I recently returned from a week-long class trip to Peru and so, as I’ve done in the past when I’ve visited other countries, I thought I’d share my thoughts about the private equity opportunity there. Aside from the requisite (and spectacular) visits to Machu Picchu and Lake Titicaca, our group spent a lot of time in the capital city of Lima, as well as a lot of time traveling via bus and making stops throughout the Peruvian countryside. The wide scope of our trip gave me a really good feel for the country. Right away, what struck me was that the overall growth in Peru has not yet trickled down to the more rural and localized areas of the country. Despite Peru’s strong GDP growth of nearly 9% in 2010 and a projected 7% in 2011, there is a stark difference between life in Lima and smaller cities and villages in the countryside.
While a similar story can be painted for other emerging countries, I thought in Peru the differences were larger and that there maybe was an overconcentration of growth and modernization in one metro area (Lima). As opposed to a lot of other emerging countries, people in rural areas did not at all seemed concerned with growth or with the outside world – the main thing that mattered to them was maintaining their way of life (It’s important to note that around 45% of Peru’s population is indigenous). It was a type of legit indifference that made me realize no matter what kind of shocks the worldwide macroeconomic environment undergoes, a significant portion of the Peruvian population would see no impact and might even be oblivious. I didn’t sense complacency though; rather it was that people seemed to take greater pride in social change as opposed to economic growth (even if economic growth was a byproduct). I realized that this is actually a good characteristic – it means that the economy is insulated. I also felt some of the same characteristics regarding change vs. growth in Lima and other larger cities which have larger foreign populations. Insulation, on many levels, is attractive for emerging market private equity investors because it actually reduces risk and volatility while providing another line of diversification.
Peru has been a net exporter for over a decade, driven in large part by a vast set of natural resources. At first glance, natural resources might seem like a good way for PE firms to invest in Peru. However, I think that because of the insulation of the country’s growth, sectors addressing broader consumption such as banking, retail, construction and manufacturing might be more attractive. Further, apparently there have been tax issues with mining in the country and of course even if all is well, investing in natural resources and exporting them means investment returns would be more correlated to the worldwide macroeconomic environment.
Private equity in Peru is still in its nascence. Private equity penetration, as measured by PE/VC investment relative to GDP, was a mere 0.05% in 2011, compared to 0.27% for neighboring Brazil. I expect that most investment that has occurred thus far has been in the form of growth equity, not venture or buyouts. While the private equity industry is very young, I think it has be ability to grow very fast. Earlier this year, Peruvian private equity leader Nexus Group launched its first international institutional fund. The fund raised $320 million (well in excess of its $250 million target), to make “control or co-control” investments in “opportunities provided by the Peruvian macroeconomic landscape.” Industry focus thus far seems to be on consumer goods, services, finance, retail and education. Larger firms are also entering Peru. Carlyle, for example, recently announced plans to open an office in Lima via joint venture. What’s clear about this move (as well as with Nexus) is that local expertise is a prerequisite for private equity success in Peru, just as it is in just about every other emerging economy.
Overall, I was more impressed with the potential of Peru than I expected. The country possesses better infrastructure than many of its Latin American counterparts; there seems to be more political stability than other countries; the population is diverse and globally aware; accounting, legal and corporate governance systems seem to be fairly adequate; and while private equity-specifics such as tax treatment fund formation aren’t yet up to par, the country’s attractive growth profile is already attracting investors. While there are issues to be addressed, I fully expect Peru to emerge as one of the leading destinations of private capital in Latin America – the growth story and potential for uncorrelated returns are too important to ignore.