LAVCA in the News
Equity Funds Still Like Latin America
7 June 2006
Undeterred by the recent selloff in emerging-market assets or the uncertainty ahead of Latin American presidential elections, private-equity firms continue their foray south of the border. Private-equity funds, which take stakes in closely held companies hoping to realize gains by later selling them or taking them public, have remained active in Latin America even as dedicated portfolio investors shed positions.
Equity Funds Still Like Latin America
June 7, 2006 — Undeterred by the recent selloff in emerging-market assets or the uncertainty ahead of Latin American presidential elections, private-equity firms continue their foray south of the border. Private-equity funds, which take stakes in closely held companies hoping to realize gains by later selling them or taking them public, have remained active in Latin America even as dedicated portfolio investors shed positions.
Last Tuesday, Advent International announced it was leading the purchase of Mexico’s Controladora Milano S.A.., the country’s largest discount clothing retailer, for $200 million. On Thursday, the same firm led a group that completed the purchase of Uruguay’s Nuevo Banco Comercial, the country’s largest domestic commercial bank, for $167 million, according to sources close to the deal.
The interest in the region is mainly focused on the two largest economies, Brazil and Mexico, with investor- friendly but smaller Chile still an attractive choice. But there is a growing interest in new markets, and investors are more receptive to innovative deals, as the buyout of Mexico’s Milano seems to attest.
Funded with $110 million in equity and $90 million in debt, Advent said it marks the first deal leveraged mainly on cash flow.
Most merger and acquisition deals since Mexico’s banking crisis in the mid-1990s have been all stock transactions smaller in size or large acquisitions by major corporations that secured their debt against existing assets.
“We were able to build a compelling case for this deal, which is mid-range for most of the world, but for Latin America it’s a landmark deal, and one that could start a trend,” said Santiago Castillo, a principal at the Advent International office in Mexico.
Advent arranged a syndicate of investors to acquire Milano from an investor group led by Newbridge Latin America, another private-equity fund that focuses in the region.
The deal included funds managed by Capital International, BBVA Proyectos Empresariales and the Netherlands Development Finance Company, along with Standard Bank of South Africa and Scotiabank of Canada, which co-led a group of top-tier Mexican and international banks, Advent said.
The deals in Mexico and Uruguay come at a time when market investors are reconsidering emerging-market assets. With global interest rates on the rise in industrialized nations, investors no longer need to seek yields in riskier assets.
Emerging-market equity funds posted $5 billion in net outflows recently, their worst result in more than two years. Data released by Emerging Portfolio Fund Research, Cambridge, Mass., said the outflows accounted for 1.74% of emerging-market equity funds’ total assets and represented the worst outflows since May 2004.
Advent’s Mr. Castillo said private-equity investors are generally less concerned with short-term market fluctuations, as they tend to have a longer horizon than fund managers, who must meet performance goals every quarter. He said Advent is still looking at opportunities in Mexico in the financial, airport and industrial sectors, and expects to see new deals with increasingly complex structures.
For experienced private-equity investors in Latin America, the timing of the Mexican deal just weeks ahead of a presidential election speaks volumes about the change in attitude.
“In the past, virtually nothing happened in an election year,” wrote Gary R.Garrabrant, chief executive and co-founder of Equity International, a real-estate private-equity firm that invests in operating companies outside of the U.S., including Latin America.
Among other investments, Equity International led the initial public share offering of Mexico’s homebuilding company Desarrolladora Homex S.A. de C.V. on the New York Stock Exchange and the Mexican Bolsa. Its first fund, Equity International Properties, was almost entirely invested in Latin America.
“We believe (and assume that others do also) that election results will have little-to-no-effect on Mexico from an investment perspective,” said Mr. Garrabrant in an email exchange during a recent trip to Asia.
He noticed a change in perception about the region since his company started investing in Latin America eight to ten years ago. In the case of Mexico, he says, there was a “breakthrough” about five years ago when major financial institutions, from Spanish banks to U.S. insurance companies and pension funds, began to make substantial investments in the country.
He also cited prospects in Chile and in Brazil, where his company has made investments in local real-estate developer Gafisa SA.
In Brazil, Mr. Garrabrant said his company is pursuing opportunities in the corporate real-estate sector and in specialty financing, while he cited Chile’s retail sector.
Despite the enthusiasm after years of investing in the region, Mr. Garrabrant recognizes Latin America still lags behind Asia and emerging Europe. For his company’s fund, Equity International Fund II, Mr. Garrabrant expects to focus in countries such as India and China. After peaking at $5 billion in 1998, private-equity flows just passed the $1 billion mark in 2005 after a few years below that level, said Alex Burgess, editor of the Venture Equity Latin America, a publication that tracks the private-equity and venture-capital industries in the region.
In contrast, Asia received $15 billion in private-equity flows in 2005, Mr. Burgess said.
It could be a matter of perception, but it remains a sticking point for economies in the region that can’t develop further without investment.
In March, the International Monetary Fund’s Managing Director Rodrigo Rato warned about the lack of foreign direct investment into the region.
“International comparisons show that Latin America has been less attractive for foreign direct investment than other emerging regions, while domestic savings and investment also remain relatively low,” Mr. Rato said in remarks at a banking conference in Acapulco, Mexico.
While it’s a mistake to consider the whole region as a single entity, Latin America needs to do a better job about telling its story, said Ramona DeNies, research director at the Latin American Venture Capital Association, a U.S.-based nonprofit organization dedicated to promoting the growth of the private-equity and venture-capital industry in Latin America and the Caribbean.
“The region in general needs to provide more information for investors,” she said.
Still, Ms. DeNies mentioned Brazil as an example of great leaps in this regard. She says Brazil is attracting the bulk of inflows not only because of the size of its economy and its growing status as an emerging global economic power, but also because of new incentives for the development of private pools of funds and the participation of existing pension funds.
She also mentioned a recent initiative by a team that included an association board member. That resulted in the passing of legislation in Mexico that allowed for the creation of investment vehicles, and she says there is growing interest in Colombia’s energy sector and opportunities in Central America as a result of its free-trade agreement with the U.S.
“Of course, we will see volatility in the near term,” said Advent’s Mr. Castillo. “But when we talk to investors today, we talk about five- to seven-year horizons,” he said.
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