While the long-term trends for the growth of private equity investment into Latin America have remained positive, 2016 witnessed slower private equity activity in Latin America as the regional economy faced various political and economic headwinds. Regional output declined 1.4 per cent during 2016 as political developments affecting Brazil, Venezuela and Mexico, continuing weakness of certain key commodity prices and some softness in international trade activity and consumer confidence took their toll on regional economic activity. Perhaps as a result, reports indicated that private equity investments also decreased in 2016 when compared to 2015. Fundraising, following overall trends in emerging markets, also declined in 2016. Not surprisingly, the exit environment for private equity investors remains a particular challenge in many Latin American countries, variously affected by some combination of depreciated currencies, tepid equity markets and political uncertainty. In response to these concerns, some private equity firms have responded by extending the life of their funds and delaying exits until a more favourable time. As we have noted in years past, for these and other reasons trade sales remained the most favoured exit route for private equity investors in the region.
Despite these challenges, both global and regional private equity funds remained committed to investing in Latin America. A number of industry surveys have indicated a strong and continuing interest among limited partners in pursuing opportunities focused on the region. In particular, comparatively stable economic and political environments, coupled with attractive business opportunities, has driven funds, both small and large, to increase operations and investments in Peru, Chile, Colombia and - more recently - Argentina.
The continued high levels of private equity interest, in spite of shrinking economic output in much of the region, suggest that private equity players have confidence in their ability to navigate the region's challenges to unlock its many undervalued investment opportunities (especially for those making investments in dollars or euros). Investments in infrastructure-related and natural resource industries led investor interest in 2016. However, sectors that have been historically underdeveloped and that are less dependent on the economic performance of the respective country's trade partners — including telecommunications, financial services, consumer or retail products, healthcare and education, among others — continue to attract considerable investor interest. The growth opportunities of these newer sectors as well as important opportunities in the industries more traditionally attracting foreign investment (eg, energy and infrastructure) will likely offer many opportunities to private equity investors in the coming year.
In the current environment of emerging opportunities and challenges, international legal services providers will continue to add value by contributing their expertise in transaction structuring, implementing innovative solutions, and analysing overall industry trends. Their deep experience in cross-border debt financing and leveraged buyouts that have been mainstays of private equity in more developed markets may also prove essential, as private equity investments in the region are likely to increasingly rely on these types of financing and continue to trend of innovating both equity and debt financing structures that are employed throughout the region. As always, effective partnerships with experienced and sophisticated local counsel in the region also remain critical in helping navigate the regulatory environment and developing tailored solutions to country-specific legal issues. Strong partnerships between international and local legal counsel are uniquely positioned to help private equity investors effectively navigate the region's current challenges in order to maximise investment opportunities and local entrepreneurs' potential.