International: Regionalism is Central American Buzzword –

WASHINGTON, D.C. – Although the market remains wary of a variety of risks endemic to Central America, the region is beginning to attract more attention among private equity investors.

This is due to several factors. Countries are proving more politically stable, and the governments are liberalizing. But equally important is the fact that the firms themselves – those who want to attract LPs for new funds, as well as multi-national companies for exits – have adopted strategies that are more regional in nature.

Although no regional figures are yet available on investment in Central America, sources estimate that the region has a combined gross domestic product of nearly $90 billion.

Existing Roadblocks

To be sure, certain investment obstacles remain. Among them: both individual countries, and – in some circles – the entire region is considered too small to be noticed by most big-name private equity investors. Furthermore, there is a dearth of credit because private equity as a concept is still new to the region, which means it must be explained to Central American business owners. To boot, family-owned businesses predominate, and these owners are hesitant to open their equity and give up control. And finally, like so many emerging regions, the capital markets there are underdeveloped, making exit strategies difficult.

In light of these difficulties, regionalism – the packaging of countries as a whole, as well as seeking out cross-border opportunities – has become crucial, as executives at both Mesoamerica Investments and CDC Group have discovered.

“We’re developing a strategy for the whole region [including South America, and Mexico],” said Ian Weetman, regional manager for the Central American office of London-based CDC Group. Weetman says CDC is launching its second Central American private equity fund – the Central America Investment Fund II LP – with a $50 million target through its subsidiary, Central American Investment Management, in the third quarter of this year. But, he added, “Fifty million dollars is strictly a stepping stone to larger, more regional investments that CDC will back.”

Regional Focus

Weetman says he will place “a strong emphasis on deals with a regional flavor,” – meaning Central America and all of Latin America – primarily in the areas of high-tech and infrastructure.

“We believe that to prosper and survive, [businesses] need to think beyond their own borders,” he said. “Family businesses will have to go regional. The most logical way, when debt financing is either not available or not appropriate, is through private equity. [This] is creating an underlying demand for private equity.”

Weetman did acknowledge that “Latin America in general is not necessarily on the radar screen of institutional investors.” He also said he does not see that changing any time soon, because of the returns in the United States. “Why take the extra risk [of investing in Latin America] with similar returns?” Nevertheless, he believes the market potential for private equity in Central America and beyond “is huge,” and over time will be profitable.

CDC will manage the fund and have participation rights in all deals, said Weetman, while the Fund will have both right of first refusal up to $5 million and participation rights, also up to $5 million. CDC acquired mostly minority stakes in small- to medium-size technological and manufacturing companies through its first fund and plans to continue this strategy. However, Weetman said his firm will consider deals ranging between $1 million to $50 million with the second fund. “If appropriate, we’re not afraid of a majority stake,” he said. Moreover, CDC is promoting management buyouts across the region through a London-based unit that is dedicated to MBO transactions.

“The fund [might] be a Grand Cayman LP, [for] ease of administration and as a vehicle to attract institutional investors in North America and Europe,” Weetman added.

Its first fund, the $26 million Central American Investment Facility Ltd. (CAIF) fund, which was launched in 1996, is now fully invested. CDC, formerly the Commonwealth Development Corp., has offices in Costa Rica, Bolivia, Peru, and recently opened an office in Miami.

Other Players

San Jose, Costa Rica-based Mesoamerica Investments is also “packaging” Central America as a single market in order to attract investors, said Luis Javier Castro-Lachner, a general partner. He said the problems and opportunities were essentially the same throughout Central America and that the regionalism strategy is working.

For example, Mesoamerica and Spanish Telefonica Internacional SA, a major telecom player throughout Latin America, each committed $200 million to a joint venture in an effort to roll up telecom companies throughout the region recently. Castro-Lachner says Telefonica “wouldn’t look at [the markets individually].” Additionally, Mesoamerica and Telefonica created Miami-based company Telefonica Centroamerica to operate the new companies it acquires. Currently it has operations in Guatemala and El Salvador.

Parent company Bain Capital, which has offices worldwide, founded Mesoamerica in 1996 to go after opportunities in a region experiencing high economic growth and increased liberalization. Limited partners included prominent Central American businessmen. Through the original $25 million fund, Bain sought to obtain a controlling interest in the equity of companies where it could play an active role in the formulation of the business’ strategies.

But Mesoamerica faced problems in investing this fund, particularly in determining how to diversify a small fund in several businesses. For example, due diligence became prohibitively expensive.

“We therefore decided to focus on only a few industries (primarily telecom, as the market for long-distance customers calling the U.S. is bigger than in most of South America),” Casro-Lachner said. “We searched for economies of scale, developed a macro strategy within these industries, and searched for companies within these industries to develop the strategy.”