Into Latin America, But Away from Brazil!

Private equity and VC investors have been pouring capital into Brazil as investment dollars going to Latin America rose more than six-fold over the prior year, to $17.2 billion in 2010, according to Venture Equity Latin America, sister publication to peHUB.com. But as investors seek to ready even more capital for deployment, it seems as if a Brazilian bubble is building, and it could be time to direct capital into other regions that also have sustainable growth potential.

As Brazil’s economy expands, its currency has been subject to inflation, as the real has appreciated about 50% in two years’ time, driving up the price of assets for PE and VC backers and spurring Goldman Sachs to call it the most overvalued in the world. It is worth noting that, along with a substantial increase in the volume of capital poured into Brazilian deals, PE capital has been increasingly spent in Latin American nations including Peru, Colombia, Panama and Chile, where the middle class is also expected to expand.

However, Brazil remains Latin America’s largest economy, and is largely responsible for helping to drive billions into the broader region. Brazil’s developing infrastructure (in part to host the FIFA World Cup in 2014 and Olympics two years after) diversified economy, and population—growing to about 200 million—is presenting investors with something they lack in other regions: a rise in discretionary income. They took notice.

On top of what they spent last year, buyout funds raised $8.1 billion for Latin America-focused funds in 2010, according to the Latin American Venture Capital Association, including Advent International, which received $1.65 billion in commitments. Now, according to data provider Prequin, it is expected that this will double in 2011 alone, to more than $16 billion. It is a pretty good time for long-term investors in Brazil to make exits to foreign buyers, it would seem.

Already, the biggest names in U.S. private equity have deployed manpower and capital to Latin America, including Blackstone, Carlyle, Apax Partners, First Reserve, and, most recently, 3i. They will compete with regional firms Axxon Group, GP Investments and BR Partners. According to the Venture Equity Latin America report, investors most frequently targeted deals in financial services, energy and food production and distribution during 2010.

Still, optimism found in Brazil is relatively new. The Venture Equity Latin America study noted that before the $17.2 billion deal bonanza unfolded across Latin America in 2010, investment in the region had trended downward from 2007 through 2009. It is also worth noting, that as investors express trepidation about rising prices in Brazil, still others worry too much capital is flooding into Asia, another hot spot for private equity.

Private equity investors will not only be betting that Brazil’s burgeoning middle class and growing economy will give a lift to their assets if they are still willing to invest there—they’ll also essentially be making a bet on deflation. Sure, heading down to Rio to catch a board meeting is virtually guaranteed to turn up a better time than going to Hangzhou or Bangalore—but investors still need to be cautious they’re not diving head-long into another bubble.

Venture Equity Latin America is a Thomson Reuters publication. To learn more, head here.