Latin America Private Equity Update

Robert Wagstaff & Alexander P. Trueba

Private equity activity in Latin America remains strong with a reported 90 closed deals in the first half of 2012, a 38% increase from the same period the previous year, based on a recent report by the Latin American Venture Capital Association (LAVCA). While dollars invested stayed relatively the same at $2.7Bn, the lower average transaction size reveals increased focus on mid market deals.

Brazil continues to be a leader in attracting investments due to its size, infrastructure needs and growing economy. The country attracted 83% of total capital invested and 57% of the number of deals. In September of this year, H.I.G. Capital made its initial investment in the Brazilian market, acquiring Cel Lep Idiomas, an English language school chain. Carlyle, which has invested over $1.7 billion in Brazil since 2009, purchased a 60% stake in Brazilian furniture retailer Tok & Stok, as well as an 85% stake in Ri Happy, Brazil’s largest toy store chain.

Yet, large deal making might not be the future in Brazil. A burgeoning middle class and the proliferation of SMEs make for attractive prospects for private equity firms investing within the country. Sectors such as consumer goods and education stand to benefit from these trends.

A survey conducted by Coller Capital and LAVCA, which polled 105 international LPs investing in private equity funds in Latin America, showed that 38% of LPs planned to increase their level of investing, while another 49% expected to keep the their same level of investment in the region. The joint survey revealed that the top three reasons for investing in the region were: availability of deal flow, economic growth and political stability.

Mexico, a country that exhibits these well- desired characteristics, further enhances its investment case given favorable valuation metrics and fewer players chasing deals, especially versus more developed and crowded markets such as Brazil. These trends seem to be helping investors get comfortable with the Mexican headline risk that has been present for the last few years. Indeed, for the first half of the year, Mexican private equity firms invested $228 million compared to $84 million the same period the year before, an increase of 170%. Next to Brazil, Mexico received the highest amount of private equity investment for the period, representing 8% of invested capital and 10% of regional deal volume.

A testament to the investment opportunity in Mexico, other investment vehicles have started to take form, partially helped by recent regulation changes. New public REITs (called Fibras) have raised capital in the public markets to invest in real estate (Fibra Uno) and hospitality (fibraHotel), with a pipeline of other deals on the way, including a new vehicle from Macquirie Group to acquire industrial properties. Further, as the Mexican pension managers (afores) reduce their Mexican government debt holdings and move toward corporate investments, private equity will get its share of these investment dollars. In February 2009 only 0.2% of these pension fund investments were in alternative categories, which increased to 2.6% by February 2012.

Mexico and Brazil are clearly in investors’ crosshairs, but they are not alone. Colombia saw a dramatic increase of private equity investments in the first half of 2012 to $99 million. Additionally, The Carlyle Group recently launched a $125 million investment fund focused on Peru. A Grant Thornton survey of worldwide investors ranked Peru number two, Colombia number three and Mexico number eight in a list of new “high-growth” markets. In that same survey, 78% of executives expected to increase their investment activity in Latin America; while 22% said that their investment activity would remain the same. As firms gain experience working in the large economies of Brazil and Mexico, they will no doubt further engage other stable economies such as Colombia, Peru and Chile.

However, a bit of caution should be taken by recent capital raising and development trends. In the first half of 2012, $1.9Bn was raised by private equity firms investing in Latin America, a 60% decline from the same period in 2011. While the drop-off is not a surprise given it follows record- breaking fundraising of $10.3Bn and $8.1Bn in 2011 and 2010 and is likely due to a built up of dry powder, the decline comes on the heals of slowing GDP growth inBrazil. Thecountryhaddisappointing Q3 results and is now expected to grow 1.5% for the full year, down from 2.7% in 2011 and 7.5% in 2010. With Brazil accounting for such a large share of the industry in the region, at the very least, these are two trends investors need to track closely .

At the end of the day, given the significant amount of capital raised in recent years, the future of the asset class in the region will depend largely on the returns these new funds generate. Stable political environments, combined with favorable macroeconomic trends and the rise of a middle class, will all be the base for potential positive returns for these funds, as well as additional investing activity within Latin America.


Sources: LAVCA, Wall Street Journal, Reuters, Financial Times, E Financial News, Bloomberg