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Fantastic four: will the Pacific Alliance boost LatAm’s investment industry?

Fantastic four: will the Pacific Alliance boost LatAm’s investment industry?

The Pacific Alliance trade bloc holds tremendous potential to drive investment into the region based on closer cooperation and stock market integration.

However, Latin American fund selectors have been disappointed by the pace of change, which they believe is needed to attract more foreign investment and create new regional opportunities.

Despite being formed in 2011, the alliance – made up of Chile, Peru, Colombia and Mexico – has only just begun to offer investment products as a bloc and remains stuck in the early stages of plans to ease restrictions on trade and investing in the region.

Once financial integration is achieved the Pacific Alliance hopes to offer 3,600 investment vehicles to regional and foreign investors.

Ambitious goals

According to Melvin Escudero, CEO and founder of Peruvian firm El Dorado Investments, the Pacific Alliance is intended to allow institutional investors, ranging from private pensions to insurance companies, to be able to operate in either Chile, Colombia, Mexico or Peru interchangeably.

‘If they could invest in fixed income, equities and alternative products considering the four countries as one, it would generate a very interesting regional cash flow,’ he said.

Pension funds in the bloc, which in 10 years are estimated to manage over $1.2 trillion, will be major beneficiaries if the planned integration is achieved.

Upon financial integration of the four markets, they would be able to invest using uniform local limits to generate greater returns.

Escudero is a member of the official business council that represents the private sector for the Pacific Alliance. He is hopeful that the common characteristics of these four countries – free-market, democratic and Hispanic –will set them apart from fellow Latin American countries such as Brazil, Argentina and Venezuela that have not enjoyed business-friendly environments over the past decade.

‘There’s strength in numbers. This project started as a way to better commerce, and now it’s about finding a place on an international platform.’

For Gregorio Velasco, the head of fixed income in Chile’s BCI Asset Management, the Pacific Alliance’s most interesting investment opportunity is the influx of foreign capital to Latin America, which is being invested in sophisticated funds.

‘In order to invest in real projects throughout Latin America, it is necessary to have an asset management industry that is much more developed,’ he said.

The discrepancies between Chile and Peru are notable in this case, and could prompt the latter to improve its own industry to be more competitive.

‘Right now, some markets are more developed than others. Chile has a strong banking system and a sophisticated range of institutional investors such as the AFPs. That is not the case in other countries,’ he said.

The products

In July, SURA Asset Management launched a fixed income fund targeted at Latin American clients who want to invest across the four Pacific Alliance countries.

It is currently domiciled in Chile, but will be made available in Mexico, Colombia and Peru in the next few months. This is the second fund the Colombian powerhouse has launched for the Pacific Alliance, following an equity fund launch in September 2015.

Juan Carlos Botero, the chief investment officer of SURA Investment Management, part of SURA Asset Management, believes the Pacific Alliance can offer a range of investment products, particularly in the retail and financial sectors, that are different from those found in other emerging markets.

‘These markets have been complying with the expectations of global investors due to their business-friendly politics, legal stability and other aspects that are fundamental for investment,’ he said.

In mid-September, the Chilean government announced the next fund for the alliance, a venture capital fund to finance small and mid-size companies throughout the region starting in 2017. The fund will be seeded with an initial $80 million and will be administered by the Inter-American Development Bank.

Long-term potential

There are still major challenges that the leaders of the four countries will have to resolve before the Pacific Alliance becomes a Latin American investment hub.

For Botero, one of the priorities is changing regulations to strengthen direct interregional investments, allowing projects to develop and stimulate capital markets.

‘There’s a series of adjustments that the Alliance needs to resolve to generate homogeneous conditions for investors, such as incentives and market infrastructure,’ he said.

Velasco sees the region’s varied political landscape as another hindrance in the bloc, saying each country has internal politics at play.

‘Political movements do have an influence. Even though these countries are more stable, it does not remove this issue,’ he said.

This article was originally published in the October issue of Citywire Americas. To sign up to receive our free magazine, follow this link.

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