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Latin American pension funds investing in private equity

by Tom Carr

  • 28 Feb 2012
  • PE

With the economic downturn continuing to affect private equity fundraising, many GPs are having to look further afield when attempting to secure LP commitments. Furthermore factors such as regulation like Solvency II and the Volker Rule, look likely to constrain the future private equity investments of certain North American and European institutional investors. However with regulation loosening and appetite for private equity improving Latin American pension funds could become an increasingly important source of capital for fund managers on the road.

Preqin tracks 80 Latin American LPs, 64 of which are based in South America and the remaining 16  are based in Central America. The largest proportion (64%) of Latin American investors is private sector pension funds. The average current allocation to private equity of Latin American pension funds is 3.7% of total assets, which is significantly below the average target allocation of Latin American pension funds, which is 7.3%.

Regulation governing private equity investments in Latin America differs from one country to the next. Below is a brief summary of regulation affecting the pension funds of certain Latin American countries investing in private equity.

  • Mexico – Mexican Afores (pension funds) can only invest in domestic private equity and cannot allocate capital to international private equity funds.
  • Brazil – Pension funds can allocate up to 20% of their total assets to structured vehicles, such as private equity funds, that have been approved by the National Monetary Council (Conselho Monetário Nacional). If they are investing in international funds this cap is lowered to 10%.
  • Chile – Pension funds can allocate up to 2.5% of total assets to private equity and can invest in both local and international private equity funds.
  • Colombia – Since 2008, pension funds can allocate up to 5% of total asset to domestic private equity and a further 5% to international private equity.
  • Peru – Pension funds can allocate up to 2.5% of total assets to alternative investments, which includes investments in private equity.
  • Argentina – All private pension fund assets were nationalised by the government in 2008, therefore Argentinean pension assets are not invested in private equity.

With regulation governing South American pension funds investing in private equity becoming less strict it is likely LPs in the region will be active investors over the coming years as they look to build up their portfolio of private equity investments. 

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