OREANDA-NEWS. February 17, 2016. If during the past few years investments of private equity and venture capital funds has increased at a global level, why is it that Latin America is an incipient market? And, furthermore, why does it have such a diverse regional reality? 

During the past years, the amounts obtained by private equity and venture capital funds  (PE/VC) have shown a cyclical behavior. 

Investments at a global level reached a historical maximum of USD 565 trillion in 2013, while during the 2009-2011 period they were below USD 400 trillion. At the same time, the region received investments for USD 144 trillion. Brazil is the destination country for investments of venture capital funds, with 64 percent of the allocated amount, followed by Mexico, Colombia, Chile, and Peru. 

Under a scheme that includes conditions in the countries, investments of PE/VC  are allocated considering issues such as: 

  • Competitiveness of national economies 
  • Institutional, political, and regulatory context 
  • Characteristics of the financial system 
  • Investment opportunities and available entrepreneurships 

IESE Business School (2011, 2012, 2013) developed an attraction index for these funds, classifying the regions as: developed markers, incipient markets, and unattractive markets, according to the characteristics of each region. Thus, Latin America is identified as incipient market with respect to the world. 

Latin America attracts resources because it offers tax benefits for entrepreneurships, and shows an increasing economic activity. However, it faces a low quality of the available human resource, and is ranked last in the indicator of Rule of Law. 

Within the region, Chile is ranked as a developed market in the region. In this respect, it offers the best ranking in terms of tax issues to promote entrepreneurship. In addition, it has a solid institutional system, which is understood as a good indicator of the Rule of Law in the country. 

At the same time, Colombia, Mexico, Brazil, and Peru, appear as emerging markets showing favorable variables to attract investments, such as the size, volume, and liquidity of their credit markets. 

The region continues with Argentina, Uruguay, and Ecuador as incipient markets, where the strengths and challenges greatly differ. Argentina shows a superior growth of real activity and the third greatest score with respect to human capital. However, it faces difficulties with respect to the social context in terms of its institutional framework. Uruguay and Ecuador face the challenge of having smaller sized markets with fewer possibilities to grow in terms of domestic demand. 

At the bottom of the ranking are El Salvador, Paraguay, Guatemala, Dominican Republic, Nicaragua, and Venezuela, as unattractive markets. They lag in the first place due to their limitations in capital markets, but also due to a weak institutional infrastructure and limited human and social capacities.   

Current studies reveal that countries such as Colombia and Mexico are making efforts to improve their investment ecosystem, while at the same time they have the largest regional deficiencies in terms of the perception of corruption and Protection of Intellectual Property Rights.  The publication  "Private Equity y Venture Capital en Am?rica Latina" (Private Equity and Venture Capital in Latin America) makes an in-depth examination of the strengths and challenges at a global and regional level.