Peru’s Emerging Appetite for Secondary Private Equity: A Democratization of Investment
For years, private equity has been the domain of institutional investors and ultra-high-net-worth individuals. But a quiet revolution is underway in Peru, fueled by regulatory shifts, innovative financial products, and a growing wealth investor class. Franklin Templeton’s recent launch of a secondary private equity fund accessible through the Lima stock exchange – with a surprisingly low entry point of just $25,000 – signals a significant democratization of alternative investments, and a potential reshaping of the Peruvian investment landscape.
The Rise of Secondary Private Equity in Peru
Peruvian investors are increasingly looking beyond traditional stock market offerings, seeking diversification and higher returns. According to Sergio Guerrien, South America director & country manager of Franklin Templeton Investments, the appetite for private markets – including private equity, private debt, and real estate – is substantial. But it’s secondary private equity funds that are currently generating the most buzz.
What exactly is secondary private equity? Unlike directly investing in a company, secondaries allow investors to buy existing stakes in private equity funds that are already capitalizing and distributing profits. This often happens when original investors, like pension funds (AFPs) in Peru, need to offload assets due to regulatory constraints or portfolio rebalancing. As Guerrien explained, AFPs facing withdrawal pressures were forced to sell holdings to firms like Lexington, a major player in the secondary private equity space, often at a discount.
Tax Benefits and Market Access: The Nuam Advantage
Franklin Templeton’s strategic registration of the fund in Chile, leveraging an agreement with Peru, provides a significant tax advantage for Peruvian investors. Instead of the standard 30% income tax on profits, investors can benefit from a reduced rate of just 5%. This, coupled with access through the Nuam integrated stock market (Peru, Chile, and Colombia), makes the fund considerably more appealing.
However, it’s crucial to understand that this isn’t an ETF. While registered on the Lima stock exchange, it doesn’t trade daily like a typical exchange-traded fund. Instead, it offers scheduled entry and exit points with a monthly quoted price. This distinction is important for investors accustomed to the liquidity of ETFs.
Beyond Returns: The Democratization of Alternatives
The growing interest in private equity isn’t solely about higher returns. It’s about access. Historically, these types of investments were reserved for large institutions. Now, asset managers are creating vehicles that allow smaller investors to participate, starting with investments as low as $25,000. This “democratization of alternatives” is a game-changer for the Peruvian wealth investor.
Where is the Money Flowing? US Companies and Diverse Sectors
Currently, these private equity funds are primarily investing in companies based in the United States, spanning a variety of sectors. While the US market remains a key focus, Guerrien also highlighted opportunities in “cheap” sectors like healthcare within the US market. This suggests a strategic approach to diversification even within the broader US investment landscape.
What’s Next for Franklin Templeton and the Peruvian ETF Market?
Franklin Templeton has already expanded its ETF portfolio in Peru from 8 to 18 this year, and further expansion is on the horizon. However, the firm is cautiously optimistic, recognizing that the Peruvian ETF market is still relatively small. A key factor will be capturing sufficient investment flow to justify further product launches. Guerrien indicated a potential announcement regarding new ETF offerings next year.
The Broader Context: Political Stability and Foreign Investment
The increasing interest in alternative investments comes at a time when Peru is navigating political uncertainty. Recent reports indicate a decline in foreign investment due to political instability. However, Guerrien emphasized that investing in the US stock market, particularly in technology, remains a crucial component of a diversified portfolio. This suggests a strategic balance between domestic alternative investments and international exposure.
Frequently Asked Questions
Q: Is secondary private equity riskier than traditional investments?
A: While offering potential for higher returns, secondary private equity carries inherent risks associated with private equity investments, including illiquidity and the potential for loss of capital. However, investing in secondaries can mitigate some of these risks by providing access to more mature companies.
Q: What is the minimum investment amount for this Franklin Templeton fund?
A: The minimum investment amount is currently $25,000.
Q: How does the tax benefit work with the Chilean registration?
A: Due to an agreement between Peru and Chile, the fund is considered a domestic investment in both countries, allowing Peruvian investors to benefit from a reduced 5% income tax rate on profits instead of the standard 30%.
Q: Is this fund suitable for all investors?
A: This fund is best suited for sophisticated investors with a long-term investment horizon and a tolerance for illiquidity. It’s important to consult with a financial advisor to determine if this investment aligns with your individual financial goals and risk profile.
The emergence of accessible secondary private equity in Peru represents a significant shift in the investment landscape. As more investors seek diversification and higher returns, and as asset managers continue to innovate, we can expect to see further democratization of alternative investments, potentially reshaping the future of wealth management in the country. What are your predictions for the growth of private equity in Peru? Share your thoughts in the comments below!
