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Private Equity Latin America

By Daniel Serventi
Posted: 27th February 2013 09:06
Latin America has continued to see significant PE activity over the last several months, as local and global firms are drawn to the region’s compelling domestic growth story.  This is despite the deceleration of the global macroeconomic environment that has challenged growth over the near-term and led to significant policy interventions designed as countermeasures against economic headwinds and consumer credit saturation.
Retail and consumer goods companies have accounted for over 37% of PE acquisitions in the last 18 months.  These deals are likely to continue into the foreseeable future, as PE firms work to consolidate and expand promising businesses in these high-growth sectors.
2012 deals illustrate the continuing diversification and maturation of the Latin America PE industry across the region.  Less than half of PE transactions were for companies headquartered in Brazil.  Argentina accounted for 20% of the annual’s transactions, followed by Colombia, Chile and Peru.  Moreover, the region continues to see investment from a diverse range of global and local PE players.  On a value basis, firms in Brazil accounted for over 60% of the region’s total investment.
According to Preqin, PE firms focused on Latin America raised just over US$440m in the second quarter of 2012, adding to the US$3.1b of funds closed in the first quarter of the year.  2012 has seen a number of significant closings by local funds and global investors alike, the largest of which was the US$850m in commitments achieved by Victoria Capital Partners’ second fund.
Another significant close was the May closing of Capital International’s sixth PE fund.  While not targeted exclusively on the Latam region, the firm has been an active player in the market for years.  Last year, the firm took two portfolio companies public – Arcos Dorados on the NYSE in April 2011, raising US$1.4b, and Magazine Luiza in Brazil, raising US$566m.  According to Capital International, the firm enjoyed a 90% re-up rate among existing investors with an active allocation to private equity.  Other closes during the quarter included GTIS Brazil Real Estate Fund, with US$850m in assets, and Rio Bravo Energia (renewable-energy sector), which closed with US$235m in commitments.
PE firms across the emerging markets have been increasingly positioned among the industy’s largest firms.  In the recently released Private Equity International rankings of the world’s 300 largest PE funds, which ranks firms based on their five-year fund-raising totals, eight firms were based in Latin America, up from four in 2011.  Gavea Investimentos entered the top 100, climbing from 136 to 84, based on the firm’s successful final close on Fund IV, which added US$1.8b to the firm’s assets under management.
Value Creation in Latam
EY performed a point study with EMPEA (Emerging Markets Private Equity Association) on value creation, an analysis of exists in Latam Markets.
The Exits
The prevalence of privately sourced deals subsequently exited via private channels results in less transparency around Latin American exits, thus constraining the development of a definitive population.  Drawing from initial research into 60 transactions executed across the region, we conducted interviews on more than 25 exits.
Consistent with the composition of the underlying investment population in Latin America, the majority of deals analysed are minority transactions, with stakes ranging from 20% to 50%.
The majority of transactions are minority deals with median equity values of US$14 million in Latin America markets outside Brazil and US$45 million in Brazil. 
Growth-driven Performance
One of the key factors behind Latin America’s success in recent years has been its resiliency in the face of adversity.  Through the downturn, the region generally saw a significantly shallower recession and faster recovery than many of the developed markets.
As a result, average gross IRRs of the exits in Latin America compare favorably with returns from the best years in the developed markets, when we saw mean IRRs in excess of 50%.  Overall, when compared with deals exited over the same period, returns in our Latin America exhibited IRRs that were roughly twice those of the US and Europe.  Given underlying EBITDA growth rates of over 45% in the Latin America deals, compared with 13.5% in the US and Europe, this strong relative performance is not hugely surprising.
Organic Revenue Growth the Overwhelming Diver of Returns in Latin America
The bulk of equity returns are driven by EBITDA growth, with leverage playing little to no role in the majority of transactions.  Organic revenue growth fuels 80% of EBITDA growth in Latin America deals.  This compares with organic growth’s 44% contribution to revenue growth in the US and European studies.
Despite the market fragmentation in these markets, add-on acquisitions are a comparatively minor factor, accounting for only 14% of revenue growth.
Cost reduction, a significant source of profit growth in the US and Europe, has contributed far less in Latin American exits.  This could also reflect the prevalence of “growth” versus “turnaround” investment rationales, as well as less stress on portfolios as a result of robust macroeconomic growth in the region over the last few years.
Buying Well: Proprietary Deals Rule
More than in developed markets, network relationships — often informal — are key at every stage in the process, from finding good prospects to direction setting to final sale.
Auctions figured into only 20% of the deals we sampled, with proprietary deal flow featuring heavily — 65%.
Owning Well: Entrepreneurial Approaches to Driving Value
While buying well is important in the Latin American market, an entrepreneurial approach to ownership is crucial, far more so than in developed markets.  In the majority of deals sampled, the investment thesis hinged on backing entrepreneurs and professionalizing incumbent teams, the goal being to enhance or transform the core business model rather than completely “clean house.”
In three-quarters of the deals analysed, PE firms backed founders or family owners, most commonly to execute on plans already in place (40%), and these deals averaged the highest IRRs.  Partnering to jointly determine an improved course of action was a feature in 35% of the deals.  Only one-quarter of the deals entailed bringing in new management and a new plan, including a handful of instances where the PE firm started a company to avail itself of an opportunity in the market.
Although the majority of deals in Latin America are non-control, PE buyers are minority investors with strong influence in decision making, achieved via strong partnerships with management, incentives and board-level advisory roles more so than through term sheets.  However, in nearly every case, the ability to introduce financial discipline by deciding the finance function was critical to the deal.  In 90% of deals studied, PE buyers installed a new CFO; the CEO (often a founder) was retained over 60% of the time; the CEO was replaced most commonly in majority-stake deals.  Senior management teams were incentivised with equity or equity and bonus in 93% of companies in the study.
Realising Value: Alignment from the Outset
Whereas 74% of deals were sourced through private channels, half were sold through private channels, and for 40% the exit was an IPO.  Of those exits via sales to strategic and PE buyers, nearly 75% were to a single buyer sourced through the PE investor’s network or with some market testing.  In many cases the PE buyer had actually identified a potential buyer at the outset of the deal.  Auctions accounted for roughly one-quarter of exits.
Regardless of whether the mode of exit is to a strategic buyer or via the listed markets, PE buyers are executing on similar goals: introducing or improving financial discipline and corporate governance to ready the company for sale, which may mean elevating a company to the international standards required by multinationals or by retail investors in international markets.
Daniel Serventi is an Ernst & Young Transaction Advisory Services Partner based in Buenos Aires, Argentina. He leads the Transaction Advisory practice that EY has in South America. Daniel has industry expertise in Utilities and Oil & Gas sectors. Daniel specialises in providing transactional and consulting services to power generation and electric utilities companies, among other industries. He also leads many due diligences in Argentina (most of the privitisation processes) as well as in other countries in the región such as Peru, Bolivia and Chile.
Daniel Serventi can be contacted by phone on +54 11 4318 1595 or alternatively via email at

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