Peru: Funds reshaping the market

Bruno Amiel

The increased activity of investment funds in the Peruvian market during the last years has led to a rapid reshaping of the Peruvian corporate and M&A market. This increased activity came about both through the creation of new local investment funds and the heighted presence of foreign investment funds. Such investment funds have become major players particularly in private equity transactions, real estate and financing operations, where transactions are no longer limited to the acquisition of controlling stakes in large scale companies. They also now include acquisitions of controlling or minority participations in profitable small and medium companies operating in different sectors by investors pooling their funds through such investment funds.

The increased activity was boosted by the Peruvian government enacting regulations to further local and foreign investment, executing investment treaties, simplifying administrative procedures for obtaining concessions, permits, and authorisations. This allowed the investment funds to further increase their investments in small and medium size companies operating in the different sectors. The consequent growth of such companies now requires a review of previously non-existent corporate governance regulations to protect new investors and maximise returns.

However, last year's heightened investment will now be affected by the fact that the existing government is about to enter its last year. The Peruvian presidential campaign is soon to begin, and the political backdrop will inform future investment decisions.

There are several key legal issues that are likely to be taken into account by investors, which are not likely to change. First, the increased authority of the Peruvian Tax Authority to assess transactions based on their true economic nature (currently suspended) and the fact that, under certain circumstances, capital gains taxes may apply to the indirect transfer of local investments and that the local operating company may be jointly liable for their payment. Second, the pro-worker approach of the Peruvian labour courts, which has become gravitational in the assessment and execution of potential corporate and M&A transactions in existing small and medium companies. Third, the legal rights of local communities and their political and social force in case of investments affecting their area of influence, including the procedures to be complied with, rights to be observed, and costs and time to be incurred. And fourth, although no merger control regulations are in force except in the electric markets, certain law projects have been analysed and their potential impact should not be overlooked.

Bruno Amiel

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