitalists seeking high-growth opportunities. Venture capital investment in the region tripled from 2020 to 2021, reaching a record $19.5 billion driven by massive late-stage deals and growth investments. This surge was catalyzed by SoftBank’s $5 billion LatAm fund launch in 2018 which boosted the region’s appeal.
The COVID-19 pandemic further accelerated digital transformation, creating new avenues for entrepreneurs to leverage growing mobile access and reach underserved consumer segments. Industries like fintech, e-commerce, and proptech attracted over 40% of regional VC funding in 2020 due to low financial digitization levels.
Thriving Entrepreneurial Ecosystems
The emergence of prominent local VC firms headquartered across Brazil, Mexico, Chile, and Colombia like Kaszek and Monashees has strengthened LatAm’s entrepreneurial support networks. These homegrown investors provide early-stage capital and mentorship that are vital to nurturing LatAm startups through all growth phases.
Furthermore, governments are adopting initiatives to develop entrepreneurial ecosystems, attract foreign capital, and support innovation in crucial sectors with high potential for economic diversification; a prime example being the rise in female entrepreneurship, with women-led startups accounting for 26% of LatAm capital raised in 2021, up from only 13% in 2019.
The rise in foreign investment channeled into Latin American ventures has created a new generation of local high-net-worth individuals searching for places to invest their newly earned capital.
How to Approach LatAm and Foreign Investors: Key Considerations
Cultural and Regulatory Nuances
Latin America comprises several countries, each with its unique cultural norms, expectations for returns, regulations and political climate. This makes it a challenging market to navigate for foreign investors and international GPs. Thorough due diligence on a country’s investment policies, tax regimes, and political stability is crucial before committing capital.
Local expertise through partnerships or on-ground teams can provide invaluable insights into navigating bureaucratic labyrinths as well as understanding LatAm investors’ expectations for their private market investments. LatAm investors are accustomed to higher returns on their investments and GPs need to incorporate this expectation into their pitches.
Hedge Share Classes for Currency Risk
One major concern for LPs investing in emerging markets like Latin America is currency volatility risk that can wipe out gains over the long term. Even locally based LPs often hedge against their own currency’s volatility, preferring to store their wealth in stable currencies like USD or EUR.
Creating a hedge share class can help GPs address this by hedging the fund to protect investor returns from currency fluctuations while paying them back in their preferred currency. This offsets currency risk on returns and acts as an effective risk management strategy to gain LP confidence when allocating to the volatile LatAm markets. It allows GPs to attract offshore and LatAm investors alike by minimizing foreign exchange exposure risks through hedging.
Sectoral Opportunities and Growth
Renewables, fintech, infrastructure, and multilatinas (LatAm multinationals) are some of the most promising areas currently attracting private equity interest in the region. Investing in solar, wind farms and other clean energy projects is an exciting prospect given the renewables boom. The growth of multilatina companies with cross-border operations also presents opportunities for institutional investors to gain exposure to multiple LatAm markets through a single investment.
Structuring Private Equity Investments to Appeal to LatAm Investors
Leveraging Local Fund Structures
To attract Latin American institutional investors like pension funds, structuring private equity funds as domestic vehicles can be advantageous. Popular options include Brazil’s venture capital funds (FMIEEs) and private equity funds (FIPs), which offer tax benefits and appeal to local LPs. Chile and Colombia have also introduced reforms allowing pension funds to invest in local private equity funds.
Tax-Efficient Structuring
Careful tax structuring using holding companies in jurisdictions with tax treaties can reduce local taxes on dividends and exit gains when investing in LatAm. This allows more capital to be redeployed into new investments.
Sector Focus Areas
Targeting resilient sectors like infrastructure, technology, and life sciences can make funds more appealing to LatAm investors given the stability and growth potential, not to mention the positive impact on their own region’s growth and quality of life. For example, GIC has invested in digital banks and fintech to promote financial inclusion as well as in Brazil’s renewable energy space to improve environmental conditions.
Monitoring Private Market Investments
Whether they are foreign investors venturing into LatAm or local players that are well-versed in the idiosyncrasies of their home market, everyone needs a reliable method for monitoring private market investments. Navigating the complexities of incorporating these alternative asset classes into their portfolio requires not only expertise but also the right tools for monitoring and analysis. Offering these solutions is a big way for GPs to attract LatAm and foreign capital.
Conclusion
In summary, attracting LatAm investment will require international GPs to take a localized approach. By establishing a regional presence, developing local partnerships, customizing offerings, and emphasizing impact strategies, GPs can appeal to LPs’ growth priorities and values. Though competition is increasing, those taking the time to understand the distinct needs of this investor class and adapting accordingly, stand to benefit from the sizable capital and growth potential in the region. Success will require commitment, cultural awareness and a long-term orientation. With strategic preparation and execution, the door is open for mutually beneficial investment partnerships across Latin America.
