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The sectors driving private equity deals in Latin America will be those benefiting from continued growth of the region's middle classes, as well as infrastructure, Emerging Markets Private Equity Association (EMPEA) director of research Jennifer Choi told BNamericas.
"This will be particularly true for Brazil, where the planned infrastructure investments for the upcoming 2014 World Cup and the 2016 Olympics are estimated at US$20bn or more," she said.
According to EMPEA's 2011 survey, nearly two-thirds of investors are expecting Latin American funds to generate returns of 16% or better, with 28% predicting returns of 21% or more.
This compares with 54% of limited partnerships (LPs) expecting emerging market funds overall to deliver above 16%, and 23% expecting returns over 21%. However, investors have slightly higher expectations for Asian funds, the report shows.
BRAZIL, THE REGION'S JEWEL
About 13% of LPs surveyed plan to begin investing in Brazil in 2011, the highest percentage for all emerging countries, while 33% say they will increase their investments in the country within the next 2-3 years.
"Investors are looking at Brazil for a multitude of reasons - to diversify their portfolios beyond Asia, to tap into strong growth and favorable macroeconomic fundamentals and to take advantage of comparatively attractive valuations relative to China and India," Choi said.
Brazil is generally viewed as less competitive than Asian markets, and as having little or no political risk. Only 3% of the investors surveyed cited political risk as a deterrent to their investment in Brazil, compared with 24% pointing to political risk as an issue for China and 11% for India.
However, the appetite for Brazil is unlikely to come at the expense of investment in China and India as its size is still modest relative to the emerging Asian markets and most investors indicate that they feel that a robust Asia strategy is necessary for their portfolios, Choi said.
"The likelier scenario is that Brazil is capturing market share from developed markets or from other emerging markets such as Russia or Eastern Europe," she said.
US, JAPAN DOWNGRADES
S&P's recent downgrades on the US and Japanese sovereign debt rating outlook may add an extra push to private equity flows into Latin America, Choi said.
"This recent outlook shift on both countries is further impacting already bearish long-term views on the economic prospects for developed markets relative to emerging markets," she added.
"Any incremental nudge in investor appetite away from the US would be part of a larger secular shift away from developed economies formerly viewed as comparatively safe to those that will account for nearly all global economic growth for the foreseeable future."
However, a shift in private equity flows away from the relatively small Japanese market would have only marginal effects on the global industry.
"The larger question for investors is to what extent will the devastation in Japan [from March's earthquake and tsunami] have broader repercussions for the economies in Asia and beyond," Choi said.