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March 25, 2013 9:23 pm

More entries and fewer exits in Latin America private equity - Analysis

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This article is provided to readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals.

Private equity investment into Latin America is on the rise, but mature portfolio companies are starting to accumulate as investors wait for more ideal exit conditions, according to mergermarket data and industry sources focused on the region.

Last year saw 53 announced private equity investments in Latin America, which was 26% greater than 2011 in terms of deal count, according to mergermarket data. At the same time, the number of exits as a percentage of buyouts stood at only 28.3%, compared to a global average of 70.2% and the US average of 91.1%.

The numbers could spell a possible uptick in exits this year, especially in Mexico, and buying opportunities, especially in Brazil, for those looking to enter some of the world’s faster growing economies. Colombia may also see more activity, with the number of announced PE investments almost tripling between 2011 and 2012.

Optimism in Mexico

For buyers combing the market, Mexico may be the place to explore as it is an optimal time for mature private equity held companies, or those held from four to six years, to exit, said one managing director at a Mexican bank that declined to be identified due to compliance reasons.

“You must understand that the motor that moves M&A activity in the world is optimism, and Mexico is right now in the middle of a large optimistic wave,” agreed Saúl Villa, Head of M&A at KPMG in Mexico.

Antonia Stolper, Partner at Shearman & Sterling and head of the firm’s Capital Markets-Americas and Latin America groups, agreed on the sentiment in Mexico. People are “hugely optimistic,” she said, and “everyone wants to get involved.” While there is not a hugely liquid IPO market in Latin America in general, Mexico has a healthy IPO pipeline, she noted.

New reforms in Mexico may also encourage more inbound investment in sectors including real estate, tourism, infrastructure, natural gas, shale oil and renewable energy, said Jose Francisco Torres Landa, a partner at Barrera, Siqueiros y Torres Landa S.C.. Healthcare, education and financial services are other hot areas, according to Villa at KPMG.

Mexico’s more than 40 free trade agreements also show that it receives foreign investment quite happily, and companies can enter the country and find good companies at good prices, Villa continued. He added that he sees EBITDA levels that are significantly greater than those of similar companies in other countries.

Challenges in Brazil

Meanwhile, Brazil has been leading the region with the most PE investments, with 32 in 2012, but sources are forecasting only modest growth in PE activity this year. According to Clovis Meurer, president of ABVCAP, the Brazilian Association of Private Equity and Venture Capital, despite its vast mineral reserves, its stable democratic government and pro-business culture, Brazil’s high interest and inflation rates pose challenges to investors.

“I believe PE firms are more likely to invest than exit their investments this year. They will wait for the stock exchange to return to normal, and may wait to sell their stakes to strategic players until the market can promise better valuations,” Meurer said.

Most investments in Brazil seem to be concentrated among large companies in the infrastructure sector, noted Andre Pimentel, Chief Executive Officer at Performa Partners, a consultancy firm focused on assisting mid-sized companies with M&A.

But mid-sized companies in Brazil may be feeling the heat, Pimentel said. The Brazilian economy grew only 0.9% last year -- the lowest rate in three years. The domestic consumption that drove the country out of the financial crisis in 2008 registered the worst result since 2003, and on top of that, the high national interest rate and inflation show no signs of abating. In the face of these adverse conditions, most companies are adopting conservative positions and refraining from making investments, he said.

The current scenario seems to only favor infrastructure companies, which are benefiting from government investment in the construction of ports, airports, railroads and roads. The government is also reformulating some of its concession agreements, to create opportunities for companies in the space, Pimentel added.

Chile and Peru

Chile and Peru are also seeing increased private equity activity due to macroeconomic factors. Both countries have well managed fiscal policies and flexible exchange rates, said Rodrigo Valdez, General Manager in charge of the Andean Region at Celfin Capital - BTG Pactual. In Chile there is growing activity in sectors such as retail, construction and financial services, he said.

Peru is also welcoming foreign investment, noted Jose Luis Silva, Peru’s Minister of Trade, Industry and Tourism, in an interview with this news service. Peru and Chile have a strong relationship, for example, with Chile investing more than USD 7bn into Peru annually, he added.


One country that may not see movement for sometime is Argentina, where PE levels are expected to remain low for the next six months as firms face difficulties finding exits for their investments, said one banker. Private equity in Argentina came alive in 2004, as it rebounded from the financial crisis in 2001, only to decrease again in 2008, the banker said.

Attractive sectors have traditionally included agribusiness, energy-related businesses, and unregulated sectors such as software, IT and online gaming, the lawyer said.

Increased government intervention in the economy and last year’s nationalization of Argentina’s largest oil company, YPF, have also turned off some foreign investors, the banker and a lawyer agreed.

One bright spot, however, may be in agribusiness. Due to a decline in asset values and the need for growth capital by some of these players, PE investors may still find attractive opportunities here and in other unregulated markets, both sources said.

The Argentine economy also benefits from high commodity prices, GDP growth, an educated workforce and its strong entrepreneurial community, the lawyer said, noting that he anticipates more opportunistic deals.

Getting out

The number of private equity exits in Latin America has been decreasing, with only 15 in 2012, compared to 16 in 2011 and 25 in 2010. With limited IPO options, selling to strategic buyers may be the best bet for these investors, several sources said.

In Mexico about 20% may use the stock exchange as a medium to exit, but most PE investors will sell their stakes to strategic buyers, said Villa.

Secondary buyouts are uncommon in the region. According to mergermarket data, secondary buyouts as a percentage of total exits was 6.7% in Latin America in 2012, compared to 34.1% in Europe and 32.1% in the US during the same period.

And while Stolper with Shearman & Sterling said the IPO pipeline is strong in Mexico and Brazil, “the rest of the continent is very spotty,” she said.


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