Private Equity Market Opportunities

An Expert's View about Banking, Finance and Insurance in Peru

Last updated: 31 Oct 2011

Market Description
Private Equity (PE) operates in an organized way (institutionally) formally in Peru since 2002, when AC Capitales started a real estate investment fund. Peru„s economic stability and sustained growth during the last years created a favorable atmosphere for PE development. Many of the investment fund companies started as recently as 2006 to 2008 and activity is growing fast. The PE market in Peru is in its initial stages of development. This means opportunity for bigger growth and return rates than in more mature markets like Chile or Colombia. The investment level is very small, marginal for the rest of the world. The minimum amounts to enter in a fund (tickets) in Peru are small as well. Investors recognize the potential and need of capitalization by small-to-medium enterprises (SMEs) in Peru. They consider SMEs with an annual revenue of US$ 10 to US$100 million the most attractive. In Peru, PE activity has been a source of diversification for pension funds? investments (AFPs by its Spanish acronym for: Administradoras de Fondos de Pensiones). The total value of the four pension funds? Assets Under Management (AUM) is roughly US$ 30 billion, increasing on average between 15 to 20 percent each year. Approximately 3.5 percent of their AUM is in PE. Other investors such as bank?s mutual funds and insurance companies invest very small amounts in PE, if at all.

Legal Framework
The Superintendence of the Securities Market (SMV: Superintendencia del Mercado de Valores) and the Superintendence of Banking, Insurance, and Pension Funds (SBS: Superintendencia de Banca, Seguros y AFP) are the market regulators.

The Securities Market Law (Legislative Decree 861-1996) promotes the orderly development of the securities market, its transparency and adequate protection to investors. It differentiates public and private offerings since the former is done through media, and the latter does not use media and have a minimum entry ticket of about US$ 140,000, for qualified institutional buyers.

The PE market is organized through Investment Fund Management Companies (SAFI: Sociedad Administradora de Fondos de Inversion), and Managing Company (“Sociedad Gestora”).

The SMV authorizes the organization and operation of SAFIs. A SAFI can have one or more public funds, which should be registered with the SMV, and one or more private funds, which are not registered at the SMV but require a filing with the SBS. A SAFI takes a minimum of six months to organize. Public offerings, unlike private ones, are exempt from income tax on capital gains.

A “Sociedad Gestora” can be organized in two or three weeks but has more regulatory requirements from the SBS and can only make private offerings, not public ones. A “Sociedad Gestora” needs to have AUM of no less than US$ 100 million to be eligible for receiving investments from the AFPs.

Recipients of AFP investments need to be registered with the SBS and approved by it. To register with the SBS the firm does not need to be referred by an AFP but, in most cases this is the common practice. In the case of public funds, registration takes about three months for routine cases, but could be more if the SBS is not familiar with the investment vehicle or when the SBS has questions.

Some of the regulatory limitations that pension funds face are that they can put no more than 5 % of their AUM in one local fund, and no more than 3 % of the AUM in alternative investments abroad. Alternative investments are restricted to private equity and contracts to trade at a specified future time at a price agreed today (forwards), since pension funds currently are not allowed to invest in other derivatives.

The legal limit for AFP?s investments abroad is 50 % and this is regulated by the Central Bank. However, the Central Bank only authorizes up to 30 %, and this %age is not expected to increase in the medium term.

An AFP investment will be considered as local if at least 51 % of the assets of the general partner (GP) receiving the investment is local, or if the GP, being foreign, invests locally 100 % of the fund.

Pending Issues
As of December 31, 2011, SAFIs that do not have a public fund must change their status to “Sociedad Gestora”, and so would lose their registration with the SMV to make public offerings. It is expected that the SMV will extend the deadline for SAFIs to organize a public fund.
The top income tax bracket in Peru is 30 %. Income tax on capital gains is 5 % for the sale of securities through the Lima Stock Exchange (BVL: Bolsa de Valores de Lima), and 30 % for securities traded over the counter (outside the BVL). Public offerings are exempt from the income tax on capital gains. The AFPs are also exempt from the income tax on capital gains. Non-domiciled companies pay 5 %. When a SAFI sells its participation in a private company, it would be subject to a 30 % income tax on capital gains, and to a 5 % tax if the shares are sold in the BVL. There is a tax incentive for the fund to list the company before selling.

The SBS is reviewing its approval process, looking to set some parameters to be used by the AFPs. As a result, the AFPs would be able to decide on investments without the SBS prior approval.

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Posted: 31 October 2011, last updated 31 October 2011