LAVCA spoke with Dirk Donath, Managing Partner Latin America for L Catterton about the mid-market consumer sector opportunity in Latin America and the appetite from global LPs for a pan-regional fund. Earlier in 2017, L Catterton Latin America successfully closed on US$400+ million of commitments towards its Fund, LCLA II. Donath also discussed the evolution of strategic acquirers targeting the region from US and European multinational corporations to regional Latin American champions and more recently Asian players seeking to establish their presence in emerging growth markets.
LAVCA: Please provide some background on L Catterton.
Dirk Donath: L Catterton, formed in 2016 through the partnership of Catterton, LVMH and Groupe Arnault, is the largest consumer-focused private equity firm in the world. L Catterton invests in all major consumer segments, including: Food and Beverage, Retail and Restaurants, Beauty and Wellness, Fashion and Accessories, Consumer Products and Services, Consumer Health, and Media and Marketing Services, as well as real estate projects anchored by luxury retail. Since its founding in 1989, Catterton has made over 100 investments in consumer brands across all segments of the consumer industry. L Catterton has US$14.0 billion of equity capital dedicated to growing middle market companies and emerging, high-growth enterprises, and over 150 investing and operating professionals in 17 offices across 5 continents. L Catterton has six distinct and complementary fund strategies focusing on consumer buyout and growth investments across North America, Europe, Asia and Latin America, in addition to prime commercial real estate globally.
Earlier in 2017, L Catterton Latin America successfully closed on US$400+ million of commitments towards its Fund, LCLA II, exceeding its fundraising target.
LAVCA: L Catterton was formed when LVMH and Catterton joined forces to create a new firm. What synergies exist that are relevant for Latin America? What is the luxury goods opportunity in Latin America?
Dirk Donath: The combination of Catterton with LVMH and L Capital brings a combination of experience, sector knowledge, expertise and know-how. LVMH also has a broad set of relevant insights and value creation opportunities in broader retail, given their ownership of Sephora and Duty Free. In addition to understanding and experience with luxury goods and high-end branded products, the combination also brings to the Latin American operations significant resources and valuable knowledge in areas such as marketing, brand-building, distribution, retail operations and real estate. Also, the L Catterton network provides a set of relationships for Latin American brands and concepts looking to expand outside of their current markets and beyond the region, particularly to Europe, North America and Asia.
Our strategic merger with LVMH and L Capital has not significantly changed our point of view on the attractiveness of the luxury goods market in Latin America. More importantly, we are focused on a broader set of categories in verticals including: food & beverage, branded products, retail & restaurants, consumer marketing/services, consumer durables, consumer finance, consumer enablers and other high-growth consumer-related categories in the region.
…we are focused on a broader set of categories in verticals including: food & beverage, branded products, retail & restaurants, consumer marketing/services, consumer durables, consumer finance, consumer enablers and other high-growth consumer-related categories in the region.
LAVCA: What is your background? In your long history in LatAm private equity, what opportunities do you see now in the region to raise a fund and what motivated you to team up with L Catterton?
Dirk Donath: I have been fortunate to have had several chapters to my career that have combined to contribute skills and experiences that are highly relevant to my role today. I spent 11 years at McKinsey as a management consultant, working with clients that included large families, groups and local/regional strategics as well as multinationals and principal investment firms. While at McKinsey I led the Latin America Consumer and Retail Practice and had the opportunity to work across the region. I was also an entrepreneur, when I created the concept, developed business plan and raised capital for FarmaCity, growing to become a leading drugstore and retail pharmacy chain in Argentina. I then entered principal investing when, along with several partners, we started Pegasus Capital, focused on distressed private equity, turnarounds and restructurings in Latin America. I then joined Eton Park, a global multi-disciplinary investment firm that grew to US$14.5 billion in AUM where I led the private equity and illiquid group for emerging markets. Members of my team and I joined Catterton to focus on private equity opportunities in the broad consumer sector across Latin America.
The LCLA team is comprised of over a dozen investment and operating professionals, including three investing partners, which bring strong expertise in investing, managing and exiting investments in Latin America. We currently have professionals in Mexico City, Bogota and Sao Paulo, which provide the Fund with local presence across the region.
There are multiple factors that make investing in Latin America attractive now. We see the current environment as very attractive for the type of capital that we can provide as well as the opportunity set to grow successful businesses in strong categories. The current scarcity of capital in the region poses opportunities to structure attractive investments for providers of capital that have a long-term vision and an ability to wait-out short term uncertainties.
LAVCA: What was the appetite for a mid-market, pan-regional, consumer-focused fund? What type of investors committed?
Dirk Donath: We see significant benefits to being a pan-regional fund and to look at opportunities across the region. Decoupling of regional economies provides diversification within the Latin American region, allowing a pan Latin America-focused fund to allocate capital to the best investment opportunities across markets over time. In addition we are seeing many investment opportunities that benefit from a regional expansion strategy and presence. Our Fund represents a differentiated private equity strategy for the Latin America market place given its particular regional focus on Consumer-related investments. As such, we found strong interest and appetite from leading institutional investors, including endowments, pension funds, financial institutions and family offices across the globe.
…we found strong interest and appetite from leading institutional investors, including endowments, pension funds, financial institutions and family offices across the globe.
LAVCA: What is your preferred ticket size? Majority vs. minority investments?
Dirk Donath: Our Fund targets investments in the US$40-75 million of equity capital and have the ability to deploy more capital through co-investments from our existing limited partners as well as from other Firm resources.
We target control or co-control investments typically through majority investments or minority investments with significant co-control and governance rights.
We pursue a partner-oriented collaborative approach in all our investments, seeking to add-value through operational improvement opportunities where we can provide (in addition to growth capital) significant sector expertise, resources, know-how, best practices and relationships.
LAVCA: What markets within Latin America do you find interesting and why? Do you see different opportunities in different markets? Is the idea to build pan-regional companies or country-specific ones?
Dirk Donath: Our Fund targets investments in Mexico, Andino (Colombia/Peru), Brazil and opportunistically Southern Cone (Argentina/Chile). We feel that these markets represent the largest consumer-opportunities in the region and enjoy positive tail-winds over the medium-long term for consumer-oriented businesses. While we take into account the macro-political environment and conditions in each market, we clearly emphasize the attractiveness of specific consumer categories and their underlying fundamentals.
We look both at opportunities which are country-specific as well as pan-regional. Our investments in Bodytech and Rapsodia represents a clear example of leading pan-regional companies with presence throughout Latin America.
To the extent possible, our team explores regional (and international) expansion opportunities for portfolio companies. Having said that, where there is significant whitespace for growth in the markets where companies already have a presence, growth in existing current markets is typically core to the business plans.
LAVCA: In the last year, L Catterton has announced deals including Bodytech, St. Marche, Grupo Espaçolaser, and Rapsodia. How do these investments fit within your strategy and what is the growth potential?
Dirk Donath: The past 18 months have been a particularly busy period for our team, as we have announced four new investments for the portfolio. These investments have all been in leading companies in attractive categories that we have targeted. They represent strong well-known brands that have been around in some cases for several decades. All of these businesses represent significant growth prospects, both in their home domestic markets as well as regionally (and in some cases globally). These growth prospects can be achieved in these cases both via organic expansion as well as M&A opportunities. Also, in all of these cases we have successfully partnered with the founders of the businesses, who see significant upside potential in collaborating with L Catterton to grow their enterprises.
The past 18 months have been a particularly busy period for our team, as we have announced four new investments for the portfolio.
LAVCA: To what extent do global synergies drive your strategy in Latin America? In the case of the merger of Australia’s Seafolly and Colombia’s Maaji, how do you source deals that complement existing portfolio companies in other markets?
Dirk Donath: We seek to deploy capital in leading consumer companies in attractive categories with strong growth potential. We also look to global consumer trends and tendencies that provide favorable underlying fundamentals to these categories. Many of these trends are identified by our proactive research and analysis of consumer behavior in Latin America and globally. In addition, we often target sectors where the Firm has successfully invested elsewhere in the past and rely on the accumulated knowledge and experience of both Catterton and LVMH.
There are several areas where we see synergies and value including: sourcing, underwriting, value creation initiatives, portfolio management, talent acquisition, supporting processes and exits.
LAVCA: How does the complexity of the political and macroeconomic environment in Latin American markets affect the private equity opportunity?
Dirk Donath: We are category investors. While we take into consideration current and expected macroeconomic conditions in our target markets, we spend considerable amounts of time and resources searching for the consumer categories that are expected to deliver strong growth over the medium term. Our regional approach investing across multiple economies provides diversification as business cycles tend to be de-coupled from one another across Latin America. Lastly, our medium to long term investment horizon assists in weathering different macroeconomic cycles.
LAVCA: What is the long-term strategy for exiting your investments in Latin America?
Dirk Donath: Our Fund’s long-term strategy to exit investments includes sales to strategics, sales to financial groups, IPOs and recapitalizations. Within the strategic set of acquirers in the region, over the years we have seen an interesting evolution from US and European multinational corporations to regional Latin American champions and more recently Asian players seeking to establish their presence in emerging growth markets.
LAVCA: Why did you join LAVCA?
Dirk Donath: LAVCA uniquely represents the principal investing community in Latin America. As such, it brings together funds, capital providers, managers, advisors and companies to facilitate investment activities across the region. In addition to providing valuable research and industry data, LAVCA offers tremendous relationships in the investing community.