On the look-out for dynamic new portfolio opportunities? Then you should explore alternative investments in Latin America. CEO of SURA Investment Management Pablo Sprenger Rochette knows the landscape better than any
It is no surprise that the current situation in the international markets has brought not only great volatility to investment instruments, but also a clear decrease in the expected returns of different traditional assets, which were once the mainstay of medium- and long-term portfolios. The low rates currently seen across most of the world, along with negative growth and performance forecasts for companies big and small, has investors looking for sources of value with an acceptable risk/return combination, but with a yield that meets their financial purposes. And this is not an easy task. Covid-19, the imminent impact of Brexit and tensions in Europe, the outcome of the trade war between the US and China and, ultimately, the uncertainty of how the global economy will look post-pandemic, are all factors that make it more complicated to make a correct decision.
However, as we have seen in previous crises, challenges create opportunities. Opportunities that are not always immediately evident. Opportunities that require looking beyond what is familiar; that require experts to help us recognise and then take advantage of them.
One of those opportunities comes from a region that is often overlooked by international managers. A market with ideal demographics, consisting of many young people wanting to consume more products and needing better infrastructure, better housing, better offices and using more energy. More than 600 million people are the evidence that Latin America is that opportunity.
With long-term growth and greater short-term yields than almost any other region, Latin America offers investors a prime solution for enhancing their portfolios. And if we look a little closer, we will see that many of the opportunities come from the growth associated with the assets known as “alternatives”: from ambitious plans by local governments to develop and invest in infrastructure, from significant development of real estate markets, and from a growing space for private debt that has grown rapidly in recent months. We see this clearly in Mexico, Brazil, Colombia, Peru and Chile.
There are two characters used to spell “crisis” in Japanese, one means “danger”, and the other “opportunity”. The Japanese are renowned for their wisdom, and understand how changes brought about by a crisis can create opportunities for the future. In the case of alternative assets, these are part of the focus of Latin American countries, especially at a time when economic revival and the need to upgrade sectors such as infrastructure, real estate and energy are critical for development.
Today, there are many projects and deals that will appeal to investors, where they can benefit from an advantageous risk/return relation. The investment required in infrastructure alone in Latin America amounts to trillions of dollars, and there are already countries including Mexico, Brazil and Colombia with projects under development that exceed hundreds of billions of dollars.
We at SURA Investment Management believe there is a diverse range of trends and opportunities in Latin America’s alternative asset market that are definitely worth a closer look. I will now explore them.
The current health crisis has produced a general fall in prices, so it is to be expected that the new vintages of post-crisis funds will show superior returns, and this is something that investors will recognise and incorporate into their investment decisions.
It is very likely that several types of alternative private assets will prove most valuable in the context of this crisis, not only because of the intrinsic characteristics that make them resilient to this type of shock, but also because of the evaluation mechanisms that make them less volatile in price.
Once the crisis is over – or to help overcome it more quickly – governments will carry out fiscal reforms aimed at economic recovery that will probably bring fiscal stimulus and incentives for capital investment in infrastructure as a tool for structural economic recovery. These types of initiatives will generate a range of opportunities for asset classes, especially debt.
Looking at real estate, the current situation has the potential to generate investment opportunities (in distressed assets for example) creating interesting returns for existing platforms. Additionally, changes in societal behaviour and work dynamics will bring new opportunities in the sector.
Private debt is where we will probably see more opportunities and greater growth of this asset class. Global regulation continues to restrict the sources of bank capital, triggering the need for private financing, especially in the current situation. This can also be explained by the natural consolidation of commercial banking, which is more focused on larger companies, leading medium-sized companies to seek financing in private markets since they do not have access to the public market.
Regulatory changes in institutional investor investment regimes – which are already under discussion and are expected to accelerate given the current situation – will provide a boost to the alternative asset sector. It is worth noting against this backdrop that Latin American pension funds currently exceed $500bn in AUM.
Choose an expert guide
If you plan on travelling with your family to a new and unknown destination, you will want a reliable guide to show you around. Latin America has a combination of risk and volatility that makes it necessary to take advice from, and work closely with, an expert team. Opportunities are available for those who want to start the journey. Which is why an appropriate investment strategy will work best when developed by an asset management expert with local presence, who not only has the capacity to make good investment decisions, but also has first class processes and high standards of compliance and control.
Several Latin American managers are already working to put these solutions at the service of institutional investors. Knowledge of the Latin American market, proper risk management, operational security and very high standards of corporate governance, will make the difference when it comes to meeting global demand.
If you plan to explore Latin America’s alternative assets landscape, it’s time to start looking for a guide who will show you safely around the best places. So, as of this moment, welcome to our world. ν