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Executive Briefings

Executive Briefing: Is Capital a Commodity in Latin America?

19 July 2012

Investors active in Latin America a decade or more ago would have had a hard time imagining the scenario that they encounter today as they seek out deals: in key markets such as Brazil and Colombia, companies are flush with cash and business owners are competing with PE investors to acquire target companies.

Fund managers tell me that LatAm CEOs are not only buying up companies in their home markets, but in many cases looking to acquire companies in the US and Europe.

Particularly in countries like Colombia, Peru and Chile, where there is a relatively smaller stock of mid to large companies, the competition among local and international strategic investors and PE firms is intense. With strategics willing to pay high multiples, PE investors can be easily priced out of deals. This is especially true for investors targeting $100m+ deals.

In one example from 2011, more than 10 PE and strategic investors participated in a bidding war for Peruvian pharmaceutical chain Inkafarma, before the asset was ultimately acquired by Peru’s Interbank Group for approximately $350m.

Local investment teams and seasoned LatAm dealmakers are resourceful by definition, and many managers are emphasizing that flexibility is the key to closing new investments in the current environment – in other words, doing equity and mezzanine, majority and minority stakes, and investing across different markets and sectors.

Another approach involves teaming up with strategic acquirers on co-investments. In March, Brazil’s Gavea Investimentos partnered with Camil Alimentos, the largest processor of rice and beans in Latin America, and sugar conglomerate Cosan Alimentos, to create a new food company with a market value of nearly US$1.5bn. According to media reports, Gavea will own a 30% stake in the company, Cosan will hold 12% and the rest will belong to Camil.

The concentration of capital in more crowded markets has also driven fund managers to geographies that a year or two ago were seen as contrarian, with Mexico as the primary example.

There are a range of reasons why Mexico is an interesting mid- to long-term opportunity for PE investors (as identified in my last Executive Briefing). But the greatest attraction today is the prospect of a very underpenetrated PE market with comparatively few PE and strategic investors competing for deals, particularly in the mid-market. Local business groups and oligopolies often crowd out opportunities for large cap deals.

Asian sovereign wealth funds, and other financial investors who take a very long term view of Latin American economies, are also looking at Argentina, presumably with the idea that there will be an interesting buying opportunity at some point in the next year or two.

But perhaps the most widespread conclusion among investors looking to deploy PE capital in Latin America today is that the deal pipeline and valuations are more far more attractive for small to mid-cap companies. Certainly it is less likely that SMEs have easy access to alternate sources of finance.

One calculation, based on proprietary LAVCA data, points to a year on year increase of 33% in the number of mid-market deals completed between 2010 and 2011 (LAVCA will be publishing ‘An Overview of Mid-Marketing Investing in Latin America’ this summer).

Even firms with $1bn+ funds to invest are making smaller investments strategically. Advent International did two smaller deals in the healthcare space in 2011, acquiring Laboratorio LKM, an Argentina-based pharmaceutical manufacturer and then Biotoscana Farma in Colombia in a bid to build a regional platform in the sector.

Across Latin America roll up strategies – where investors set out to acquire mid-sized businesses in a given sector in order to achieve scale – have been popular. Nexxus Capital is aiming to achieve this with Taco Holding, a holding company with a diversified platform of brands in the quick service restaurant industry in Mexico. Since March last year, the company has acquired Arrachera House & Sixties Burger, Krispy Kreme de Mexico, Neve Gelato, Sbarro Mexico, and Caffé Diletto.

It is important to put any discussion of the current environment in Latin America into context: in Brazil, Mexico, Colombia, Peru and Chile private equity investment as a percentage of GDP is still a fraction of that in developed and other emerging markets such as Asia, and there is still a large stock of mid-sized, family-owned businesses that can benefit from PE investment in order to serve expanding domestic demand for a wide range of goods and services.

In addition, real estate investors are targeting an undersupply in housing, commercial, office, and tourism space, and infrastructure funds have been raised to finance a wide range of projects, from energy to transport, water, and sanitation.