Private equity investments in Argentina
September 2016 | SPECIAL REPORT: PRIVATE EQUITY
Financier Worldwide Magazine
Over the last 12 years, the level of private equity (PE) investment in Argentina has decreased significantly, thanks to the 2001 economic crisis and as a result of the uncertainty surrounding the economic policy implemented by the Kirchner administration since 2003 (not to mention unprecedented levels of corruption). In contrast, over the same period of time, many other countries in the region (such as Brazil, Mexico, Colombia, Peru and Chile) have experienced an influx of foreign direct investment, including PE investment.
The 2015 presidential elections marked a remarkable milestone for Argentina. A new administration led by right-centrist Mauricio Macri took office with the clear intent of shifting policy toward a pro-business model.
The political and economic changes since December 2015 have triggered a renewed interest among foreign and local investors looking for opportunities in Argentina. The new administration, led by Mr Macri, quickly addressed some of the most urgent economic and legal issues the prior administration created or failed to address in order to restore confidence in the business community and attract investment. Before completing six months in office, Mr Macri put an end to more than 12 years of legal dispute with the holders of Argentine sovereign debt in default, put Argentina back into the international capital markets, eliminated taxes on certain exports and eliminated several foreign exchange restrictions (including on the transfer of dividends to foreign parent companies), among others.
While deal flow is expected to increase significantly over the next few months, there has already been a clear renewed interest in Argentinean assets – particularly among PE firms, which have been exploring opportunities in Argentina for the past several months. Many of these firms have already formed Argentina-specific funds and closed several investments in the country.
In particular, there has been a strong appetite for renewable energy, an area incentivised by new laws. A recovery in oil prices should also trigger a rejuvenated interest in oil & gas assets, including the now postponed shale oil and shale gas projects in Vaca Muerta. The agribusiness sector also presents opportunities; commodities price have started recovering in the last few months and, in addition, the Macri administration amended the existing law blocking the purchase of land by non-Argentine investors. The telecommunications and media sector has also experienced increased activity in the last few months, as well as the logistics sector.
Types of PE transactions in Argentina
In recent years, PE funds have been taking equity interests (rather than debt interests) in closely held portfolio companies. The equity interest is usually acquired through corporate acquisitions of ordinary shares of corporations or quotas in a limited liability company. To a lesser degree, PE transactions involve the acquisition of a minority interest.
In our experience, joint ventures or acquisitions through preferred stock (acciones preferidas) are less common. Debt interest, on the other hand, is currently being used, to a lesser degree (due to some foreign exchange regulations), although some transactions use mezzanine debt and convertible debt.
Although leveraged buyouts (LBOs) were frequent during the 1990s, today, these types of transactions are rarely seen for a number of reasons, including the current foreign exchange markets, limited access to credit and capital markets, certain legal uncertainties identified as a result of the LBOs that took place during the 1990s, etc.
Foreign PE funds (including foreign funds managed by Argentine nationals) are the most active players. While these funds typically come from the US (and to a much smaller degree, from Europe), in recent years there has been an increase in the number of regional PE funds (mainly from Brazil and Chile) investing in local companies. There are some operating Argentine PE funds; however, their ability to raise funds locally has decreased in recent years.
Main features of PE funds in Argentina
Local PE funds are small to medium-sized in comparison with foreign funds. Moreover, funds operating in Argentina have traditionally raised funds outside the country, although some fundraising is done through local family offices and high net-worth individuals or local investment companies.
PE funds lack a specific regulatory framework in Argentina. Therefore, activities of funds are governed by the general rules governing companies and M&A. Moreover, no specific investment vehicles or other structures are in place to incentivise or facilitate private equity investments.
Local PE funds are generally structured as foreign limited partnerships. These partnerships usually create offshore special purpose vehicles in certain jurisdictions that allow for efficient tax planning.
Most PE funds operating in Argentina obtain funding from foreign investors. Some PE funds incorporated abroad but managed by Argentine managers obtain funding from local family offices, private individuals and some investment companies. Local banks, insurance companies and government agencies do not normally invest in PE.
There are no PE funds listed in Argentina. If a PE fund intends to raise funds in Argentina through a public offering, it needs to register with the Argentine Securities Commission (Comisión Nacional de Valores) as a registered issuer, either as a corporation or as a financial trust. Yet, no private equity funds have been created locally using these structures.
Some local conglomerates that are listed and organised as corporations resemble a private equity fund but no locally formed funds have offered securities to the public in Argentina.
Licence and registration requirements regarding PE funds
In Argentina, there are no specific disclosure, registration or licensing requirements affecting PE funds. However, depending on the type of portfolio company, activity or industry, certain investments may be subject to regulatory approval.
Furthermore, if a PE fund intends to publicly offer an investment in its fund in Argentina, it must have a licence. Most PE funds are created offshore and the fund’s promoter, principals and manager will not require a licence unless they plan to make a public offering of the fund’s securities or partnership interests in Argentina.
In addition, there are no specific restrictions, requirement or protections applicable to foreign investors in connection with PE investments, other than those restrictions, requirements or protections applicable to any type of local or foreign investor.
Main issues in connection with the liability of fund managers
Given that there are no specific regulations applicable to PE funds and PE managers in Argentina, general corporate regulations apply. Under the Argentine Companies Law (ACL), company managers and directors have a duty of loyalty and diligence, owed to the shareholders, the portfolio company and, under certain circumstances, to the creditors of the portfolio company.
Furthermore, managers and directors can be held liable in case of: (i) violations of law or by-laws, provided such violations cause a damage or loss; and (ii) damage caused by fraud, abuse of authority or gross negligence.
Local law does not expressly recognise the ‘business judgement rule’ as a standard of liability. However, Argentine courts rarely impose liability on managers and directors simply for bad judgement, and tend to abstain from reviewing the substantive merits of a director’s conduct.
In addition to the duties mentioned above, managers and directors of public traded companies are also subject to a duty of loyalty, a duty of confidentiality, and a duty to inform.
Limitation of liability under the Argentine corporate law
Under Argentine corporate law, the liability of shareholders of local corporations (sociedades anónimas) and limited liability companies (sociedades de responsabilidad limitada) is limited to their subscribed shares or quotas, as applicable.
As in other jurisdictions, however, there are certain cases in which the corporate veil may be disregarded and, therefore, the shareholders may be held liable with all of their personal property. Local courts tend to pierce the corporate veil in very extreme cases.
Main exit strategies of PE investors
Although IPOs are an attractive exit strategy in other countries (including Latin American countries), in Argentina these are less common due to the underdeveloped nature of the Argentine capital market. Argentina’s stock exchange is relatively small and most trades are made on debt instruments.
The most typical form of exit in Argentina is a trade sale to a strategic investor. The sale may eventually be carried out in an auction.
Fernando S. Zoppi is a partner at Perez Alati, Grondona, Benites, Arntsen & Martínez de Hoz(Jr). He can be contacted on +54 11 4114 3053 or by email: email@example.com.
© Financier Worldwide
Fernando S. Zoppi
Perez Alati, Grondona, Benites, Arntsen & Martínez de Hoz(Jr)