By Charina Amunategui
As investors consider their near-term investment goals and long-term view for the coming decade, they may want to assess some of the globe’s more disregarded corners to better pinpoint return opportunities. This is especially true in our increasingly uncertain market: volatility factors are once again gathering steam with coronavirus breeding instability and Brexit unfolding. Latin America offers a solution.
Latin America, sometimes overlooked by money managers, can provide a wealth of opportunities to investors committed to impacting their bottom line through long-term growth and high short-term yields. Much of Latin America’s growth comes from the alternatives space – countries like Brazil are experiencing sustained success in infrastructure, while private debt in the real estate sector is yielding strong returns in Mexico – and talented local money managers are realising the region’s potential for offshore investors.
Beyond making the correct investment decision, though, it is important to work with a fund servicing partner who will help best navigate the Latin American market. Your fund servicer should be a partner in decision-making; they should be experienced and entrenched, familiar with the region’s unique volatility and risk factors, and alert to budding opportunities across its many countries. With the right servicer and investment strategy, Latin America offers investors a long runway of returns in an emerging market.
Finding Alternative Opportunities
Alternatives are in focus in Latin America as countries look to build up and modernise their infrastructure, real estate and energy systems. As a result there is heavy deal activity, presenting the well-researched investor with worthwhile opportunities.
In Brazil, President Jair Bolsonaro has made infrastructure a priority. His government has greatly expanded their role in supporting investment with a particular eye on boosting foreign cash inflows. In fact, they’ve outlined a plan to increase infrastructure investment by $65 billion (£50 billion) per year by 2022. This effort is aided in large part by the Investment Partnership Program (Programa de Parcerias de Investimentos or PPI), which oversees priority infrastructure projects. And the PPI has already found success, with approximately $58 billion in projects currently being deployed – much of this cash coming from international capital markets. PPI is continuing their efforts through airport, railway, and shipping port auctions to foreign buyers.
To further increase foreign investor participation, Brazil also hopes to change the primary financing methods of major traditional energy, renewable energy, and transportation projects. In the past, over 50% of projects in each sector were financed by the National Development Bank (BNDES). But now Brazil would like the BNDES to act as a facilitator for international commercial banks, private banks and fund financing, further emphasising their support for developed market investment.
Mexico also provides an interesting consideration for investment in Latin America – and large European and US institutions are taking notice. For example, Credit Suisse expanded their Latin American operations in 2018 through the Mexico Credit Opportunities Trust II, which supplies long-term credit to mid-sized enterprises, and in 2019, BlackRock and KKR pursued significant private equity fundraising campaigns with Mexican pensions funds.
Mexico is receiving attention from the private equity world thanks to enticing entry multiples and a long runway for GDP growth, and high interest rates provide attractive compensation for lenders. In addition, private debt issued to real estate builders of commercial properties in Mexico City has attracted robust institutional investor interest and generated meaningful returns. Mexico has the chance to shake off a recent economic slump, and certain alternatives vehicles stand to profit.
Using the Right Partner
The correct investment strategy is best empowered by a capable fund service provider – particularly in markets with high barrier to entry, such as those found in Latin America. And, while a service provider might have a complete and trustworthy practice in the US or Europe, this does not mean they will have the competency and experience to navigate the Latin American market. The region remains one where reputation and roots are valued, where a local strategy and vision are necessary to make the best investments, and where sophisticated services can offer investors meaningfully higher returns. As an investor in the region, you need a fund service provider who will equip you with the tools to succeed.
Many Latin American countries come with idiosyncratic risk and compliance factors that require fund servicer expertise. For example, you’d want your servicer to regularly and thoroughly conduct AML/KYC checks (anti-money laundering measures) in accordance with the offshore jurisdictions where your funds are domiciled. Additionally, given the unusual economic history of the region, a service provider with long-standing roots in Latin America will be better positioned to synthesise and contextualise new information and to evaluate the performance of an asset. A longstanding commitment to the region also implies the ability to weather a downturn.
In Latin America, a service provider must be a true specialist. They need to understand the local and international regulations relevant to various types of fund structures, offshore fund service requirements, and more. This background will help you trade with a greater variety of sophisticated instruments and capture upside unavailable through less-entrenched servicers.
In many cases, investors have regarded the region warily for good reason: too many Latin American countries carry a history of political instability, fiscal irresponsibility, corruption and crime that has whipsawed asset prices routinely over the decades. But the impact of these risks is largely dependent on the leadership in place, and countries like Mexico and Brazil both tout business-friendly, tough-on-corruption presidents.
With shrinking opportunities for robust returns in the larger developed markets and growing geopolitical turmoil on the horizon, more investors are turning to Latin America. Alternative investments, whether in infrastructure, private debt, or private equity, have shown promise in multiple countries across the region. Partnering with expert service providers will help navigate the local landscape which can provide increased operational scale and efficiencies.