Last week Secondaries Investor polled readers on which emerging market they thought would be the first to develop a mature private equity secondaries market and the majority of respondents – 55 percent – said Brazil.
Brazil beat out other emerging markets including Southeast Asia (Indonesia and Thailand), which received 30 percent of the votes, and the Andean region (Colombia and Peru), which received 10 percent of the votes. Sub-Saharan received the fewest number of votes – only 5 percent.
“There is no doubt the [Brazilian] market will grow as time passes and significant funds continue to be raised,” Duncan Littlejohn, a partner in StepStone Group’s São Paulo office told Secondaries Investor.
Private equity secondaries activity in Brazil has predominately been foreign LPs selling stakes in larger funds. Meanwhile, local LPs have not been sellers. The development banks want to be seen as supporting private equity, while the few pension funds that invest in the asset class ramp up their allocations.
The pension funds also typically have fewer than 20 funds in their portfolio and aren’t comfortable with the burden of multiple tail-end positions. Therefore, Brazil’s market is relatively small in terms of assets under management and the number of active general partners compared to the US and Europe, Littlejohn explained.
“It is also relatively immature, it was only recently that we began to see funds raised at over $1 billion. None of those could be considered tail-end funds at this point.”
However, StepStone wants to establish a closer presence to the market and strengthen market penetration and its capacity to react quickly to opportunities and its due diligence capabilities, which is why the firm opened the São Paulo office in April of this year, Littlejohn added.
“As a consequence of Latin American economic history over the last decade, combined with a cultural aversion to debt financing in the middle markets, the Latin American private equity industry has been growing and will continue to grow.”
Competition hasn’t been strong in the market, which is mostly covered by global specialised secondary funds and fund of funds. However, as the market grows, so will the number of players, Littlejohn said.
StepStone was joined this spring by Pantheon Ventures which opened an office in Bogotá to manage the firm’s primary, secondaries and co-investments for Brazil, Colombia, Chile, Mexico and Peru.