LATAM – Latin American money: Moving locations, where and why
Since the beginning of the global pandemic UHNW and HNW individuals have started to restructure their finances, relocating their investments. With a focus on Latin American countries, Citywealth interviewed experts from the sector to understand the reasons behind this phenomenon.
Since the beginning of the global pandemic UHNW and HNW individuals have started to restructure their finances, relocating their investments. With a focus on Latin American countries, Citywealth interviewed experts from the sector to understand the reasons behind this phenomenon, looking at restrictions and risks involved, but also focusing on the investments that are producing results.
Private wealth in Latin America
“Latin America has seen a throve of activity in the wealth management sector”, states Pedro Dias Ferreira, Managing Director at Goldman Sachs International (London). As Pedro points out, there has been a concrete increase in the number of investors, both local and from abroad. “The biggest countries in the region, namely Brazil, Mexico, Argentina and Colombia, have all seen a renewed focus from players from Switzerland, the US and a newly found impetus from the local players. If you look at Brazil, by far the biggest and wealthiest country in the region, local players have been particularly active in the affluent and in the HNW/UHNW segments.”
“In terms of trends, if we compare the upcoming generation with their parents or grandparents we can clearly see that younger generation are more oriented to countries other than their own”, comments Christina M. Baltz, Partner and Head of Latin America Team at Withers (New York). Christina adds: “For instance, they may have been educated in the US or England and then they may have got a job in one of the major capital markets and feel more comfortable living and investing in that realm. They are familiar with entrepreneurial wealth creation not necessarily in their country, while the older generation is more inclined to operate businesses onshore. There’s a lot of relocation of people, a lot of work we do is pre-immigration planning.”
The Covid19 pandemic was one of the reasons why Latin American countries struggled to sustain economic growth, but the future, despite uncertain, looks brighter, as underlined by Evelyn B. Sheehan, Partner at Kobre & Kim (Miami): “Latin America is slowly emerging from complicated years due to the coronavirus pandemic and much uncertainty remains on its short-to-medium-term outlook. The region has struggled to sustain economic growth for decades and has been consistently struck by political upheaval and external shocks (not the least of which is a global pandemic). More recently, successes from left-wing presidential candidates and increasingly dysfunctional politics have caused concern. Potential confiscation and/or nationalization efforts in some countries are certain to jeopardize long-term growth.”
Speaking to the Association for Private Capital Investment in Latin America (LAVCA) we can take into account a different prospective, that one of a non-profit membership organization which has some exposure to HNWIs and UHNWIs who are allocating capital to alternative investments. In terms of private capital, Angela Maria Tafur, Executive Director at LAVCA (New York), says that “2022 is on track to be the second largest year for private capital investment in Latin America, buoyed by increased dealmaking in digital infrastructure, renewable energy, distressed assets and early-stage startups. Capital deployed in Latin America in 1H 2022 reached USD15.9b across 636 transactions, exceeding full-year investment totals from prior to the pandemic.”
Speaking of trends, Pedro clarifies that “we have seen technology democratising the access to platforms that were until now exclusive for UHNW clients and on the other hand a fight for talent, in this case the bankers that have relationship management responsibilities. Both onshore and in the offshore centres (Miami first and foremost) there have been team moves and a strong investment in human capital by the players. These movements were the result of the wealth managers trying to shift their clients’ minds away from being inward focused to being open to the idea of offshoring and diversifying away from their home countries. Political instability and the desire to secure a legacy have driven this activity and the clients’ actions.”
Migration of money: where and why
Latin America is at the centre of this peculiar migration of money, but which Latin American countries have been most affected by this relocation of wealth? Evelyn thinks that “within Latin America, Uruguay and Paraguay have been two major Latin American countries to which investments have been flowing from ultra-high-net-worth and high-net-worth individuals. Notably, ultra-high-net-worth individuals have also been moving their wealth out of Latin America altogether, either offshore or to the United States and Europe (even if it exposes them to higher taxes). In the United States, Miami continues to be a particularly popular destination. This wealth is moving from a number of jurisdictions, but two of note from which ultra-high-net-worth individuals are moving both their investments and their own families are Brazil and Mexico.”
Brazil is an obvious choice also for Pedro, who stresses that “the pandemic has forced clients and their families to consider the options for wealth preservation and what tools/structures in a scale that had never happened until then. Our focus is primarily in the Brazilian market and here we have clearly witnessed an increase on client queries in relation to the offshore centres and the use of international law firms to advise on best structures for each of the possible situations. Clients have used this opportunity for, in many cases, expanding their business from the country and into other markets and jurisdictions, so they quickly identified European financial centres as a great option for the certainty in regards to the rule of law.”
“Latin American economy has a long history of ups and downs with clients always having some part of their investment portfolio offshore”, comments Christina. “It’s the changing nature of diversifying their portfolio. Clients in Argentina, Chile, Peru, Mexico have just increased how much they send offshore. There’s also been an acceleration of more professionalised family offices established in the United States to manage a large amount of liquid wealth in a more regulated environment and now I think people like the predictability, the safety that comes with highly regulated jurisdictions. People are realising that the security of predictability for their wealth by being in a highly regulated environment has its appeal.”
Understanding the phenomenon: main causes and successful investments
The global pandemic, political changes and taxation as some of the causes, diversification of jurisdictions and providers as one of the objectives.
“There is more globalisation, generally speaking”, comments Christina. “I think that the pandemic caused clients who normally don’t do this to face their mortality and focus on succession planning. Clients also assessed the global mobility they took for granted. Even when the US allowed non-US people to enter our borders, I still had clients who had to quarantine in Colombia or Mexico before they could enter and these are people who have homes here, so I think that the uncertainty that Covid created and the increasing unrest around the globe made people focus on where they wanted to live, which was directly connected with the theme of proximity to family who have relocated offshore and inevitably related to having their investments in a safe and stable jurisdiction.”
Also Pedro insists on the crucial role played by Covid19. “The realisation that a trans-national phenomenon like the COVID pandemic can quickly cause havoc to entire countries meant that clients started opting for diversification of jurisdictions and providers. This way, for this very specific population, who value mobility and safety, options will be available when disruption threatens the lives of their families.”
“The political pendulum is on the move once again in Latin America, prolonging uncertainty and potentially raising the tax burden on assets”, reveals Evelyn. “In the last 18 months, presidential candidates backing progressive economic policies have emerged victorious in several national elections, including Gustavo Petro, Pedro Castillo and Gabriel Boric in Colombia, Peru, and Chile, respectively, while Brazil’s government is posed to change hands if Jair Bolsonaro loses to Lula da Silva in October. In the face of this political change, it appears many ultra-high-net-worth individuals are looking to hold their assets in jurisdictions where taxation is likely to remain lower and the risk of expropriation or currency devaluation is less severe. We have also seen that clients are seeking to move their assets to jurisdictions where they face less risk of enforcement by their own national authorities, particularly where they perceive those in power to have political interests adverse to their own.
Global economic disruptions like rising inflation, interest rates and energy prices are also pushing emerging-market investors to keep their wealth in more secure markets, such as the United States or jurisdictions in Europe. This shift is notable for many ultra-high-net-worth Latin American individuals, because by holding their assets in the United States they expose themselves to greater risk of investigation and asset forfeiture by the U.S. Department of Justice if any allegations of misconduct arise, and of forfeiture by foreign governments seeking cooperation from U.S. authorities via mutual legal assistance requests.”
Angela adds: “The Latin American startup ecosystem is increasingly attracting local and global capital alike, and these investors are often co-investing together in the same deals. And while we have seen some pullback from global growth investors in the region as well as globally, we are still seeing record seed and early-stage activity, and we have heard from a number of investors that valuations are settling to a more sustainable place. As the Latin American startup ecosystem continues to mature, positive feedback loops are created in which successful entrepreneurs invest in other companies that give rise to new generations of successful entrepreneurs, and that’s certainly part of the dynamic here. Finally, rising interest in VC among HNWIs, UHNWIs, and FOs is also an indicator of growing appetite for riskier investment alternatives that may help investors to hedge against inflation and volatility in public markets. Successful companies are often founded during periods of economic downturns, so we are looking forward to seeing how the next year unfolds in terms of investment activity.”
Speaking of investments popular among Latin American UHNW individuals, Evelyn states: “I could note that Latin America UHNWIs are increasingly turning to investments in cryptocurrencies a form of an ‘offshore’ jurisdiction all their own, thinking that crypto-held assets are better insulated from volatile markets and safer from enforcement than traditional currencies. Investors across the region are turning to cryptocurrencies in exponentially greater numbers, with adoption projected to increase by 91% in Brazil, 208% in Chile, 235% in Argentina, and 345% in Mexico over the next year. Unfortunately, the recent ‘crypto winter’ has disabused much of the notion that crypto is a stable investment and they are starting to realize that governments are getting increasingly sophisticated with how they pursue taxation, enforcement and confiscation against digital assets.”
Main risks involved? Our experts believe that…
… for the firms operating in the region it is crucial to understand the markets and how they differ, from say, Europe or the US. The reality varies enormously within the region and from country to country. The risks are the same as with any other market we cover but with the added complication of having to resort to sources of information that are many times completely outdated for our KYC and SOW needs.
In terms of clients, the risks can be mitigated hopefully through quality and sound advice, provided by experts who clearly intend to become the trusted advisors for their clients. LatAm clients are, from experience, extremely loyal to their advisors but are at the same time extremely demanding and have high expectations from the firms they entrust their wealth to.
Pedro Dias Ferreira
… the major risks involved can be:
- Diminished domestic and foreign investments in Latin America.
- Increase of investments to Europe and the United States.
- Expropriation/nationalization, especially within economies such as Chile and Colombia.
- Potentially lower rates of return and higher rates of taxation, particularly in the United States.
- Greater risk of political persecutions and confiscation by incoming govts targeting outgoing party.
Evelyn B. Sheehan
… with more investment coming to the US from Latin American countries, those investors should take into account and plan for the risk of potential tax consequences that come with longer-term inbound investments. Compliance with complex US tax and reporting rules can be challenging. In the US you have an estate tax risk at 40%, if at your death you own US real estate or shares of a US company, no matter where you hold the shares, if for instance you own shares of Google in your Mexican account, you still have an estate tax risk at 40%. So tax compliance and not having a surprise tax bill are significant factors when you are investing.
Christina M. Baltz