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August 2010 
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Latin America Private Equity: In The Starting Blocks |
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Pauline Renaud, December 2009 |
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Although Latin America has been dragged down by the worldwide financial crisis and the prolonged recovery in most countries, it is still considered as a region that offers attractive opportunities for private equity investors. Once local countries start emerging from their current difficulties, and buyout firms find it easier to obtain capital, the investment outlook for Latin America should brighten considerably. This revival of optimism will also be boosted by a number of recent legal and political developments in the region. Only time will tell how soon a sustained uptick will take hold, but in this rapidly-changing landscape, investors should put themselves in the starting blocks and prepare to seize potential opportunities and maximise returns.
Optimism following a difficult year
The financial crisis has indisputably had impact on private equity activity in many Latin American countries. In 2007, there were 38 announced buyouts worth $4.87bn, according to Dealogic.
Last year this figure plummeted to 18 deals with a total value of $1.25bn. And a recovery does not seem likely before the end of 2009, as only $391m worth of financial sponsor deals were announced to the end of October this year. Notable transaction in 2009 include Linzor Capital Partners’ $35m purchase of a 60 percent stake in Corporación Santo Tomás, a Chilean university, and the $4m acquisition of Peruvian importer of beauty products IasaCorp by Aureos Capital.
Despite lower deal values, local experts remain positive. They point out that the number of deals has remained relatively stable since the collapse of Lehman Brothers more than a year ago. They are also looking at the drivers of future activity, and suggest that the ability of buyout firms to attract limited partner commitments focusing on the region remains strong. “Even though Latin America experienced a decline in the value of deals and exits, statistics show an increase in fundraisings,” says Alejandro D. Fiuza, a partner at Marval, O’Farrell & Mairal. Fundraising is expected to continue rising as investors’ aversion to risk diminishes in the months ahead. Many fund managers believe limited partners will start committing to new funds in the region by the end of the year.
Presently, the level of investment activity varies substantially from one country to another. Private equity firms prepared to compromise historical returns for less risk have been selecting their investment destinations carefully. Brazil has emerged as the top target. Buyout houses are encouraged by the attractive prospects Brazil has to offer. The country is eager for investment in infrastructure and real estate; two crucial sectors of a growing economy with a developing middle class. In addition, Brazil is set to host the football World Cup in 2014, as well as the summer Olympic Games in Rio de Janeiro two years later. In the meantime, the country is exploring its massive deep water oil discoveries, as well as developing certain sectors such as tourism and agribusiness. Brazil has also enjoyed a resurgence of its local capital markets, where more certainty and liquidity has created a platform for exit strategies that were not viable in the past.
Other countries, such as Chile, Colombia, Peru and Mexico, are also attracting potential investors. The Latin American market is now more globalised than before, and is easily accessible to PE firms from Europe, North America and Asia, according to Sergio J. Galvis, head of the Latin American practice at Sullivan & Cromwell LLP. “A more recent and equally important development, however, has been the rise of a stable middle class in countries like Mexico, Brazil and Colombia,” he says. “As a result, investments in companies servicing domestic markets also are becoming increasingly attractive as the domestic client base becomes more established.” In addition, as the region has opened up to foreign injections of capital, it has benefitted from the expertise brought by overseas dealmakers. It has also been forced to adapt to their general expectations for a suitable regulatory framework that supports their investment methods. “Throughout Latin America, the problem of implementing regulation that will work in practice has been resolved through what is, in effect, a trial and error process, with fund managers educating local regulators on the asset class,” explains Francisco Acuña, chairman and CEO of InTrust Global Investments, LLC. “The Latin American Venture Capital Association (LAVCA) has played an active role on this front, with board members engaging with regulators in the policy revision process,” he adds.
In some countries – notably Brazil and Mexico, but more recently Argentina, Colombia and Chile – fund managers have formed trade associations aimed at promoting local private equity and venture capital industries, as well as obtaining support for structural regulatory reform. This initiative has been particularly successful in Brazil. Furthermore, the country has accelerated some regulatory provisions that benefit shareholders and creditors. “Recent legislation that modernises the country’s bankruptcy laws has provided better protection for minority investors, as well as improved corporate governance practices. Such developments have been encouraged by the Novo Mercado – a listing segment of the Sao Paulo Stock Exchange, known as Bovespa – and the confirmation by the Supreme Court that foreign arbitral awards would be recognised by Brazil’s courts,” says Marcello Hallake, a partner at Thompson & Knight LLP. Brazil has also introduced favourable tax treatment for private equity investments, taking in capital gains, income tax and double taxation. Colombia has taken similar steps to Brazil in order to address and reform minority protections through corporate law, an essential aspect of any private equity transaction.
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