Private Equity Investing in Latin America
Transcript of Private Equity Investing in Latin America
Private Equity Investing in Latin America Past and Present
JANUARY 2013
FEDERICO SCHIFFRIN
Senior Vice President, Private Equity
Private equity investing in Latin America has historically been a volatile affair.
However, over the last ten years, as the region has stabilised politically and
economically, countries have begun to show promising and sustainable
growth. Within this new paradigm, opportunities to invest in high-quality,
private companies have increased, supported by secular trends that have
allowed millions to enter the middle class and to begin demanding products
and services which were previously unavailable to them. This paper analyses
the private equity opportunity in Latin America, the universe of high quality
managers as well as the suggested investment approach in the region.
Investing in Latin America I 2
Table of contents
1. Macroeconomic background ...........................................................................................................................3
1.1. Overview of the region ......................................................................................................................................... 3
1.2. Economic history of Latin America ...................................................................................................................... 4
2. Private equity investing in Latin America .......................................................................................................9
2.1. Background ........................................................................................................................................................... 9
2.2. The evolution of private equity in in Latin America ............................................................................................ 9
2.3. Current state of the market................................................................................................................................ 10
2.3.1. Fundraising ................................................................................................................................................................ 10
2.3.2. Returns ...................................................................................................................................................................... 11
2.3.3. Managers .................................................................................................................................................................. 15
2.3.4. Sources of transactions and value creation ............................................................................................................ 17
2.3.5. Exits ........................................................................................................................................................................... 18
3. Unigestion approach to investing in Latin America..................................................................................... 19
3.1. Approach............................................................................................................................................................. 19
3.2. Risks .................................................................................................................................................................... 21
4. Investment recommendations ...................................................................................................................... 22
Investing in Latin America I 3
1. Macroeconomic background
1.1. Overview of the region
The countries in Latin America within our definition of the region1 share a common background, having been
colonies of Spain or Portugal for almost 300 years and gaining independence in the 1800s after protracted battles
for independence. They have struggled to gain a footing and a voice as members of the Western world, veering
constantly in their global alliances and their definition of what their core political and economic beliefs should be.
Consequently, these countries have swung from periods of Marxist governments or military dictatorships, to those
of Darwinian capitalism or populist demagoguery, all of which resulted in structural instabilities that generated
unwanted uncertainty for investors. This, in turn, meant slow declines of the economies relative to the rest of the
world and difficulties in growing their economies on a sustainable basis. This situation started to change towards
the end of the 1980s and beginning of the 1990s, as new democratic governments started to implement
fundamental reforms to their economies. Exhibit 1 is a synopsis of the defining characteristics of the main
countries in the region.
Exhibit 1: Summary characteristics of the region and its countries
Description of market CountriesTotal GDP
(USD Bn)
Forecasted
GDP growth
(2010 - 2020)
Population
(in millions)
Gini coefficient
of development
(0=best)
Ease of doing
business
(Global rank)
Mature (and largest) market Brazil 2,000 4% 190 0.55 127
Mature markets Mexico, Chile 1,500 2% - 3% 130 0.4 - 0.59 35 / 43
Maturing marketsColombia, Peru, Panama,
Costa Rica750 4% - 7% 80 0.45 - 0.59 39 / 36 / 72 / 125
Frontier markets
Argentina, Paraguay,
Venezuela, Ecuador,
Central America
c. 1,000 (1%) - 5% c. 100 0.45 - 0.59115 / 106/ 130 /
172 / NA
Total 5,250 490.0
As % of world 9% 8%
Source: CIA, Ernst and Young, IFC, Other Sources
This paper will attempt to bring to light the opportunities and challenges that lie ahead, as well as provide a
framework for an optimal approach to private equity investing in Latin America.
1 For the purposes of this paper, we will consider as Latin America all countries from Mexico all the way down to Tierra del
Fuego, in the southernmost part of Argentina and Chile, and we will exclude most countries in the Caribbean.
Investing in Latin America I 4
1.2. Economic history of Latin America
Over the last 60 years and up until the early 1990s, a period which we will call “pre-reform”, economies in Latin
America had, for the most part, been highly sensitive to business and economic cycles, going through periods of
booms and busts. This was a result of ever-changing core economic policy and the uncertainty it cast on the
investing climate in the region. The effects of these uncertainties have caused most countries in the region to
suffer from bouts of currency volatility, high inflation, sovereign defaults and political instability. Investing in Latin
America has thus been a task for the brave, a “timing of the cycle” game that few have done consistently well. As
can be seen in Exhibit 2, these cycles were very pronounced and were usually triggered by an internal event
compounded by some external shock.
Exhibit 2: Latin American GDP growth, %, 1970 - 2010
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
GDP Growth Rate (%)
Population Growth Rate (%)
Global
financial crisis
Brazilian debt
default
Brazil and
Argentina currency crisis
Mexico peso
crisis
Source: Bloomberg
Things began to change beginning in the early 1990s with the advent and establishment of democratic
governments. At this point, leaders, empowered by their people, recognised that the only path to sustainable
growth lay in attracting capital investments for growth, and that the main source of capital could only be foreign,
as a lack of domestic savings limited the ability of countries to self-fund the required investments. In order to
establish a stable environment conducive to foreign investment, leading countries such as Chile, Brazil and
Colombia started to pursue market-friendly reforms, liberalising protected industries, opening up borders to trade
and pursuing strong measures to control inflation and currency imbalances.
Investing in Latin America I 5
Some of the major reforms were:
i. Central bank autonomy:
The trend to allow the Central Bank to be free from political will was pioneered by Chile and Mexico, and
then fully implemented in Brazil by President Fernando Cardoso. Having an independent bank allowed a
country to anchor inflation expectations and reduce interest rate volatility, and, hence, the potential for a
currency crisis. Many other countries, including Peru, followed the example, and the results are now
apparent in the low levels of inflation in the region over the last 10 years.
ii. Fiscal targets:
Starting in the early 2000s, Brazil began to target a fiscal surplus (before debt interest payments) of 3% of
GDP. This allowed the country to take strong budget control measures and boost tax income by reducing
evasion and avoidance. The country has now had six consecutive years where tax receipts have exceeded
government expenses, enabling it to pay down debt and strengthen its financial standing. This trend has
become pervasive in the region, with governments endeavouring to pursue fiscally sound policies.
iii. Trade liberalisation:
Mexico became a member of the North American Free Trade Agreement in 1995, while other countries
pursued their own free trade agreements with the world, such as Chile with the US and Korea. This set the
stage for more open economies willing to compete both domestically and abroad. It created new markets for
such products as Chilean salmon, Peruvian cotton and Ecuadorean fruit, as well as the development of
global business champions such as defence and commercial aeroplane manufacturer Embraer or Chilean
airline LAN.
iv. Tax reforms:
Tax reforms have been key to increasing the competitiveness of countries, by reducing distortions and
boosting collections. For example, Brazil reduced to virtually zero the remittance of dividends of Brazilian
subsidiaries of foreign companies, while Chile lowered its corporate tax rate to under 30%. This has
contributed to a sense of stability and predictability for foreign investors, as well as reduced the
bureaucratic burden of tax filing by foreigners.
v. Privatisations:
Privatisations of state-owned entities have brought efficiencies to the market and redirected funds to other
uses. For example, to get a telephone line in Brazil or Peru in the 1980s, wait times could be up to six
months. Today, these lines can be set up within a 2-week period.
Investing in Latin America I 6
The institutional stability that has been created has given way to an unleashing of forces supporting economic
growth. Some of these trends are:
i. Tens of millions of people are now entering the middle class:
Thanks to a number of factors (stability, government development programs, investments), millions of people
in Latin America are entering the middle class and are now able to purchase goods and services that were
previously unavailable to them. For example, in Brazil, citizens who are in the “C class” (see Exhibit 3) can
now access the mortgage markets through a government supported plan called “Minha Casa Minha Vida”,
which provides low interest rates and long repayment periods for borrowers, enabling a whole new segment
of the population to become proprietors of their homes. This trend is unlikely to stop until the deficits of
supply are solved, and will continue to set the foundations for the development of new companies serving
the new consumers. Exhibit 3 shows the growth of the middle class in Brazil from 2006 – 2008 and the
relative change in their share of total consumption.
Exhibit 3: Brazilian growth of middle class, %
Source: TRG, Unigestion
A Upper class
BUpper middle class
classC
Middle class
D&ELower class
5% 5%
24%28%
39%46%
32%21%
2006 2008
Percentage of population by income groups Change
% of total consumption
From 37 m to 44 m
From 60 m to 71 m
22%
45%
27%
6%
Source: TRG, Unigestion
Investing in Latin America I 7
ii. Relatively young population that is getting richer:
As per Exhibit 4, the Latin American region has a relatively young population that is getting richer. This trend
bodes well for long-term investors, who can take advantage and invest on the basis of expected increases in
demand as the population ages and gets wealthier. In addition, young and productive populations in growing
economies produce a “demographic dividend”, which is the result of growth in their spending abilities that
creates ripple effects of wealth across the economy.
Exhibit 4: % of population under 30 years old and income levels, in USD
Source: TRG
iii. Opportunities to address unmet needs in a variety of industry sectors:
Throughout the region, there is increasing demand for goods and services previously unavailable to large
parts of the population. For example in Peru, where the economy has been growing at a real rate of 4% over
the last six years, insufficient supply of goods and services in financial services, telecoms, education and
energy still exist. This creates an opportunity for private investors to buy emerging companies in these
segments, as shown by private equity investments in pipelines (Conduit Capital), schools (Nexxus) and
pharma (Altra).
Over the last 10 years, foreign investors noticed the great opportunities presented by the overall improvements in
the standard of living of the lower and middle classes, and the results showed. As can be seen in Exhibit 5,
Foreign Direct Investments (“FDI”) began to increase in the mid-1990s. and, although cyclical in nature, have
remained at high levels even through the crisis of 2008 and up to this day.
Source: TRG
35%
40%
45%
50%
55%
60%
65%
70%
75%
0 2000 4000 6000 8000 10000 12000 14000
Sub-S Africa
South Asia
Middle income countries
MENA
LATAM
Europe
East Asia
Investing in Latin America I 8
Exhibit 5: FDI into Latin America, 1990 - 2011
6.4 9.6 11.8 11.2
25.0 26.5
38.7
54.661.1
78.769.4
62.4
49.5
37.7
58.964.4 61.7
98.6
114.0
71.4
105.7
137.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Bloomberg
Going forward, we expect the region to continue to attract a significant share of global FDIs, as structural reforms
continue to be implemented, even as governments change. Countries such as Chile, Peru and Colombia have
maintained their core economic policies even as political parties have taken turns in power.
Also as a result of the improvement in the economic climate, the stock markets in the key countries in the region
have delivered strong returns over the last 10 years. For example, since 2002, the Brazilian stock index grew by
over 23% per year, while the Colombian index delivered 30% growth per year.
Exhibit 6: Stock market performance, indexed, 2002 - 2012
-
,500
1,000
1,500
2,000
2,500
01.1
2.20
02
01.0
4.20
03
01.0
8.20
03
01.1
2.20
03
01.0
4.20
04
01.0
8.20
04
01.1
2.20
04
01.0
4.20
05
01.0
8.20
05
01.1
2.20
05
01.0
4.20
06
01.0
8.20
06
01.1
2.20
06
01.0
4.20
07
01.0
8.20
07
01.1
2.20
07
01.0
4.20
08
01.0
8.20
08
01.1
2.20
08
01.0
4.20
09
01.0
8.20
09
01.1
2.20
09
01.0
4.20
10
01.0
8.20
10
01.1
2.20
10
01.0
4.20
11
01.0
8.20
11
01.1
2.20
11
01.0
4.20
12
Colombia
Peru
Chile
Argentina
Brazil
Mexico
Source: Bloomberg
Investing in Latin America I 9
2. Private equity investing in Latin America
2.1. Background
During the pre-reform years, even as international players were mostly out of the market, there were some
private equity investors who were net “winners” in the market For the most part, they were local families, who
used their knowledge of local networks, politics and the nature of cycles in their respective countries to increase
their wealth substantially by buying good assets in bad times. Only a few savvy foreign investors thrived, but that
was the exception, not the norm. However, once institutional reforms began in the 1990s, the composition of the
“winners” changed. The lower perceived risk of investing in the region attracted institutional (private equity, large
asset managers) and strategic capital (companies such as Telefonica of Spain) to invest, mainly focusing on
companies providing services to the new middle classes. Thus, the slow arrival of institutional investors gave way
to the development of institutional private equity as a viable asset class.
2.2. The evolution of private equity in Latin America
As mentioned, the first private equity firms to be formed in the late 1980s and early 1990s where those supported
by wealthy local families, who, seeing that reforms had opened up a whole new set of opportunities, developed
platforms that allowed them to leverage third-party capital to improve their access to such opportunities. This
was the genesis of firms like GP Investimentos in Brazil or BISA in Argentina. These firms opened the door of
medium sized companies to private capital and the eyes of foreign investors to the opportunity to invest private
capital into promising companies. As a result, in the mid-1990s, the first foreign institutional private equity firms
entered Latin America. Most of these were US-based firms, who opened local offices and seconded US-trained
employees to the region. Advent International entered the market in 1996, buying a credit card administration
company in Brazil called CSU. They were soon followed by Texas-Pacific Group and General Atlantic.
In the early 2000s, new entrants began to participate in the market. These new players ranged from local firms,
such as Exxel, merchant banks such as Deutsche Private Equity and opportunistic firms such as Hicks Muse -
everybody wanted a piece of the pie. These firms bought iconic consumer brands, football teams and even funded
internet companies. Unfortunately for many of them, the Argentine and Brazilian currency crisis of 2000-2001,
coupled with the NASDAQ market crash, rendered many of their investments worthless. It appeared that, again,
the region was providing only disillusionment to investors. It would take a few years for investors to regain faith
in the region.
But investors did come back, and in a big way. By 2005, as Brazil was able to demonstrate years of steady growth
and joined the club of “BRIC” countries, a new wave of private equity fundraising began. This wave accelerated
when developed countries entered into protracted recessions in 2007, while emerging markets were able to
escape relatively unscathed. This gave investors the confidence they needed to increase their allocations to
emerging markets, and, in particular to countries such as Brazil. With this background, Advent and Southern Cross
raised USD 1 billion-plus funds, and new, smaller firms emerged all over the region. The asset class grew
dramatically, from just a few firms to almost 100 by 2011.
Exhibit 7 shows a timeline of private equity in Latin America, including who the participants were, as well as
descriptions of some structural issues affecting the economies of the region throughout this period.
Investing in Latin America I 10
Exhibit 7: A timeline of private equity in Latin America
Source: Unigestion
2.3. Current state of the market
2.3.1. Fundraising
Fundraising in the region has more than doubled since 2007, as private equity in developed markets has been
maturing and investors were generally looking for better returns and diversification away from central economies.
Exhibit 8: Private equity fundraising in Latin America, 1993 - 2011, in USD billion
0.1
0.8 0.8
1.5
3.43.7
1.8
2.6
0.6 0.4 0.40.7
2.3
3.2
4.7
5.8
4.1
8.1
10.3
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
USD million
Source: LAVCA
Source: LAVCA
2000 20061998 200720052000 2006 20071994 1995 2008
Pre-1990s:
Private equity being
done by family and family-controlled entities
1994:
Plano Real,
stabilization plan launched in Brazil. Inflation tamed to low double digits
1993:
First, local,
single countryinstitutinoalfunds emerge
1998 - 1999:
Russian crisis;
Brazil devalues its currency
1998:
First local,multicountry funds emerge
1995
1996:
Internationalfirms enter the market
2005:
New bankruptcy law
enacted in Brazil –better protection for creditors, minorities and foreign equity
investors. Brazilian companies start to report under IFRS rules
1990
1990s:
Brazil, Argentina,
Peru and Colombia elect liberal, pro-reform presidents
Pol
itic
al
and
eco
nom
ic e
vent
sP
riva
te e
quit
y in
dust
ry
2001
2001:
Argentina
devalues
2011:
Brazil
successfully transitions to a new president, its fifth since a
return to democracy
2011
2008:
Brazil raised to
investment grade.
2008 - 2011:
Many funds exceed USD 1 billion mark
2008 - 2010:
PE fundraising reaches a high of USD 8 billion per year. New players
exmerge
2002 - 2006
Few private deals being done as a result of bad reputation of industry (Exxel, Hicks)
Valorem (Colombia,
Santo Domingo), Luksic (Chile), BISA (Argentina), Slim (Mexico)
Firm
s
GP Investimentos,
Exxel, CEI
Advent, TPG,
Hicks Muse
Southern Cross
1995:
Banks create
merchant banking units to capitalise on opportunities
DB Merchant
Bank, AIG Capital Partners
Vinci, Axxon,
Linzor, BTG
Southern
Cross, Gavea, GP
GA, GP
Investments,Southern Cross
Investing in Latin America I 11
Looking forward, and from our conversations with limited partners and research analysts, we expect fundraising
volumes to stabilise in the USD 5 – 8 billion range per year over the next 5 years. In addition, we expect
fundraising to be directed mostly to generalist funds, but, over the next few years and as the industry matures, to
start veering towards strategy-specific funds such as distressed debt or agricultural land development funds.
However, an interesting point is that despite this new influx of capital, private equity investment as a proportion
of GDP remains low in Latin America as compared to other developed and emerging economies. In addition, with
investment amounts ranging over the last few years in the USD 6 – 7 billion per year2, virtually no capital
overhang exists. Both factors are likely signalling that, overall, private equity still has growth potential in the
region without an apparent risk of overheating. (see Exhibit 9).
Exhibit 9: Penetration of private equity in Latin America compared to other regions, % of GDP, 2010
0.030%
0.033%
0.070%
0.150%
0.200%
0.300%
0.320%
0.000% 0.050% 0.100% 0.150% 0.200% 0.250% 0.300% 0.350%
Russia
All LATAM
Brazil
China
Europe
US
India
Source: Ernst and Young
2.3.2. Returns
As can be seen in Exhibit 10 (a) and 10 (b), investing in public markets in Latin America has, over the last 10 years,
provided a way to capture returns and diversify risks in a global portfolio, as returns were high and correlations
between Latin America and other economies was fairly low. In spite of this, during the crisis that started in 2007,
the rate of growth in the public markets in Latin America dropped from 46% per year (2002 – 2006) to around 7%
per year, while correlations with other markets increased, all but eliminating the diversification effect without a
corresponding increase in returns. We expect that correlations will remain higher than in the past, with a likely
reversion to the mean over the next few years.
2 Source: LAVCA
Investing in Latin America I 12
Exhibit 10 (a): Returns of public markets, indexed, 2003 - 2012
-
,100
,200
,300
,400
,500
,600
,700
,800
01.1
2.20
02
01.0
4.20
03
01.0
8.20
03
01.1
2.20
03
01.0
4.20
04
01.0
8.20
04
01.1
2.20
04
01.0
4.20
05
01.0
8.20
05
01.1
2.20
05
01.0
4.20
06
01.0
8.20
06
01.1
2.20
06
01.0
4.20
07
01.0
8.20
07
01.1
2.20
07
01.0
4.20
08
01.0
8.20
08
01.1
2.20
08
01.0
4.20
09
01.0
8.20
09
01.1
2.20
09
01.0
4.20
10
01.0
8.20
10
01.1
2.20
10
01.0
4.20
11
01.0
8.20
11
01.1
2.20
11
01.0
4.20
12
SP 500
DJ Stoxx
MSCI LATAM
MSCI Asia
Source: Bloomberg
Investing in Latin America I 13
Exhibit 10 (b): Correlation between Latin America and other major markets, public market indexes
Latam / Europe Latam / USA Latam / Asia
02.03.2003 0.393 0.414 0.353
02.03.2004 0.651 0.526 0.545
02.03.2005 0.683 0.745 0.591
02.03.2006 0.658 0.736 0.587
02.03.2007 0.862 0.814 0.802
02.03.2008 0.855 0.803 0.734
02.03.2009 0.936 0.836 0.834
02.03.2010 0.865 0.863 0.624
02.03.2011 0.793 0.765 0.779
02.03.2012 0.897 0.823 0.883
Increase / (decrease)
in correlation (9 yrs) 10% 8% 11%
Increase / (decrease)
in correlation (crisis) 31% 10% 37%
Regional Indexes
Note: Regional indexes are: MSCI EM Latam, Dow Jones Stoxx 600 (Europe), S&P 500 (US), MSCI Asia Pacific (Asia)
Source: Bloomberg, Unigestion
Returns for private equity in Latin America, on the other hand, have also been fairly strong but have appeared to
be mostly de-coupled from other regions, particularly in the observation period from 1997 through 2008, as per
Exhibit 11.
Investing in Latin America I 14
Exhibit 11: Latin America private equity returns vs. other regions, multiple of invested capital, vintage years 1997 to 20083
0.5x
1.5x
0.4x
0.4x
4.5x
2.7x
2.5x
1.8x
1.2x
1.6x
1.1x
1.4x
1.6x
2.4x
2.0x
2.5x
2.3x
1.6x
1.2x 1.
3x
1.0x
1.0x
0.8x
1.8x
1.7x
1.6x
1.6x
1.9x
1.8x
1.5x
1.5x
1.x
1.x
1.x
1.x
1.6x
1.3x
1.1x
1.4x
1.7x
1.7x
1.6x
1.5x
1.4x
1.1x 1.
2x
1.2x
.x
.5x
1.x
1.5x
2.x
2.5x
3.x
3.5x
4.x
4.5x
5.x
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
LATAM
Asia
EMEA
USA
Source: Preqin, Venture Economics
We believe one of the main reasons private equity market returns remained strong even in the light of public
market return convergence and lower returns is that private companies in the region derive most of their revenues
from their domestic markets or the regional market, and thus can succeed and grow even as other economies
don’t grow. In addition, the greater inefficiencies in companies in Latin America enabled and enable private
equity firms to create value by addressing these inefficiencies, providing an avenue for improved profitability even
under poor macroeconomic scenarios.
3 Returns beyond vintage year 2008 are not meaningful given young age of funds. Also, data for LATAM vintage 2006 is not
available.
Investing in Latin America I 15
Exhibit 12: Main revenue sources of companies, % of revenues
Domestic Domestic region
Switzerland 12 44
Netherlands 21 51
Singapore 27 65
Germany 32 67
France 36 68
UK 36 51
Italy 43 77
HK 45 65
Spain 46 65
Canada 57 83
Australia 61 78
Mexico 61 90
India 64 64
Korea 65 79
Taiwan 68 82
US 69 72
Japan 71 79
Brazil 87 90
China 93 94
Source: TRG
In summary, the returns in private equity in Latin America, while certainly exposed to global crises, appear to be
driven more by the performance of the regional economy than the global economy, and will certainly offer some
level of diversification when compared to other regions.
2.3.3. Managers
Over the last five years, Unigestion has scoped the market of private equity managers and concluded that there
are about 100 managers who could be viewed as typical private equity investors. There are three broad classes of
managers:
i. Global private equity firms with local offices:
These are global firms with headquarters in the financial centres of the world, who open local offices in
order to source and execute transactions that fit into their global strategy. Their regional offices are usually
staffed with a mix of locals and foreigners, and will generally invest from a global pool of capital. Examples
of firms (and deals) of this type are Providence (Torresur), General Atlantic (Cetip), Apax (Tivit) and
SilverLake (Locaweb). In addition, there are other global firms like Carlyle and Advent that have raised local
funds to execute their strategy.
Investing in Latin America I 16
ii. Local private equity firms with regional offices
These are pan-regional firms with headquarters in one of the major cities in the region (Sao Paulo, Buenos
Aires, Lima), and smaller offices in other countries of investment focus. Most of these firms are staffed by
locals who have studied and worked abroad, mainly in the US and Europe, and who mix their local contacts
and knowledge with the skills that they learned in the more mature markets. Examples of these types of
firms are Southern Cross, Linzor and Victoria.
iii. Local private equity firms with single-country focus
These private equity firms have a focus on a single country. The investment professionals of these firms are
usually locals who have spun out of banks, family offices or local corporations. Examples of these firms are
GP Investimentos, Gavea and TMG (Brazil), Altra (Peru) and Tribeca (Colombia).
Of the approximately 100 managers in the region, we qualify around 15 as “institutional quality”, defined as
managers who have solid teams, a proven track record and who are focused on markets and industries where
they have deep knowledge (see Exhibit 13).
Exhibit 13: Short list of attractive Latin American private equity managers
Source: Unigestion
Most managers today are generalists, investing across various industries and applying a fairly common playbook
of improving corporate governance, processes and people. As the industry matures, with steadier flows of capital
and less arbitrage opportunities to capture, we will likely see a trend towards greater specialisation in strategies.
This is similar to what has happened in the US, where generalists have had to start focusing on industry or
strategy specific opportunities in order to generate above average returns. Thus, it will not be surprising if, for
example, over the next five years a Brazilian consumer or a Chilean energy fund is raised.
Advent 2014 1,500 Buyout / Generalist All LATAM Yes
Southern Cross 2014 1,500 Buyout / Generalist All LATAM Yes
P2 2013 1,000 Infrastructure franchise builder Brazil / Chile / Peru Yes
Victoria Capital 2015 750 Buyout / Generalist All LATAM Yes
Linzor 2015 400 Buyout / Generalist All of LATAM, except Brazil Yes
Patria 2013 700 Buyout / Generalist Brazil Yes
Gavea 2014 1,500 Minority / Generalist Brazil Yes
Carlyle South American Partners II 2014 1,500 Buyout / Generalist Brazil Yes
Stratus 2014 250 Minority / Generalist Brazil Yes
TMG 2013 300 Buyout / Generalist Brazil Yes
VincI 2014 1,000 Buyouts / Minority / Generalist Brazil Yes
Actis 2015 1,000 Minority / Generalist Brazil Yes
GP Investimentos 2013 500 Buyouts / Minority / Generalist Brazil Yes
Nexxus 2013 250 Buyout / Generalist Brazil Yes
Altra 2015 250 Buyout / Generalist Brazil No
Met
by UNGGeographic focusFund
Year of
expected
fundraise
Expected
fund sizeStage / expertise
Investing in Latin America I 17
2.3.4. Sources of transactions and value creation
Exhibit 14 shows a sample of 34 transactions analysed by Unigestion that were closed in the region over the last
10 years. The results indicate a strong bias towards sourcing and investing into family-owned companies. Such
companies tend to be under-managed, and offer quick value creation opportunities through the improvement of
their operations, the creation of a proper board of directors or the acquisition of competitors. Going forward, we
expect that as companies get larger and become more mature, there will be a shift towards “take-privates” or
secondary purchases from other private equity firms, as is happening more often in some markets in Asia.
Exhibit 14: Type of company purchased and value creation strategy, by # of deals
Value creation Family owned Non-core divisions Listed co's
Organic growth 8 9 0
Consolidation 11 1 2
Turnaround 0 2 1
19 12 3
Type of company
Source: Unigestion, based on a sample of 34 transactions in the region
From a value creation perspective, we analysed a sample of transactions from four different general partners in
four different countries over the last 15 years to understand how value had been created upon the exit of these
businesses. As can be seen, these deals generated a 2.7x multiple of invested capital over an average holding
period of around four years. The majority of value (~80%) was derived from revenue increases and margin
improvements. The remainder was created from leverage, although, to note, companies purchased in Latin
America typically have levels of leverage which are well under 3x EBITDA, considerably lower than one would see
for companies in developed markets. Finally, in the sample we analysed, price to EBITDA multiples contracted
upon the exit of the company. This can be attributed to the fact that as a company matures, its growth rate tends
to decrease, thus lowering its price to EBITDA multiple (which is a function of future growth expectations).
Exhibit 15: Value creation, by source of value
Source: Unigestion
199
▲ +249
▲ +190 ▼ -219
▲ +132 551
0
200
400
600
800
1,000
Equity at entry Revenue increase Margin improvement Multiple arbitrage Leverage Equity at exit
USD m
Investing in Latin America I 18
We believe that Exhibit 15 is representative of how value is being created from private equity transactions across
the region, even though we expect these sources of value to change over the next few years, as detailed below:
i. Value creation next 7 – 10 years
The value creation drivers for the next seven to ten years will remain fairly similar to those existing
today. They will be indicative of a growing, yet still relatively immature market. Returns will be driven by
increases in sales and margin improvements. Key drivers of these improvements will be management
professionalisation, implementation of superior corporate governance and industry roll-ups. As is the
case today, we expect leverage to still play a relatively small role in ultimate returns.
ii. Value creation beyond 7 - 10 years
Beyond these seven to ten years, as the region’s economies mature, returns will be driven by a new set
of drivers. We believe multiple arbitrage, fixed cost reductions and leverage will serve as the primary
value creation drivers. At this point, we expect higher levels of specialisation of managers and a general
increase in fund sizes. Examples of deals we expect to see are large consolidations and more “take
private” transactions.
2.3.5. Exits
Contrary to popular belief, the M&A market in the region has been buoyant. Over the last 10 years, there have
been over 150 IPOs and 1,000 strategic exits in markets such as Brazil, Colombia, Chile and Peru, with companies
as far ranging as airlines (GOL, Brazil), supermarkets (La Polar, Chile) and shopping malls (BR, Brazil). In that
period, there have been at least 40 exits of private equity-backed companies, mainly through sales to strategic
buyers. In 2011 alone, private equity exits totalled USD 10.6 billion, almost tripling the USD 4 billion in exits in
2010. If this trend continues, and fundraising remains at current levels, the volume transacted will provide ample
room for private equity firms to exit their investments in a timely and profitable manner. In Exhibit 16, we have
highlighted 11 of the most notable private equity backed-transactions that have happened over the last six years.
Over the next few years, we expect that exits are going to continue to be driven by strategic sales, as
consolidations in certain industries continue to take place and also as global companies acquire a footprint in the
region.
Exhibit 16: Private equity exits, last six years
Source: Unigestion
Strategy
Supermarket chain Chile Retail Family-owned Pan-LATAM Consolidation IPO 8.1x
Consumer products Argentina Consumer Strategic seller Pan-LATAM Turnaround Strategic buyer 7.5x
Real estate developer Brazil Real estate Family-owned Brazil-focused Consolidation IPO 6.6x
Energy generation Brazil Energy Listed Brazil-focused Turnaround IPO 3.x
Mine operator Dominican Republic Mining Strategic seller Pan-LATAM Turnaround Strategic buyer 3.x
Mine operator Mexico Mining Strategic seller Pan-LATAM Growth Strategic buyer 4.8x
Rail and logistics Brazil Logistics Strategic seller Brazil-focused Growth IPO 4.1x
Restaurants Brazil Consumer Strategic seller Pan-LATAM Growth IPO 9.9x
Outsources services Brazil Business services Family-owned Pan-LATAM Growth Strategic buyer 2.8x
Cinemas Argentina Retail Strategic seller Pan-LATAM Turnaround Strategic buyer 2.4x
Exchanges Brazil Financial services Privatisation Pan-LATAM Growth Strategic buyer 4.5x
Company Country Industry Firm typeExit
MultipleExit type
Source of
transactions
Investing in Latin America I 19
3. Unigestion approach to investing in Latin America
3.1. Approach
Over the last five years, Unigestion has been following the Latin American market for private equity and has
developed a view of the best approach to investing in the region. When deploying capital as primary investors,
the two main high level questions to answer when choosing a general partner should be: what geographic focus
should a firm have (pan-regional or singly country), and what types of deals should it pursue (buyouts, minority or
specialised).
To answer these questions, and per Exhibit 17, we have analysed the returns of different funds pursuing different
geographies and strategies to understand if there was any performance bias towards any one or combination of
factors. In reviewing the data, there appears to be more consistency in funds which have a pan-regional focus,
which take control or significant minority positions in companies. Put another way, the only funds which have
delivered less than 2x cost have either been single country focus or minority investments.
Exhibit 17: Returns of funds with different geographic and types of transactions focus
Source: Unigestion
To try to answer why we believe pan-regional focus is likely a better approach, we analysed to what extent key
Latin American countries were correlated to each other. This would help answer whether there is a clear
diversification benefit by investing in a pan-regional fund versus a single country-focused fund. We performed an
analysis of 3-year rolling average correlation of the respective public markets of each country in the region for the
period 2003 - 2012, as per Exhibit 18.
Type of Source of
transactions differentiation
Pan-LATAM pre-fund Pan-LATAM Buyout Focus on non-Brazil 1990 2.2x 23%
Pan-LATAM Fund I Pan-LATAM Buyout Sourcing 1996 2.3x 25%
Brazil-focused Fund II Brazil Buyout / Minority Sourcing 1997 2.0x 10%
Pan-LATAM Fund II Pan-LATAM Buyout Operational involvement 1998 3.2x 32%
Brazil-focused Fund I Brazil Minority Picking right sectors 1999 4.3x 28%
Argentina-focused Fund II Argentina Buyout N.A. 2000 0.1x 0%
Pan-LATAM Fund II Pan-LATAM Buyout Sourcing 2001 2.7x 54%
Pan-LATAM Fund II Pan-LATAM Buyout Operational involvement 2003 2.5x 27%
Pan-LATAM Fund I Pan-LATAM Buyout Operational involvement 2005 3.5x 54%
Brazil-focused Fund III Brazil Buyout / Minority Sourcing 2005 2.6x 55%
Pan LATAM (Ex-Brazil) Fund II Pan-LATAM Buyout Focus on non-Brazil 2006 2.0x 41%
Brazil-focused Fund IV Brazil Buyout / Minority Sourcing 2007 1.2x 7%
Brazil-focused Fund I Brazil Buyout/Control Operational involvement 2008 2.2x 29%
Colombia-focused Fund I Colombia / Peru Minority Operational involvement 2009 1.6x 17%
Fund Focus VintageGross Multiple
of Fund
Gross IRR
of Fund
Investing in Latin America I 20
Exhibit 18: Correlation of public markets within region, rolling 3 year average, 2003 - 2012
Bra /
Col
Bra /
Chile
Bra /
Arg Bra / Per
Bra /
Mex Col / Per
Col /
Chile
Col /
Arg
Col /
Mex
Per /
Mex
Latam /
Europe
Latam /
USA
Latam /
Asia
02.03.2003 0.245 0.408 0.042 0.199 0.343 0.074 0.166 0.294 0.269 0.113 0.393 0.414 0.353
02.03.2004 -0.081 0.115 0.104 0.497 0.380 0.090 -0.097 -0.045 0.043 0.183 0.651 0.526 0.545
02.03.2005 0.271 0.537 0.241 0.299 0.605 0.206 0.062 0.291 0.277 0.166 0.683 0.745 0.591
02.03.2006 0.235 0.309 0.53 0.28 0.630 0.020 -0.038 0.066 0.320 0.16 0.658 0.736 0.587
02.03.2007 0.608 0.582 0.750 0.323 0.710 0.253 0.493 0.607 0.552 0.069 0.862 0.814 0.802
02.03.2008 0.488 0.765 0.827 0.577 0.819 0.256 0.492 0.480 0.408 0.641 0.855 0.803 0.734
02.03.2009 0.806 0.634 0.862 0.710 0.851 0.723 0.593 0.767 0.770 0.695 0.936 0.836 0.834
02.03.2010 0.625 0.600 0.774 0.673 0.710 0.441 0.525 0.597 0.452 0.638 0.865 0.863 0.624
02.03.2011 0.426 0.502 0.657 0.448 0.719 0.339 0.299 0.427 0.405 0.188 0.793 0.765 0.77902.03.2012 0.691 0.743 0.710 0.564 0.670 0.407 0.607 0.507 0.593 0.488 0.897 0.823 0.883
Increase / (decrease)
in correlation (9 yrs) 12% 7% 37% 12% 8% 21% 15% 6% 9% 18% 10% 8% 11%
Increase / (decrease)
in correlation (crisis) 159% 88% 42% 15% 13% 1165% N.A. 820% 73% -57% 31% 10% 37%
Source: Bloomberg, Unigestion
Note: Regional indexes are: MSCI EM Latam, Dow Jones
Country indexes Regional Indexes
Note: Regional indexes are: MSCI EM Latam, Dow Jones Stoxx 600 (Europe), S&P 500 (US), MSCI Asia Pacific (Asia)
Source: Bloomberg, Unigestion
From the data above, we can make several observations. The first is that countries have varying degrees of
correlation with each other, with highs of 0.6 – 0.8 for correlations between Brazil and Chile, and Brazil and
Argentina, and lows under 0.5 for the correlation between Peru and Colombia, which seem to be the least
correlated countries within the region. The second observation is that correlations between countries within Latin
America have increased over the last decade, and, finally, that during a crisis (for example 2007 – 2009),
correlations increased significantly such that all countries become correlated with each other, particularly the key
countries. Thus, the varying correlations could offer a first argument in favour of a pan-regional approach.
A second reason that could be making pan-regional funds more consistent is that they can address different
sectors across countries where their levels of development are different, and avoid potential traps of investing at
the wrong point in the cycle in a sector in a specific country. As can be seen in Exhibit 18, a study by the IMF and
Credit Suisse analysed the attractiveness of different industries on a country by country basis – the varying
degrees of attractiveness of similar sectors in different countries can be notorious. A good pan-regional fund will
likely have the ability to choose better investing conditions across countries.
Investing in Latin America I 21
Exhibit 19: Relative sector prospects, by country
Country TotalOver
65s
School
Age
Working
Age
Real GDP
PPP (2009)
Household
utilities
and fuels
Food and
beverage
Financial
servicesHousing Telecom Tech Health Education Transport Leisure
Peru 6 19 -4 9 8'723
Mexico 6 20 -2 8 13'542
Chile 9 21 -6 6 14'299
Brazil 4 21 2 -4 10'456
Colombia 6 21 -4 -4 8'206
Venezuela 8 23 -1 -1 12'496
Argentina 5 11 3 3 14'126
Population growth (2014 vs. 2009),
% and Real GDP, in USDRelative sector prospects
Source:IMF, US Census Bureau, Credit Suisse, TRG
Results shown in quintiles: 5 (dark blue) means highly rated, 1 (white) is lowly rated
As far as the types of deals that render better results, our analysis concluded that exercising control or having
strong minority rights makes a difference. Firstly, this allows the private equity firms to drive change where
change needs to happen, usually in such things as corporate governance, financial and accounting processes and
strengthening of management teams. Second, through control or significant minorities a private equity firm will
be able to force a sale when it believes that the time to exit is right. This is in contrast to the oft seen situation
where a family wants to hold on to an asset for extremely long periods of time. Finally, we believe that at times
of crisis, having the ability to make cuts and react to the changes is fundamental, and only through direct control
and supervision can these changes be identified and executed.
3.2. Risks
We have identified a number of risks that should be addressed when investing into the region.
Cyclicality and the risk of entering “at the top” of the market. Given the interest in the region, many
investors will enter as followers, investing into a market at a point where assets are fully priced to future
expectations. However, we have taken comfort that this risk could partially be mitigated by adhering to a
diversified approach to the region, mainly by investing with pan-regional funds. In addition, we believe that
fundamentals are now much stronger than they were ten years ago, which has, as shown in 2008, served as a
cushion to shocks and a spring to growth beyond a crisis.
Political and economic instability. The region has historically been politically unstable, which has led the
economic climate to become unpredictable. In fact, history has shown that changes in government can result in
massive policy alterations, which could drastically affect foreign investment, the most recent example being the
expropriation of YPF by the Argentine government. On a pan-Latin American basis this risk can be reduced.
Countries like Peru, Colombia, Brazil, Mexico and Chile all have had 20 years of uninterrupted and peaceful
political transitions without core economic policy changes.
Global economic slowdown. A general slowdown in the world economy, particularly in Europe, which
together with China and the US, consistently represent almost 30% of overall exports from the region, represents
a risk to the Latin American economy. While a slowdown will definitely have an effect on the region, exports still
represent around 15% of overall GDP, with the balance of GDP comprised of internal consumption. By way of
comparison, 50% and 30% of Germany’s and China’s GDP, respectively, are exposed to export markets, making
them more generally vulnerable to global slowdowns.
Investing in Latin America I 22
4. Investment recommendations
Throughout the paper, we have presented evidence of Latin America as an interesting investment destination. We
have also presented data that shows that there are institutional quality managers that have historically been able
to produce good returns. In conclusion, we believe that the optimal approach when making primary and secondary
investments on firms that predominantly have the following characteristics:
i. Pan-regional funds that cover and invest in several countries, resulting in a higher
diversification offered by their exposure to somewhat uncorrelated economies and who can
capture value in interesting sectors across different countries.
ii. Firms who can have control or significant minority positions that enables them to drive
meaningful changes in the companies acquired.
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__________________________________________________________________________________
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investment advice nor an offer or solicitation to subscribe in the strategies or in the investment vehicles it refers to. Some of
the investment strategies described or alluded to herein may be construed as high risk and not readily realisable investments,
which may experience substantial and sudden losses including total loss of investment. These are not suitable for all types of
investors. The views expressed in this document do not purport to be a complete description of the securities, markets and
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forward-looking and subject to a number of risks and uncertainties, including, but not limited to, the impact of competitive
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Data and graphical information herein are for information only and may have been derived from third party sources.
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