Private equity investment in Latin America

October 2018  |  FEATURE  |  PRIVATE EQUITY

Financier Worldwide Magazine

October 2018 Issue

2017 was a notable year for the private equity (PE) industry in Latin America. According to the Latin American Private Equity and Venture Capital Association (LAVCA), 424 transactions were completed, a 20 percent year-on-year increase. Deal value reached $8.4bn, the second highest amount in LAVCA records.

Brazil and Mexico were the most targeted countries in 2017, with $4.1bn, or 49 percent of Latin America-focused transactions taking place in Brazil – 170 deals. Mexico was the second most targeted region with $1.7bn across 111 transactions.

Though presidential elections in Mexico, Brazil and Colombia are expected to impact investment and fundraising in 2018, leading investors to be slightly more cautious, the region still seems primed for greater PE investment, particularly given the upturn in national economies. Argentina and Brazil recently emerged from recession and are performing well, while Peru and Chile have also recorded relatively strong growth.

Recent past

Following years of relative underachievement, Latin America saw annual economic growth of 1.9 percent in 2017 – one of the strongest performances in recent years. Brazil is expected to grow around 3 percent in 2018 as efforts by the government to lower inflation allowed the country’s central bank to start cutting interest rates in 2017.

With pro-business reforms underway in Brazil, agile firms will be able to prosper. Traditional investment spaces in the region, including infrastructure and real estate, are relatively safe bets. Equally, emerging industries, such as FinTech and RegTech, will attract attention and investment moving forward.

Local and international investors are increasingly interested in opportunities in the infrastructure space, for example. Improved economic conditions driven by lower interest rates, reforms and an increase in efforts by local governments to privatise certain industries have created opportunities. North American pension funds have been particularly active. Canada’s Public Sector Pension Investment Board has entered into an investment with Mexican airport operator Grupo Aeroportuario del Sureste, announcing plans to acquire a 50 percent stake in airport operator Aerostar from US fund Oaktree in a $430m deal. Institutional investor La Caisse de dépôt et placement du Québec has also been active in the region.

Furthermore, industries such as foodservice, online retail, technology and healthcare have also proved attractive to investors. Latin America has seen a number of major technology firms establish a presence in recent years, including Amazon, Google, Facebook, Netflix, Spotify and Uber. New international investors are also branching out in the region – 25 global investors made their first investments in Latin America in 2017, according to the LAVCA. The region appears set to continue to benefit from PE and VC investment.

Deals and deal drivers

In Brazil, two deals which caught the eye were the acquisition of an 80 percent stake in Walmart Brazil by Advent International and the investment by Kaszek Ventures in Cartó The Walmart deal is significant for the Brazilian retail industry, impacting competition.

Renewable energy has offered investment opportunities to PE investors. 2017 saw 12 PE deals worth $3.92bn. As a result, the industry was ranked the highest by value last year, accounting for five of the 10 largest PE deals in the region.

Interest and investment in Latin America is undoubtedly increasing, but what is driving this interest and how can countries in the region continue to benefit?

“Latin American countries have taken steps to make the investment environment more hospitable,” says Luiz Filipe Aranha, a partner at KLA - Koury Lopes Advogados. “Such steps are motivated by how PE can positively affect the economy, lead to job creation and promote overall growth of the region. Particularly in relation to Brazil, the regulatory framework is favourable since the entrance and exit of money into the country is easy and not restricted, requiring just a simple registration with the Central Bank.”

However, it is important to note that Latin America is far from homogenous, and though some countries offer rich investment opportunities, there are still weaknesses. “Most of the region’s countries still suffer from unstable economic and political conditions,” notes Mr Filipe. “Nevertheless, Latin America continues to make important progress in fomenting an attractive regulatory environment for PE investment, especially in sectors such as healthcare, infrastructure and technology, which were the focus of most of the investments seen in the first quarter of 2018. In addition, the new anticorruption legal framework, influenced by the recent developments in Brazil, including ‘Operation Car Wash’, has demonstrated that countries in the region are strengthening their institutions, favouring the consolidation of a reliable legal environment for PE investments.”

Following years of relative underachievement, Latin America saw annual economic growth of 1.9 percent in 2017 – one of the strongest performances in recent years.

In Argentina, PE funds have been particularly active, according to Fernando S. Zoppi, a partner at Martínez de Hoz & Rueda, due to the political change which occurred in the country in December 2015. “After more than 10 years of government policies that discouraged investments, including through a strong government intervention in the economy, exchange controls, restrictions on the import and export of goods and services, price controls, freezing of tariffs and so on, as well as extremely high levels of corruption, the Kirchner Administration was finally replaced by a pro-business administration led by president Macri,” says Mr Zoppi. “The new administration put an end to the legal dispute surrounding Argentina’s sovereign debt, which, in turn, made it possible for Argentina and Argentine companies to regain access to the international capital markets. The administration also eliminated exchange controls and reduced certain taxes, for example those taxes affecting mining and agricultural activities. It also created several incentives for private investments in the energy sector, mainly on renewable energy and shale oil & gas in the Vaca Muerta play in the Argentine Patagonia, in an effort to – coupled with the update of the up-to-then frozen utility tariffs – reduce government subsidies and existing fiscal deficit.”

New entrants into Latin American countries have become commonplace. Chile’s Administradoras de Fondos de Pensiones (AFPs) has approved new PE funds run by US firms Hamilton Lane, Lexington Partners, Partners Group and Triton Partners over the last 12 months. Additionally, Chile has enacted investment-friendly anti-corruption legislation which criminalises money laundering, facilitation payments and the active and passive bribery of public officials and foreign officials. It also places mandatory asset disclosure requirements on public officials.

In Mexico, new anti-corruption measures have been launched which are likely to help drive additional PE investment. A change in rules allowing Mexican pension funds to make allocations of up to 10 percent of their assets into PE has enabled the formation of new firms and promoted growth.


Globally, record-breaking levels of capital were secured by general partners last year. Apollo Investment Fund IX, for example, raised the largest PE fund ever, reaching almost $25bn in seven months. Fundraising activity has increased in 2018, despite a slow start to the year, compared to same period in 2017.

For its part, Latin America also benefitted from the wave of committed capital. “Interest in the region recovered in the first weeks of Q3 2018, after the uncertainty perceived about the election cycles in Mexico, Brazil and Colombia,” explains Julio César Martínez, an investment manager at Fondo de Fondos. “Medium size funds – around $500m – have dominated the Latin American market in recent years, and 2018 has been no exception. The institutional investors that committed capital during the first half of the year have looked for a diversified investment thesis and preferred regional funds instead of local ones. In Mexico, some funds could not get the original capital target and supported the fundraising activity through the issuance of CKDs – a public instrument that the Mexican pension funds use to invest in alternative assets.”

The prospects for future fundraising, while positive, may be darkened by one or two clouds on the horizon. “One of the risks, derived from the fruitful fundraising season in 2017, is the increase in valuations in stabilised industries with moderate expectations of growth, like real estate or retail,” says Mr Martínez. “Moreover, some of the transactions rely entirely on value creation through financial structures than the quality of fundamentals or macroeconomics. That being said, the disciplined funds during due diligence and price negotiations are the most valued in a frame with restrictions on international trade, normalisation of interest rates in developed countries, and increasing productivity through tech investments.”

Globally, fundraising does appear to be slowing down. According to Preqin, the first quarter of 2018 saw 246 funds close, raising a total $88bn – the first time in six quarters that the figure raised failed to exceed $100bn.

Looking ahead

As a result of widespread reforms, an improving political landscape and greater economic performance, Latin America is a much more attractive proposition for PE investors. And there is considerable potential for further growth. “It is a region with many opportunities related to infrastructure, including, crucially, in areas such as clean energy, education, healthcare and technology,” explains Mr Filipe. “Furthermore, in Brazil, such sectors are still largely dispersed and definitely there is room for consolidation. Latin America offers a strong entrepreneurial environment that is prime for PE capital investments and valuations are now attractive to foreign buyers, due to the currency devaluation vis-a-vis the dollar.”

However, political uncertainty in some of the region’s biggest economies, notably Brazil, may disrupt investment activity. Changes to economic policy may also cause issues. “There are big opportunities in regulation that new governments may consider, favouring the participation of private investors in attractive opportunities together with public investment,” says Mr Martínez. “In Mexico, a comprehensive tax structure for the industry is necessary to incentivise institutional investors’ commitments in PE and VC. Moreover, this may bring equality between different kinds of investors versus pension funds, which have a better tax framework to invest in alternative assets.”

In Argentina, PE activity lacks a specific regulatory framework, including special tax incentives, according to Mr Zoppi. “While some believe that these types of incentives are key to favourable PE investments, the improvement of existing general rules and structural reforms may be more helpful at this stage, as happened during the 1990s – the last time Argentina underwent important legislative and structural reforms – when the country led all rankings of foreign and PE investments in the region.”

Latin America could be on the brink of a new golden age of PE investment. Much depends on Brazil, given its economic dominance in the region. Having once been heralded as one of the emerging ‘BRIC’ economies in the 2000s, the country’s economic difficulties have been well documented. But with the economy on the road to recovery, Brazil is no longer beholden to commodity exports to generate growth and attract investors. A number of different sectors, from industrial production to retail sales, are driving economic growth. With the region’s biggest economies stabilising and entering a new period of prosperity, there will be myriad opportunities for investors to capitalise.

© Financier Worldwide


Richard Summerfield

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