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Latin America is attracting more private equity investments from institutions based both domestically and overseas, lured by a combination of favorable regulatory changes, demographic shifts and strong economic fundamentals, according to two reports published this month.

Institutional assets in Latin America are growing at one of the fastest rates on the planet at 20% compounded annually over the past three years, with aggregate pension assets having reached about $638 billion in Brazil, Mexico, Chile, Peru and Colombia, according to “Local Pension Capital in Latin America” published by the Emerging Markets Private Equity Association. So far, about $14.9 billion of that is invested in private equity strategies, but the amount could reach as high as $25 billion in the medium term, depending on such factors as expected regulatory changes and the market environment, several sources who are familiar with the EMPEA report said. Institutions such as pension funds and sovereign wealth funds elsewhere in the U.S., Europe and Asia also are looking to increase private equity exposures to emerging markets — including Latin America.

“Global (limited partners) are expressing a lot of interest in Latin America,” said Cate Ambrose, president and executive director of the Latin American Venture Capital Association based in New York. Ms. Ambrose, who is a contributor to the EMPEA report, said in a telephone interview that in the past six weeks alone, at least $5 billion was raised for private equity funds investing in Brazil — easily more than half the estimated $8 billion raised for all of Latin America in 2010.

“Brazil has leapfrogged China as the most attractive market for dealmaking (by general partners) in the near term in LPs’ eyes,” Jennifer Choi, director of research at EMPEA, Washington, wrote in an e-mail. According to a separate annual survey of LPs conducted by the EMPEA in association with private equity manager Coller Capital, 47% of the respondents said they are either launching or expanding private equity investments in Brazil.

Brazil — considered the center of private equity activity in Latin America — has attracted the most commitments recently and offers “compelling long-term opportunities,” according to a separate report titled “Latin America Private Equity: Reaching Out to Untapped Opportunities” published by Partners Group, a fund-of-funds manager based in Zug, Switzerland, with about €20 billion ($28 billion) in assets under management. (Partners recently opened an office in Sao Paulo in January.) However, the Brazilian private equity market is also “becoming more crowded, and valuations in the large-cap space are rising,” according to the report. The group is overweight Brazil, as well as Colombia and Chile.

Colombia also held strong potential for managers looking to invest in the country, according to sources who contributed to the report. “The case for private equity (in Colombia) is supported by strong deal flow … and attractive protection of minority shareholder rights,” ranking sixth highest in terms of investor protection in the World Bank’s “Doing Business Index,” surpassing both the U.S. and the U.K., according to the Partners Group report. Standard & Poor’s raised Colombia to investment-grade status in 2011.

Chile has the most established business environment in Latin America, according to the report, “combining a well-developed banking sector and capital markets with prudent regulations.” Elsewhere, investors are taking a wait-and-see approach to Peru following the June election won by Ollanta Humala, the nation’s new populist president, sources said. Mexico, which is the second-largest economy in Latin America behind Brazil, also held strong potential. However, “Mexico has a high correlation to the U.S.A., which ties the economy to the recovery of the advanced world,” according to the Partners Group report.

Capital sourced from pension funds in the region is also expected to increase “at double-digit rates for the foreseeable future,” said Julio F. Lastres, a guest contributor to the EMPEA report and senior managing director for Latin America at Darby Overseas Investments Ltd. based in Miami. Darby is the private equity subsidiary of Franklin Templeton with about $3 billion in assets under management globally, about a third of which is invested in Latin America. Darby has regional offices in Sao Paolo, Mexico City and Bogota.

Latin America’s “young and rapidly growing populations are fueling steady increases in pension fund assets under management,” according to the EMPEA report. “The growth in dry powder exceeds the supply of publicly traded investment opportunities, pushing them into alternative assets, including private equity.” For example, the $13.3 billion Administradora de Fondos de Pensiones Proteccion, Medellin, Colombia, is planning to commit between $2 billion and $3 billion to private equity over the next two years. The fund now has about $235 million invested in private equity strategies. Colombia’s pension funds, considered some of the most sophisticated private equity investors in Latin America, can invest up to 5% of the total assets in domestic private equity and another 5% in foreign private equity funds, according to the EMPEA report.

Brazilian pension funds, however, hold the most potential in terms of domestic sources of new commitments for private equity managers in the long term with about $300 billion in assets. While the funds are not allowed to invest in private equity funds denominated in foreign currencies, they can invest in funds managed by international fund managers through local currency investment vehicles. About 25% of the private capital raised in Brazil is sourced from domestic pension funds, according to the EMPEA report.

In addition to Partners Group, other international private equity houses that have opened offices in Latin America in the past several years include The Carlyle Group, HarbourVest Partners LLC and Capital Dynamics Inc., Ms. Ambrose wrote in the EMPEA report. Private equity investments in Latin America surged to $6.6 billion in 2010 compared with $1.3 billion the previous year, according to the EMPEA report. Brazil took the lead with $4.6 billion of 2010′s total, but investments in Latin America ex-Brazil still increased about fivefold to $2 billion.

“It’s in many ways part of the global emerging markets story,” said Darby’s Mr. Lastres. “There’s higher expected growth compared to the developed markets, again going back to the demographic story among other factors. I think there’s a lot of potential for private equity investing.”

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