The consensus among private equity firms conducting business in Latin America seems to be that the year 2000 was mostly quiet. The great wave of privatizations has passed, the Internet bubble has burst in Latin America, as elsewhere, and the attitude among many firms ranges from disappointment – “the year wasn’t quite what we hoped for” – to acceptable mediocrity – “it was not bad, but not great.”
Pedro Batalla, a principal with Darby Overseas Investments Ltd., called this year’s investment climate a mixed bag.
“We have had more opportunities, a lot of business coming to us, but financial structuring has become a key part of our work – you need to be more creative to generate funding, and it’s difficult for companies to raise money right now with the stock market situation,” he said. “[Thus] we are cautious. It will be key to have business plans that are fully funded next year and even through 2002.”
Ian Weetman, regional manager at CDC Capital Partners, was tentative in speaking on Central America, where CDC is a major investor. “We’ve seen a rather flat year across the region with more negative than positive trends, slowdown in growth and un-bullish business sentiment in all countries.” He attributed this in part to commodity prices, affecting agriculture industries.
Bernard Aronson of Acon Investments, concurred, citing several sources of the investment difficulties including, capital that left the region not returning, low commodity prices and high U.S. interest rates that have made competition more challenging.
Amid growing competition a year ago, investors said to stay the course and not panic in order to compete for the region’s best deals, limited financing opportunities and often-volatile political situations. Investors wondered if these troubles trickled from Asia or were homegrown, and worried if the Brazilian Real would stabilize. Most said they postponed fund-raising activities.
“There have been almost as many strategies implemented as funds raised,” said Ernest Bachrach, chief executive of Latin America at Advent International.
Looking forward, sources agree that Argentina is the biggest trouble spot. Acon’s Aronson said the Andean region is in turmoil. The capital markets are still not open, and exits remain problematic. Add to this the issue of track records where the results are in, and they are at best mixed, a fact that can be off-putting to potential LPs.
Jacques Gliksberg of Banc of America Equity Partners, said, “A lot of mistakes have been made. For those who are hoping to raise money for second funds, this is very difficult without exits from the first.”
Indeed, fund raising this year has proven to be much more difficult than firms anticipated. At least two firms – Hicks, Muse, Tate & Furst and TCW/Latin American Partners LLC – did not raise the money they sought for new funds in 2000, although Hicks Muse expects to hold a close on its second Latin American fund in the first quarter of 2001. Brazilian firm AIG Capital Partners was seeking to raise $300 million, but managed to raise only $40 million. Deltec Asset Management Corp. invested $70 million through a fund it raised only two years ago, but has otherwise closed shop in Latin America.
It is estimated that $1.9 billion in new funds were raised this year, down substantially from the $3.6 billion raised in 1998, but still more than last year’s $804 million. Investors, however, attribute this at least in part to the first run of funds coming to fruition. They are simply running out of money.
Also, some surmise expectations were too high. In other words, firms that at first raised $50 million sought to raise $500 million their second time around.
“A lot of funds have been too quick to invest,” said Advent’s Bachrach. “This is only our second fund in five years.”
At press time, Advent was set to close on a first round of financing for the Latin American Private Equity Fund LP II. Advent’s goal was to reach $150 million for the first closing, an amount Bachrach said was exceeded. Advent’s target for the total fund amount is $500 million, and Bachrach said he expects to close on a second round with new investors in the first quarter of the year.
“[If firms are] in the market and getting resistance to raising funds, this means one of two things, either [LPs] don’t like you or they don’t like the region,” Bachrach said. “But to say they don’t like the region is the defensive answer. What they may really be saying [without saying it] is your portfolio or track record doesn’t stand up to scrutiny.”
Other firms, most notably, J.P. Morgan, which closed the $677.3 million J.P. Morgan Latin America Capital Partners last summer, have been successful in raising money. Tim Purcell, managing partner of the fund, said J.P. Morgan has been investing its own capital and the capital of its employees in Latin America since 1990 – and is seeing 60% returns.
Hard Times? Yes. Leave? No.
The downturn in U.S. markets over the last half of the year also has investors once again looking at Latin America.
“Why Latin America?” asked Bachrach. “There’s not as much money in Internet investing in the U.S., too much dry powder in Europe – or one could say it’s getting crowded – and Asia is a complex market and it isn’t attracting a huge amount today.”
Speaking on a per-country basis, investors are most sunny about Mexico, where they say President Fox is “doing all the right things.”
Alfredo Alfaro, a partner with Advent in the Mexico City office, said, “The market is attractive here, even though the country is threatened by the U.S. slowdown, due to a slowdown in exports. The potential growth stems from internal demand, and we believe the government will continue with controlling public expenditures and inflation.”
In Venezuela, the Chavez administration has begun to promote foreign investment, but the political – and resultant economic – upheaval of the past year has led to a degree of uncertainty about the country’s foreign investment policies. This is according to the annual [Index of Economic Freedom] produced jointly by The Heritage Foundation and The Wall Street Journal. Furthermore, reported tensions with the incoming Bush administration could cause additional challenges.
However, investors are finding individual opportunities in countries like Venezuela where political and/or economic climates seem at first discouraging. Batalla of Darby Overseas said, “We’re seeing good opportunities in the Andean region, [such as] in telecom in Venezuela where they’re opening competition.”
Because of its small size, Chile is not always an investment choice for private equity investors. However, the country is climbing out of the recession of 1998 and 1999. Still, President Clinton recently initiated an act to integrate Chile into NAFTA, which would potentially open new markets and attract foreign investment to the country.
In Brazil, interest rates are coming down and inflation has stabilized. Economists are predicting 4% growth in 2000, and at least that in 2001, something LPs said was perhaps not stellar, but strong and stable. After two years of stagnation, the economy seems to have recovered with a “seasonably adjusted GDP growth of 1.2% for the first quarter of 2000 [and] inflation under control,” according to the Index of Economic Freedom.
However, in Brazil, substantial barriers remain to foreign investment. Foreigners may not own or run media, broadcasting, airlines, some real estate, lotteries, atomic power or alternative energy. The biggest challenge remains reforming both the tax and social security systems.
Lastly, despite the major backing off in Internet investing the second half of the year, LPs who remain are undaunted, even upbeat about tech-related investments. Shying away for the most part from dotcoms, they are now investing in services and infrastructure. Others say reduced competition equals better valuations and deals for those who remain.
“When God created the income statement he placed at the top the revenue line. We forgot about that for some time,” said Advent’s Alfaro, adding that only 3% of Advent’s Latin American portfolio is Internet-related.
But Gary Nusbaum, a partner at E.M. Warburg Pincus said, “The Internet sector is strong and getting stronger, and our strategy remains the same: to find talented management teams in growth industries. If anything, there are more attractive opportunities now.”
This fall, Newbridge Latin America/Newbridge Andean Partners LP, affiliates of the Texas Pacific Group created Newbridge Technology Ventures, a new $50 million technology fund for the Latin American region, as a response to the downturn.
“We want to be in a position to take advantage of the opportunities that are there,” said Daniel Jinich, a Newbridge partner. “And there are more opportunities now given that there’s less competition.”