Private equity in Latin America is heading towards a new high, as capital invested in the region looks set to pass $5 billion, a previous record set in 1998. In recent years capital-raising for private equity in Latin America has gone from a record low of $800 million in 2004 to $2.8 billion in 2006, and is now predicted to pass $5 billion this year, according to investors.
"Despite the skyrocketing growth of private equity globally, there is yet to be meaningful activity in Latin America. Nonetheless, we understand that many private equity organizations are considering increased investment in the region," says James Quigley, chairman of Merrill Lynch International, and head of Latin America at the bank.
Julio Lastres, senior managing director, Americas, at Darby Overseas Investments, has also noticed change: "There used to be only a handful of dedicated Latin America private equity funds in 2003 but now that number is growing at the regional and country-specific levels, and many more are looking," he says. One problem is that it is difficult to get hard data on private equity in Latin America. However, anecdotal evidence suggests that investors are turning their attention to the region.
Renowned financial sponsors such as Advent International, which raised a record $1.3 billion fund for the region last month, are present, while other types of investors, such as hedge funds, are monitoring the situation. Eton Park and Millennium Investments, for example, have been notably active, with Eton Park investing in such companies as Brasil Telecom, Brazil’s third-biggest telephone company, and Mexico’s Cemex, the world’s third-largest cement producer.
Despite the growth, Latin America is still a long way off seeing the level of capital flows that Asia, particularly China, has experienced. In the first six months of this year, for example, Asian private equity funds raised $15.8 billion, of which China accounted for $5.26 billion.
"There is a long-standing attraction to India and China, especially since Latin America was pushed into the background after its financial crises at the turn of the decade," says Lastres. "But now the Latin American economies are generally doing well at the macro level, and the capital markets are opening up and offering low-cost local financing. These local factors are supported by high global liquidity and the commodities boom, which together are driving this renewed interest in private equity."
As the capital markets mature, so too has the private equity market in Latin America. Cheaper and more flexible local-currency financing is now becoming possible and this is helping to shift transactions from pure cash deals to partial leveraged buyouts. In April, the $700 million leveraged buyout acquisition of the McDonald’s Latin American business by a private equity consortium marked the start of a new trend. Although it wasn’t the first leveraged buyout deal in the region, the size of the transaction showed that the liquidity and depth of the local market was able to support such transactions.
But when compared with the US private equity markets, leverage is still low in Latin America at only two or three times ebitda on average. "You have to operate differently in Latin America than how you would in the US or European markets," says Jerome Booth, head of research at Ashmore Investments Management. "We don’t want to leverage up companies for quick returns – instead building relationships is more important."
Relationships
It is this relationship side of the private equity business that tips the balance in favour of local players rather than the global funds: "Time will tell whether exporting high finance via global funds will work in Latin America, or whether the local investment funds, who view the markets in a more microscopic way, will perform better. I think there is room for both types of player to succeed, especially if they collaborate," says Matt Cole, a partner at North Bay Equity, a Latin American private equity adviser in Miami.
The other shift has been an increase in the use of IPOs as an exit strategy and the ease with which this can be done. In the past few months, Advent has undertaken IPOs with two of its companies on Bovespa: Brazilian bank Paraná Banco and duty-free operator Dufry South America. In 2006, 12% of IPOs in Brazil resulted from the exit strategies of private equity firms, and this figure looks set to increase, according to GP Investimentos, a Brazilian investment firm.
But as Warren Buffett said, it is dangerous to think "it is different this time around". Cole says: "I think it is time for investors to ask if it really is different, and so safer, this time around. Now that the region really is part of the global economy, with non-fixed currencies, I really don’t think it is possible to say that Latin America is safe from volatility in international capital and commodity markets. I also think that Latin America will be one of the first to suffer the consequences of a decrease in global liquidity as, and when, it comes around."