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Private Equity In Latin America « Back
Matt Atkins, October 2011
With an improving political and regulatory framework and a positive economic outlook, Latin America is fast-becoming an attractive environment for private equity investment. With over $17bn worth of private equity deals closed in 2010 – five times the previous year – and greater results expected for 2011, the future looks bright, though there are, of course, challenges to making successful investments. The diversity of the region makes market knowledge and an extensive local network key factors in dealmaking. For PE firms looking to enter the market, forewarned is forearmed.

Untapped potential

Decades of subdued growth, elevated inflation, and political instability have been reversed in recent years as far-reaching structural reforms have improved economic prosperity and generated sustained growth. GDP growth of 6.1 percent in 2010, year on year, saw the region post the second strongest growth rate globally, surpassed only by emerging Asia.

Goldman Sachs expects the region to generate GDP of $5.3 trillion in 2011. Furthermore, sound fiscal and monetary policies coupled with a strengthened regulatory framework have helped to boost sovereign credit ratings across the region.

It is of little surprise then that Latin America is fast becoming one of the most sought-after regions for private equity, as limited partners and general partners alike recognise its untapped potential. Following a slump during the hardest years of the financial crisis, investment activity surged. According to the Latin American Venture Capital Association (LAVCA), in 2010 PE investment in the region reached $7.2bn – an increase of 120 percent over 2009 and 57 percent over 2008. In a similar vein, the amount of capital generated from exits grew almost 100 percent in 2010 compared with 2009. In addition, transaction sizes have increased notably in deals conducted by PE groups.

This accelerating pace in investment is easily matched by fundraising activity. Fundraising by Latin America-focused PE funds reached a new record of $8.1bn in 2010, more than double the amount raised in 2009, according to LAVCA. PE groups have also achieved larger fund sizes. However, while fund managers are well capitalised and looking to make new investments, because asset prices have been driven up with so many bidders in the market, it may be a challenge to find attractive valuations.

In geographic terms, the deal environment is one of intense competition, particularly between the major players Brazil, Colombia, Mexico and Peru, while Argentina and El Salvador lag behind. That Brazil receives much of the attention from PE firms is no real surprise, seeing that the country has enjoyed an annual growth rate of 4.3 percent since 2003, and expects a rate of 5.8 percent for then next four years, according to the Brazilian Ministry of Finance. Brazil, then, is the powerhouse of the region. “It is noteworthy that most of the capital invested during 2009 and 2010 was in Brazil, which accounted for 72 percent of the total capital invested during that period,” explains Alfredo Alfaro, managing partner for Latin America at Advent International PE Advisors, S.C. “This was followed by Mexico and Colombia, which each accounted for 6 percent of the total funds invested in the region, according to the 2011 LAVCA Industry Data report. Activity in the region has tended to concentrate on growing industries such as healthcare, energy, technology and education. These sectors, combined, attracted more than 60 percent of investment dollars during 2010 and a similar percentage in 2009.” These areas present attractive investment opportunities due largely to strong internal demand; however the region’s growing economic prosperity and stability have also boosted demand in consumer-related products.

The Economic Commission for Latin America and the Caribbean (ECLAC) has observed that in the past 15 years, 56 million Latin Americans have joined the middle classes. Moreover, in 2010 more than 50 percent of the continent’s population was below the age of 30 and nearly 50 million people are estimated to join the economically active population by 2020.
The booming middle class has seen a surge in the consumption of non-essential goods, and placed great demand on the leisure industry. Demand for consumer-related products such as accommodation, cars, and watches is only expected to rise. A report by the global private market investment firm Partner’s Group notes that 52 percent of Brazil’s GDP is generated in consumer related sectors. However, just 14 percent of all public market equity is allocated to this sector, with an emphasis on volatile commodity companies and financials. This pattern is one seen across the region, and, in the absence of public equity, PE players are offered great exposure to the consumer sector, which they can capitalise upon for long-term growth. The region has already seen a great number of deals in retailing and restaurant chains, including investments in Fogo de Chao, Scarlat and Taco Holding. IT and online companies have also seen increased PE investment, where examples include a new round for Brazilian deal-a-day site Peixe Urbano, and software/BPO related investments in Certisign, Sascar Tecnologia and ALOG data centres. PE investments in the consumer sector look set to continue along with the region’s growth. Indeed, PE firms may well find it difficult to keep up with the region’s rate of expansion.

Attractive opportunities also exist in the infrastructure sector, where rapid economic growth is straining the capacity of roads, railways, ports and airports, making increased investment a priority. “There is a keen awareness within the public and private sector in Latin America of LAVCA,” says Cate Ambrose, president and executive director of the LAVCA. “However, despite abundant available capital for this sector there have been significant delays in seeing new projects realised. This is typically attributed to slow bureaucracy and regulatory processes. Nonetheless, there have been new deals realised in 2011, notably a major port container deal in Brazil by Advent International.” Investment into Brazil is made all the more urgent with the country due to host the FIFA World Cup in 2014 and the Summer Olympic Games in 2016.
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