Private equity in Latin America – outlook for 2012



FW moderates an online discussion covering private equity in Latin America between José Setti Diaz at Demarest e Almeida Advogados, Daniel O. Serventi at Ernst & Young LLP, and Christopher L. Mann at Sullivan & Cromwell LLP.

FW: How would you describe recent deal activity involving private equity firms in Latin America?

Diaz: Deal activity in the initial months of 2012 presents a less active scenario compared to 2011. We need to recognise that 2011, especially the beginning of the year, was very active, but clearly the deal flow has presented a reduction. One explanation might be that PE firms are being more cautious on their acquisitions due to price sensibility. In addition, the Brazilian capital markets have moved down strongly this year and the IPO exit does not look as attractive to PE firms as in previous months.

Serventi: The number of PE deals remained invariable during 2011 compared to 2010, with 72 announced investments. However, aggregate deal value declined 78 percent. This decrease is led by an absence of large deals during the year – higher than US$400m, and mostly oil & gas oriented – related to a temporary shift in focus to fund-raising in 2011, in addition to an absence of large assets coming to market during the year. During 2011 Latin America represented 22 percent of the total private equity capital raised for emerging markets. Brazil continues to be the main target in the region, with 68 percent of deals volume and 59 percent of the region’s total value. The movement of global funds into the Latin America region has been a continuous trend in recent years involving both local and global active investors. 

Mann: The private equity market in Latin America continues to be active, particularly in Brazil. These transactions are generally financed primarily through equity investments and, as a result, investor activity focuses on middle market companies that can generate long-term value through enhanced management and improving sales driven by growth in middle-class demand. However, as capital continues to be deployed in Brazil and foreign investment funds increasingly seek a footprint there, competition for middle-market opportunities and the resulting sustained high asset values in Brazil will continue to lead investors to explore growing markets in Colombia, Chile and Peru, including through co-investments similar to General Atlantic’s co-investment in Suramericana’s purchase of ING assets in Colombia. 

FW: Which key sectors are these PE firms targeting, and why?

Serventi: The main sectors targeted by PE firms investments during 2011 were retail and wholesale, asset management and real estate, contributing to 52 percent of total PE deal value in Latin America in that year. Other sectors that have also received significant investments during previous years have been oil and gas, banking, capital markets, technology and consumer products. There are great prospects for PE investments in the retail and wholesale sector, healthcare, education and consumer products, emphasising a theme prevalent through the emerging markets, as PE firms seek opportunities amid rapidly growing middle classes and increased consumption. This pattern is similarly witnessed in the other BRIC nations.

Mann: Latin America’s vast natural resources will continue to attract investors seeking to capitalise on global demand. Continued investment in natural resources also will require the development of related infrastructure and logistics projects in order to transport raw or partially processed goods from remote regions to international ports. Infrastructure investments in Brazil will continue to be driven to a significant extent by international trends, including developments in the Chinese and European economies, although the upcoming World Cup and Olympics in Brazil, as well as the development of Brazil’s offshore oilfields, will also drive such investments. We expect Colombia to see an increase in activity as it seeks to fund an estimated US$100bn in infrastructure investments over the next decade. Particularly in Brazil, growth in demand for local goods and services is increasingly driven not only by foreign demand for natural resources but also by demand for consumer products and services by the burgeoning middle class. As consumer spending rises, domestic, consumer-oriented businesses, particularly in the retail, IT and industrial sectors, will see continued growth. 

Diaz: Any sectors that can capture the growth of the Brazilian middle class, especially those that are consumption driven, are attracting the attention of PE firms.

FW: Are you seeing attractive opportunities for investment in Latin America’s developing infrastructure?

Diaz: Yes, but it is very hard to combine the mindset of PE firms to the needs and the requirements for developing infrastructure. The only exception to this would relate to the Brazilian Pension Funds which are more driven by long term investments that fit best for infrastructure. 

Serventi: Generally, strategic players see most of the large infrastructure opportunities in Latin America. However, PE investors will probably focus on companies servicing the infrastructure sector, such as equipment producers and service providers. Additionally, foreign investors are closely eyeing the infrastructure sector in Brazil in anticipation of two of world’s biggest sporting events – the FIFA World Cup in 2014, and the 2016 Olympics to be held in Rio de Janeiro. It’s important to highlight that there are significant investment opportunities in developing infrastructure in Latin America, considering that there is a big gap between infrastructure in comparison to its needs.

FW: What incentives and policies have Latin American governments introduced to actively welcome foreign private equity into the country?

Mann: As an effort to boost private equity activity, each of Colombia, Brazil and Peru has undertaken pension fund reforms that make additional funds available for private equity investment. Access to capital markets in Brazil also has increased and we expect this to result in an increase in domestic IPOs in the coming years as private equity firms seek to exit investments. It will be interesting to see what effect the new political leadership in Peru will have on foreign investments. Initial signs are encouraging, but investors may seek additional assurances before committing large amounts of capital to fund local investments. 

Serventi: PE investors in Latin America had support of public institutions providing financial resources to attract additional investments and introducing supporting regulations. The incentives for foreign investors range from special tax considerations for priority sectors, agreements to avoid double taxation and fiscal stability regulation, modifications to corporate governance codes and legal stability agreements, to name a few. However, there are still significant challenges in Brazil, including the need to strengthen its legal framework for fund formation, lower its restrictions on institutional investors, decrease the tax burden of international investors and develop the capital markets to facilitate the exits through IPO’s.

Diaz: There is nothing in particular that I would mention or highlight. On the contrary, certain recent tax and regulatory measures taken by the Brazilian government have actually presented certain challenges to PE investment, mainly on the fund formation side and reinvestment in invested companies.

FW: What general advice would you give to PE firms on how to structure and negotiate buyouts in Latin America, with a view to minimising risk and maximising future value?

Serventi: It is observed in deals involving Latin American investments, that PE firms prefer to take lower risks, engaging in joint-ventures or investing in minority stakes. Another common practice observed is that PE firms prefer to back founders, entrepreneurs and family owners executing plans already in place and getting involved in decision making process through CFO placement. The strategy mostly taken by firms in these cases has been focused on supporting companies’ revenue growth in order to strengthen EBITDAs as the main way of generating value. This contrasts to PE fims’ strategies in other regions that has been focused in ‘cleaning the house’ through cost improvements. The objective has been to improve core businesses and prepare and strengthen management to ready companies for exit. The success of this has been evidenced, when measuring higher returns of PE firms when exiting Latin American companies in comparison with US and European investments. 

Diaz: In general, I would advise firms to take care of the potential labour and tax risks that may be presented by the target companies with a very careful due diligence. At the same time, a phased acquisition, or an acquisition with a some sort of earn-out that reinforces the capacity of the target to deliver the results expected by the investors, have became important tools to help PE firms face risks as well as add value to their acquisitions. 

Mann: As with any private equity investment, corporate governance and shareholder rights continue to be important issues to consider in any potential transaction. These rights are important from a management perspective, but investors should also evaluate their investment timeline in order to negotiate effective exit rights. Initial public offerings have not been used widely in Latin America outside of Brazil, but we expect domestic capital market activity to continue to increase as countries use regulatory levers to promote liquidity. 

FW: What tax considerations do PE firms need to make when conducting operations and executing buyouts in Latin America? Have there been any recent regulatory changes in this area?

Diaz: As indicated above, there have been recent changes to our taxation affecting foreign loans and investment in the country. Most of these measures derive from Brazil’s intention to better manage the over-valuation of Brazil’s currency. Since Brazil’s currency has gone through a devaluation of approximately 20 percent in the last two months, in case the exchange maintains that path, we would not expect additional changes in that area.

Serventi: The PE fund and the acquisition process need to be well structured to take possible tax advantages on capital gain upon exit. Additionally, a further consideration should also be given to the possibility of utilising goodwill paid on acquisition and mind possible tax consequences for sellers. Throughout Latin America, PE firms usually intend to use a ‘buy to sell’ approach. In such scenarios, their general tax strategies focus on leverage transactions, eventual goodwill amortisation, tax leakages on future dividend distributions, and tax impact on exit strategies. As a general definition, it should be noted that Latin American countries have different tax regimes being the most complex the Brazilian one. Consequently, Private Equities should carefully understand tax rules and implications in each particular country given that general acquisition structure´s rationale used in a particular country may not necessarily be appropriate or efficient in another one.

FW: What trends do you expect to see in private equity activity through 2012, and beyond?

Mann: We expect the private equity market to continue to be active in 2012. In light of its size and development potential, Brazil will continue to lead the way, but we do anticipate that investments will increase outside Brazil as investors seek to gain access to more investment opportunities, particularly in light of very high asset values in Brazil. We also may see growth in the number of co-investment transactions that will allow small private equity funds to participate in larger deals that would normally be out of reach. 

Serventi: Private equity activity in Latin America is expected to be reinforced in the following months and years, due to the region’s sustained economic growth and the fact that there are still some large global funds that have not entered the Latin American market yet, creating a great opportunity for the region. In fact, surveys revealed that 65 percent of investors expect to initiate or expand their private equity investment projects in the region. Despite growing projections, PE investors will remain conscientious and cautious in the coming year, as focus has directed to global economic concerns derived from the US slowdown, Europe’s economic uncertainty and China’s potential deceleration. Additionally, the region has its own domestic issues that require close monitoring such as decelerating growth, inflation and currency volatility. Going forward, small and mid-market PE deals should continue with a major share of the region’s activity, as Latin American companies increasingly work with PE firms for start-up funding, growth capital, and expansion/consolidation needs. However, large PE investments are anticipated in resource-intensive sectors. Exits from for the funds who invested in the last five-six years are also expected.

Diaz: We actually believe that this recent devaluation of the Brazil’s currency may actually put Brazilian asset prices in a more satisfactory position and may actually serve as an impulse to future deal flow and activity by foreign funded PEs. 


José Setti Diaz is a senior partner in the corporate department at Demarest e Almeida Advogados. He practices primarily in the area of mergers and acquisitions involving private equity funds. Mr Diaz has a deep understanding of emerging economy peculiarities and is a legal adviser on a regular basis to a large number of private funds and multinational companies. He advises clients in trade remedy proceedings, foreign investments and regulatory cases. He can be contacted on +55 11 3356 1549 or by email:

Daniel O. Serventi is the South American Transactions Advisory Services leader of Ernst& Young LLP. Mr. Serventi has significant experience in financial advisory services, mergers & acquisitions and financial due diligence, with expertise in utilities, oil & gas companies and insurance/pension fund companies, among others. He can be contacted on +54 11 4318 1593 or by email:

Christopher L. Mann is a partner at Sullivan & Cromwell LLP. He has over 20 years of experience in a wide variety of corporate and financing matters, including private equity, mergers and acquisitions, joint ventures, strategic finance, project development and finance, infrastructure, capital markets and restructuring matters. He has acted frequently for private equity funds and hedge funds, sponsor and lending clients in equity and debt investments in oil and gas, mining, infrastructure, power, telecommunications, financial and other sectors in the United States, Latin America, Southern Africa and elsewhere. Mr. Mann can be contacted on +1 212 558 4625 or by email:

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José Setti Diaz

Demarest e Almeida Advogados


Daniel O. Serventi

Ernst & Young LLP


Christopher L. Mann

Sullivan & Cromwell LLP

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