LPs are pulling back on commitments to Latin America because of perceived tax and regulatory conditions, according to a recent survey from Coller Capital and the Latin American Private Equity and Venture Capital Association (LAVCA).
The survey results reflect a relative shift in LPs’ perceptions about Latin America, rather than an actual worsening in the tax and regulatory environment, according to legal sources. In the study, approximately 37 percent of surveyed LPs called the tax and regulatory environment “unattractive” or “very unattractive” compared to 33 percent of respondents in both 2012 and 2013. The survey gathered answers from 131 international and Latin America-based LPs.
The negative outlook is having a tangible effect on fundraising in the region which was down 88 percent in H1 2014 compared to H1 2013, marking the worst decline of any region, according to PEI’s Research and Analytics team. This year, only $240 million was collected for Latin American-focused funds in contrast to $2.06 billion that was raised from eight funds in H1 2013.
Investors were more likely to ignore tax and regulation hurdles during the commodities boom, but now that the economic fundamentals in the region have become less frothy, the complex tax and regulatory systems are coming to the forefront of LPs’ concerns, noted Debevoise & Plimpton tax partner Peter Furci in an interview with pfm.
“When economic growth and gains are less easy to be had, the role that regulatory and tax friction plays in the economy gets more attention,” said Furci. “LPs can be very impressionistic, and might evaluate factors in a way that is less than fully scientific.” The survey results contradict the fact that Mexico, for example, has introduced reforms that plan to ease the burden on private equity firms investing in energy and infrastructure.
“The key takeaway from this survey for GPs is that you need to make a specific case about why, notwithstanding high regulatory and tax costs, you think you can deliver returns, either because of your differentiated knowledge or ability to find opportunities where returns are attractive,” added Furci.