Real Estate Limited Partneships In Latin America (Mexico)

Real Estate Limited Partnerships in Latin America

NOV, 2009Real Estate Investing

Real Estate investment for Limited Partners (LPs) in Latin America can really be seen as a tale of two countries, namely Mexico and Brazil, and recent experiences there offer important contrasts between each country’s different market practices leading up to the global recession, some of the ways in which local participants responded differently, and, ultimately, lessons that the global recession may offer Limited Partners for future investing strategies in Latin America.

For LPs, the contrasts between Brazil and Mexico couldn’t be sharper, but identifying the appropriate strategy going forward may not be as clear. There seems to be a general consensus today that investors want to avoid Mexico but remain committed to investing in Brazil. One can’t blame them. This situation, in fact, is nearly a mirror image of the situation ten years ago when investors, beleaguered by years of boom and bust in Brazil, concentrated almost exclusively on Mexico as it emerged from the 1994 peso crisis. What we now know, of course, is that investors who were early to the game in Brazil have been rewarded handsomely, while experiences in Mexico are mixed at best.

During the last fund-raising cycle, most investment strategies that came to market were structured as country Funds. The emergence of country Funds, headed by dedicated local management teams, introduced a new era of competition for LP capital, which means LPs now have more options when analyzing investment choices.

This question of how LPs invest going forward will become more prominent as the reality sets in that foreign-based managers are really not set up to deal directly with day-to-day issues on the ground, and one lesson investors may take from the current crisis is that being closer to the investment itself is generally a good thing. This reality check is pushing LPs to look at their investment vehicle choices, their ability to defend their interests, fees they are paying as well as the overall investment strategy.

Issues facing LP investors are further complicated if the Fund is co-mingled. For LPs who had the ability and foresight to demand a seat at the table, either de facto or through negotiations, having more say in the matter when investments turn south turns out to be a pretty good thing. The lesson that LPs need to plan for a downturn when executing agreements is a prominent theme throughout the industry.

Over the last five years, Mexico and Brazil each benefited from a tremendous influx of equity capital, and excessive liquidity permitted global managers to tap into leverage that further increased demand for risk assets.....

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