Central and South America a market with huge potential, but it is not without its difficulties. Alejandro Rodriguez, Partner at Kandeo Fund, joins us for an exclusive interview to reveal more on the market trends and opportunities in the new and emerging Americas.
The majority of respondents to a recent Preqin survey said Europe and North America offer the best opportunities for private debt investment over the coming 12 months. Asia and emerging markets ranked a distant third (16% each), followed by Australasia (2%), and the Middle East and Latin America (1% each). Given your firm’s focus on Central and South America, what are your thoughts on the future for private debt investing in this region?
The private credit market, as we know it today, is relatively new. It has become an important source of capital for companies, particularly after the 2008 financial crisis. Because of the huge disruption the crisis caused in the US and Europe, as well as the size and depth of those markets, we have seen most private credit allocations go to these developed economies.
Initially, that allocation made sense, given the extent of the opportunity, including the availability of capital from institutional investors in these regions, and the readiness of teams with the skill set to execute on the strategy. However, private credit in emerging markets presents an appealing risk-reward proposition to institutional investors around the world, and I believe these regions will play a bigger role in global allocations in the future.
What changes are needed for private debt investing to gain further traction in these regions? Can or should these markets have a meaningful place in a global private debt allocation?
The opportunity created by the supply and demand imbalance, especially in the middle market, has existed for decades in many emerging markets. In addition, we have seen changes in a number of countries that have created the right environment for the flourishing of a credit industry. Strengthening of institutions and legal frameworks, clear and consistent fiscal and monetary policies, and reforms after crisis, are some of the ongoing changes in the countries in which we invest - Mexico, Peru and Colombia. These changes will increasingly provide investing opportunities for private credit managers.
Institutional investors in some emerging markets have already started to play a role in terms of allocations to private credit both in their local markets and globally. This participation, primarily by pension funds and insurance companies, is helping develop the ecosystem for a healthy local and regional private credit market. In addition, opportunity has attracted talent. Increasingly, experienced managers are focusing on, and investing in, private credit in emerging markets, allowing local and global investors to act on the opportunity.
In short, we believe emerging markets that have created the right environment can and should have a more meaningful share of global private credit allocations.
The same Preqin survey found direct lending will present the best investment opportunities over the coming year, followed by distressed debt, mezzanine and special situations. Do you agree with these sentiments? Does this vary meaningfully by market or region? Which strategies do you think are most attractive in emerging markets?
It’s difficult to generalize since each market/country presents a different set of dynamics and foundations that create investment opportunities. Having said that, we are seeing the best risk/reward in Latin America, in direct lending and mezzanine.
Many middle market companies that can’t access the public capital markets, or not for the type of financing they need, don’t have very sophisticated capital structures. A private credit solution through a “custom made” direct lending product that adjusts to companies’ cash flows, or mezzanine financing considered “non-dilutive equity” to fund a growth initiative, could be very appealing in these markets.
When it comes to private debt strategies, how much of a concern are geopolitical factors, particularly in emerging markets? Are there regions you believe investors should avoid for the time being?
I can’t think of an investment strategy, whether in developed or emerging markets, that would be immune to geopolitical risk. That said, I believe private markets in general have the benefit of patience and more flexible structures to cope with this type of risk.