While Brazil remains private equity’s sweet spot in Latin America, other countries in the region are increasingly capturing the spotlight.
Forty-six percent of global institutional investors surveyed said they plan to commit more capital to Latin America beyond Brazil this year, according to the Emerging Markets Private Equity Association’s Global Limited Partner Survey.
Both Brazil and the Latin America ex-Brazil region saw 11 transactions take place in the first quarter of 2013, the data show. In the first quarter of 2012, just 10 deals were done in Latin America ex-Brazil while 15 took place in Brazil.
When it comes to the value of transactions, Empea data show those of Latin America ex-Brazil were slightly higher at $122 million, compared to $120 million just for Brazil. The opposite was true in the first quarter of 2012, when the value of deals done in Latin America ex-Brazil was $188.4 million, much lower than Brazil’s $682.4 million.
“Across the globe we are seeing … that countries with similar characteristics to the BRICs [Brazil, Russia, India and China] are appealing to private equity,” said Jeff Bunder, global PE leader at Ernst & Young. In the case of Latin America, investors are looking to invest in markets such as Mexico, Colombia and Peru, which exhibit similar characteristics to Brazil, he said.
“Mexico and Andean countries Colombia and Peru bring very attractive investment opportunities because there is a coincidence of factors in all three,” said Gustavo Ferraro, managing director at Gramercy Funds Management LLC, head of the firm’s Latin American Markets and co-head of Latin America Private Equity. “They have a sound macroeconomic situation, a growing consumer base and resilient growth, even when global growth is facing difficulties.”
It is no coincidence that all those countries — Mexico, Colombia and Peru — moved up in the Latin American Private Equity and Venture Capital Association’s 2013 Scorecard, which ranks Latin American markets by how investor-friendly they are in terms of private equity.
Gramercy, an emerging markets investment manager that formed a Latin American private equity team in December, plans to invest evenly in Mexico, Peru, Colombia, Argentina and Brazil, according to Ferraro. The firm is said to be fundraising, but Ferraro would not comment, citing regulatory issues.
Out of the up-and-coming ex-Brazil Latin American markets, Mexico is garnering the most attention. Mexico has surpassed Brazil in gross domestic product growth, with gains of 3.9% in the past two years, versus Brazil’s 2.7% in 2011 and 0.9% last year. As an additional sweetener, Goldman Sachs Group Inc. predicts Mexico will become the world’s fifth-largest economy by 2050.
Mexico lends its name to a new acronym that identifies the emerging market geographies with the most growth potential. The acronym, TIMPs, stands for Turkey, Indonesia, Mexico and the Philippines, and was coined by Turner Investments chairman and chief investment officer Bob Turner. Turner points to Mexico President Enrique Peña Nieto’s administration’s reform efforts, particularly in the energy sector, as something that will drive growth in the future as it would break up monopolies and increase competition.
Reform efforts from previous administrations have also helped Mexico attract private equity investments. For instance, in 2009 the government allowed domestic pension funds to invest up to 20% of their $137 billion assets in private equity. According to data from Bain & Co., pension funds have since invested a total of about $4 billion in fresh capital, half of it focused on the real estate sector.
Andean countries Colombia and Peru — while not part of any newly acronymed group — are also experiencing GDP growth above that of Brazil’s and a rapid expansion of their private equity industries.
In Colombia, where GDP increased 4% in 2012 and is expected to rise 4.2% in 2013, according to Barclays plc, the private equity industry is still small, but growing aggressively. According to data from local development bank Bancóldex, 10 Colombia-focused private equity funds closed with commitments of $647 million, up from 2011, when five funds closed with $277 million in commitments.
In Peru, GDP growth has been even more spectacular and is expected to continue that way. Barclays’ data shows that 2012 GDP increased 6.3% and that it is expected to rise 6.6% this year, making it the fastest-growing economy in Latin America.
Fundraising for Peru-focused funds has seen a lot of activity recently. Carlyle Group raised a Peru-focused fund that closed in February with $308 million in commitments. In May, local fund Nexus Group raised $600 million for its NG Capital Partners II LP fund, exceeding its $500 million target.
Another common driver of increased private equity interest in these Latin American markets beyond Brazil is potential returns on investment. According to the Coller CapitalLavca LP survey, while 76% of investors expect net annual returns of 16% or more from their Latin American private equity funds excluding Brazil, 65% expect the same returns from their Brazil-only funds.
In addition, intensifying competition among private equity firms vying to make acquisitions in Brazil, particularly in the southeastern part of the country, has been driving up valuations, especially those of target companies with annual revenues surpassing $100 million.
“According to reports from local fund managers, this concentration has … driven up multiples, with large private companies in the range of 10 to 12 times Ebitda, while midsized private companies are being acquired for 6 to 8 times Ebitda. However, competition from Brazilian strategic or corporate investors has also pushed up valuations at the top end of the middle market,” said Juan Savino, director of research at Lavca.
Meanwhile, valuations for middle-market targets in Mexico, for example, have remained relatively stable at 4 to 7 times Ebitda, according to sources.
Nevertheless, that does not mean private equity firms are leaving Brazil behind to explore opportunities in Mexico, Colombia or Peru. Actually, private equity activity still has room to grow in Brazil.
Darby Overseas Investments Ltd., for instance, continues to see attractive investment opportunities in Brazil. “About 40% to 45% of limited partners seeking to invest in Latin America say they would invest in Brazil-focused funds. Another 40% to 45% say they would invest in Latin American regional funds in which Brazil plays a dominant role in terms of the fund’s allocations.
“This shows that the market still considers Brazil a key destination in Latin America,” said Darby managing director Eduardo Farhat.
For midmarket players such as Darby, Brazil still presents a wealth of opportunities, especially when venturing out of São Paulo. “As part of your Brazil strategy, you need to go deeper to find the right opportunities at reasonable valuations,” he said.
He added that the northeastern and southern regions of Brazil are growing at 10% rates annually and that there is not as much competition for deals as in São Paulo. “In places like Ceará and Pernambuco, you can take advantage of Chinese-like growth without having to speak Mandarin and while staying at places that have very nice beaches and no cold winters,” Farhat said.