As the global financial crisis begins to take its toll in Latin America, several banks are starting to look towards private equity opportunities. “Investment banks are very creative at finding ways to charge fees,” says Matt Cole, managing director at North Bay Equity Partners, a Latin America focused private equity house. “In 2006/07 the investment banks encouraged companies to list on the stock exchange. Now the banks are starting to pitch private equity deals rather than public equity deals.” Antonio Neto, debt banker at HSBC, says: “It makes sense for the investment banks to consider private equity investments when the capital markets are so quiet.”
Goldman Sachs and Morgan Stanley are among those expected to be active in the region after already acquiring telecoms and electronics assets in the summer. Optimism is the flavour of the day for private equity players. Cole says: “The current liquidity crunch will create opportunities for private equity investors – unlike with other crises in the past, this time there is a lot more dry powder available both for established regional fund managers, as well as those in the process of deploying capital.”
He reckons private equity investment will pick up next year as corporates face liquidity and refinancing risks. Some already distressed corporates might have to turn to private equity much sooner as part of their restructuring efforts. Last month, several Mexican and Brazilian corporates announced that they had made big losses on bad bets in the FX derivatives market that had hit their balance sheets. Mexican retailer Controladora Comercial Mexicana was one victim that filed for bankruptcy on October 9 after $1 billion in FX-related losses. “Prior to this crisis a retailer like CCM would have not been on the market, and if it had been it would have been selling for very high multiples,” says a senior banker. “I assume private equity guys are interested in CCM. CCM’s shareholders would probably also rather have a private equity investor than sell to someone like Wal-Mart.” Private equity investors estimate assets could be sold with up to a 50% discount on 12 months ago.
One big advantage that Latin American private equity firms have over their regional counterparts is their limited use of debt to finance deals. Cate Ambrose, executive director at the Latin American Venture Capital Association, says: “Latin private equity deals have used very little leverage to date, so this is not something we are too concerned about.”
But Ernest Bachrach, chief executive, Latin America, at Advent International, says: “The difference between Brazil and the US at the moment is that the Brazilian local banks are still fundamentally strong. They still have large balance sheets and I think they will continue to maintain lending relationships with their leading clients even though they are becoming more cautious.”
Cole adds: “I see private equity as the investors of last resort. It’s the most expensive form of capital for a company but if public equity, mezzanine financing and debt are not available then it is the next logical step.”
