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Fundraising for private equity investments in Latin America will likely double this year amid growing optimism about the region’s prospects, according to one of the industry’s top executives. Richard Frank, the chief executive of Darby Overseas Investments Ltd., who was installed Saturday as the chairman of the board of directors of the Latin American Venture Capital Association, says dedicated Latin America funds should be able to raise about $800 million, and possibly as much as $1 billion, in 2004.

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Latin America Pvt Equity Fundraising Back On The Rise

March 29, 2004 07:37 LIMA (Dow Jones) — Fundraising for private equity investments in Latin America will likely double this year amid growing optimism about the region’s prospects, according to one of the industry’s top executives.
Richard Frank, the chief executive of Darby Overseas Investments Ltd., who was installed Saturday as the chairman of the board of directors of the Latin American Venture Capital Association, says dedicated Latin America funds should be able to raise about $800 million, and possibly as much as $1 billion, in 2004.

“This is a moment of opportunity,” Frank said Saturday in an interview with Dow Jones Newswires on the sidelines of the Inter-American Development Bank’s annual meeting here. “We’re starting to see investors worldwide look again at those kinds of investment in Latin America.”

Private equity deals for Latin American companies slowed to a trickle following Argentina’s $100 billion default in late-2001. After having peaked at $3.7 billion in 1998, fundraising for Latin American deals fell to about $400 million in each of the past two years.

Members of Lavca, as the venture capital association is known, are hopeful that fundraising could hit $2 billion this year, a figure that Frank feels is a bit too optimistic. “It all depends what some of the big firms, such as the Carlyle Group do,” the Darby CEO said, referring to the world’s biggest private equity company, which recently opened its first regional office in Mexico.

One of the problems that the Latin American private equity industry faces in growing its business is its relatively young status. International private equity funds dedicated to the region, Frank notes, have only been in existence for a decade.

“We haven’t yet shown a consistent track record. Compound returns over ten years in the mid- to high teens will do wonders for the industry,” Frank said, noting that, since the average life span of these funds is a decade, the jury is still out on most.

Annual fundraising of “$4 billion, from an opportunity point of view, isn’t that much; (the industry) could place that very well,” he said. “The constraint now is convincing investors about the (negative) headlines they read (about the region), and demonstrating a track record.”

Darby’s track record appears to have bucked that of the overall industry trend in recent years, as it has consistently expanded its fundraising activities. Darby, a wholly owned affiliate of Franklin Resources Inc. (BEN), has nearly $800 million under management in Latin America. That marks a ten-fold increase from the amount under management when the firm was established in 1994 by former U.S. Treasury Secretary Nicholas Brady, who’s best known for implementing a debt restructuring plan that bears his name and rescued many Latin American countries in the 1980s.

“Our goal is to have a firm in five years that is twice or three times as big as it is now,” Frank said, noting that he expects to close a handful of deals in the coming months.

Within the next ten days, Darby should close a deal in the energy sector in Brazil, Frank said, without providing details. A banking-sector investment in Central America will likely be completed within 30 days.

Darby is even eyeing investments in Argentina. The firm had steered clear of Argentine companies in the years before the default – Frank says it turned down 30 projects there between 1996 and 1999 – as valuations seemed exorbitant.

That caution served the firm well, but it’s looking at “a couple things” in Argentina, in what Frank termed as “opportunistic investment.” He said it’s too early to say when an Argentine deal will close, but said an energy sector investment is in the works.

“Argentina, we are looking at that from the point of view not of ‘distressed assets’…we’re looking for distressed seller positions,” Frank said. He explained that Darby is interested in situations where shareholders demand that an asset be taken off the books because of economic turmoil – something that has occurred in Argentina and elsewhere in the region in recent years.

Last month, Darby said it had purchased a stake in Colombia’s largest thermal electricity generator from FirstEnergy Corp. (FE), wrapping up the latter’s retreat from Latin America. Darby purchased a 28.67% interest in Termobarranquilla SA Empresa de Servicios Publicos.

Meantime, Darby continues fundraising for Latin America projects. Fundraising work is well underway on the Darby-BBVA Latin American Private Equity, with $100 million raised out of a target amount of $250 million. The firm is also nearing completion on a Brazilian mezzanine fund, valued at $100 million. Mezzanine financing involves debt instruments that contain equity features, such as loans or bonds that are convertible into equity.

Overall, Darby seeks to deepen its involvement in Latin America while diversifying geographically. A new mezzanine fund for Central and Eastern Europe, its first for the region, is an example of that diversification. Investment also continues in Asia, for which Darby has a $246 million infrastructure mezzanine fund.

Frank noted that the scarcity of capital in Latin America bolsters the opportunities for private equity firms to make money in the region. By contrast, emerging Asia, where international private equity has been at work for a quarter century and capital is more readily available, doesn’t generate returns as attractive as those in Latin America.

In his new capacity at Lavca, Frank will serve as a spokesman for the industry and he aims to boost membership in the association, which held its second annual policy seminar here on Saturday.

Through advocacy, research, education, networking and identification of best practices, Lavca seeks to strengthen the environment for private equity and venture capital to spur economic development in Latin America.

The number of actively investing Latin America private equity firms stood at 46 last year, down from 77 in 2000.