By Pan Kwan Yuk
Financial Times

September 12, 2012 – Remember all those stories about the huge lovefest happening between private equity and Latin America?

Well, it seems like even the most sincere and ardent love affair can do with a pause every now and again.

After two years of record fundraising for the region, funds raised for private equity and venture capital investment in Latin America fell dramatically in the first half of 2012 as firms took a break from fundraising to focus on capital deployment.

Only $1.9bn was raised in the first six months of the year, a steep decline from the $4.9bn raised during the same period a year ago, figures from the Latin American Private Equity & Venture Capital Association showed.

Cate Ambrose, president of LAVCA, attributed the decline to a number of factors, most notably greater participation from mega funds last year. Brazil’s Vinci Partners, Gavea Investimentos, BTG Pactual and Carlyle Group were among those that raised billion-dollar funds in 2011.

“2011 was an extraordinary year,” Ms Ambrose told beyondbrics. “There are still not that many Latin American funds that can raise more than $1bn. So obviously, if you raised $1bn last year, then you are not going raise $1bn again this year because someone has to go and invest the $1bn that has already been raised first.”

The second half is not expected to get any better. Patrice Etlin, managing partner at Advent International, said fundraising for the second half of this year would most likely be weaker than the first half.

“It usually takes three to four years for capital raised to be deployed,” he told beyondbrics. “The fundraising cycle should pick up again in 2013 and 2014.”

But don’t be fooled by the headline fundraising figures said Ms Ambrose. Private equity’s interest in Latin America is as strong as ever.

Despite the fall off in fundraising this year, private equity investment in the region has held steady. Ninety deals, worth $2.73bn were struck in the first half, compared with 65 deals, worth $2.67bn, achieved during the same period in 2011.

Separately, a LAVCA/Coller Capital survey of 105 private equity investors around the world, found that 87 per cent of those already investing in the region say they plan to maintain or increase their exposure to LatAm PE funds over the next 12 months.

Ms Ambrose also cites the rise in the number of mid-sized funds, with $200m to $300m, as cause for optimism.

“In a way, these are more important numbers because these funds are more sustainable,” she said.

Brazil still attracts the most private equity interest in the region – accounting for 45 per cent of funds raised and 83 per cent of deals struck by value. Investors are attracted by the country’s growing middle class, its emerging energy industry and its huge infrastructure needs.

But with more than 80 per cent of the private capital available in Brazil chasing deals from among a small pool of just 3,000 large companies in the country (those with sales of more than $200m), competition for big deals is fierce.

Instead, the real opportunities will be in the mid-market and that is why the growth seen in the number of mid-sized funds is encouraging. In Brazil, there are over 14,000 companies with sales of between $30m and $200m and these are the ones that need access to cheap capital. (Remember, despite recent interest rate cuts, the benchmark Selic is still at 7.5 per cent).

And still there are others who are casting their nets further afield. Both Mexico and Colombia have seen private equity investment in their country surge: with Mexico, from $84m in the first half of last year to $228m in the first half this year, and for Colombia from $1m to $99m.

“LatAm is a region that is not going away,” said Ms Ambrose. “It’s going in one direction: up.”

http://blogs.ft.com/beyond-brics/2012/09/12/private-equity-in-latam-cooling-but-still-hot/#axzz26vOsyuBo