Private Equity LATAM 2014

By Daniel Serventi

Posted: 3rd February 2015 09:15

Many of the fundamentals driving the economic upswing over the last several years deteriorated in 2014.  Among them was a stagnating and lackluster recovery in several of the developed economies, in particular across Europe and Japan.  While the accelerating strength of the US recovery provided a counterpoint, slowing growth in Japan and Europe had a marked impact on many LatAm economies.  Indeed, the outlook for many of the region’s key trading partners remains uncertain.  In the US, speculation centres on when the Fed will raise interest rates, and how will it manage its now US$4.5t balance sheet.  In Europe and Japan, fears linger that weak industrial production and anaemic consumption growth could lead to a deflationary spiral.  At the same time, China continues to rein in growth expectations, putting increased pressure on commodity prices.
 
While Latin America’s overall growth slowed, individual countries vary significantly, with LatAm’s two largest economies, Brazil and Mexico, currently trending in diametrically opposed directions.
Mexico continues to benefit from the ongoing US recovery.  Its economy is gaining traction, evidenced by higher consumer confidence and increased manufacturing output.  At the end of September, Mexico’s Government drafted a bill that seeks to address declining productivity in recent years and increase the country’s long-term competitiveness.  The loss of productivity in recent years has been a leading drag on Mexico’s economic performance.  As a result, the IMF expects Mexico’s economy to grow at a healthy 3.5% in 2015.
 
Brazil will face a more challenging environment.  Having just secured a second term, President Dilma Rousseff must now address policy changes regarding high inflation, government expenditures, low investment rates and sluggish employment growth.  Moreover, a fresh round of corruption scandals, which includes state-backed oil producer Petrobras, threatens to derail the focus on economic growth.
 
Inflation continues to be a pervasive concern.  Both Brazil and Mexico are experiencing above-target inflation and will need to tighten monetary conditions in the coming months.  Argentina and Venezuela are seeing high rates of inflation coupled with negative GDP growth
 
Fundraising
 
While macroeconomic concerns took centre stage in 2014, limited partners (LPs) remain focused on the longer-term outlook.  To that end, the region saw its best fundraising year since 2011, with aggregate commitments reaching US$9.0b.  This represents an increase of 73% from the US$5.2b raised in 2013.
 
The recovery in LatAm fundraising follows the global trend. 
 
Globally, PE firms closed 687 funds valued at US$444.7b in 2014, up 11% from the US$401.1b raised by 644 funds in 2013.
 
This represents the strongest market for fundraising since the recession.  It’s being driven by record liquidity in the exit market.  Currently, global PE IPO exits are at record levels, and M&A exit activity is up nearly 65% by value versus last year by value.  As a result, global LPs are flush with distributions and increasingly able to reallocate assets in line with their desire for greater LatAm exposure.  Indeed, a survey of global LPs released earlier this year by Coller Capital and the Latin American Venture Capital Association (LAVCA) found that nearly 80% of LPs with exposure to the region expect to maintain or accelerate their commitments to Latin America over the near term.
 
According to Preqin data, despite its political and economic woes, Brazil is expected to receive nearly half of these resources.
 
2014, however, has been driven by closings from several of the largest firms in the region, including Pátria Investimentos, which closed with US$1.8b in June after just eight months on the road; Advent International, which closed with US$2.1b after just six months on the road; Gávea Investimentos; and BTG Pactual.
 
Aquisitions
 
While fundraising increased, PE firms were less active in acquiring companies in the region in 2014.  The year saw just 76 transactions, down 18% from the 93 that were announced in 2013.  Total deal value increased to US$4.3b from US$2.9b in 2013.  Both years remain below the levels of activity seen in 2012, when volume reached 101 deals, totaling US$4.5b.
 
The year’s largest transaction occurred in February, when global PE firm Partners Group acquired Mexico-based Fermaca from Ospraie Management in a transaction valued at US$750m.

Fermaca is a leading operator of gas infrastructure in Mexico that builds, owns and operates pipelines and other related energy assets in the country. 
 
Another significant investment in the pipeline space was the US$650m investment in Transportadora de Gas del Peru completed by the Canada Pension Plan Investment Board.  It was the direct investor’s third, and largest, acquisition of shares in the company, which is the largest natural gas transporter in Peru.
 
While energy investments represented some of the year’s largest deals, consumer products and retail remained attractive to PE investors.  In January, Tiger Global Management invested US$500.4m in e-commerce portal B2W Cia Digital SA.  The company has operations across Latin America, offering nearly 40 separate categories of products and services across a range of platforms.
 
Transactions and exits
 
2014 was similarly quiet on the exits front.  Just 19 exits were announced, of which one was an IPO: the Grupo Hotelero Santa Fe raised US$56.8m on the Bolsa Mexicana de Valores in September.
 
The company, which owns and operates urban and beach hotels under a series of different banners, is backed by Nexus Capital and Walton Street Capital, which invested in the company over four years ago.
 
 
Outlook
 
It is a maxim of private equity that many of the best deals are made during the worst of times.  While the current downturn in certain sectors of Latin America’s economy hardly qualifies as the “worst of times,” clear dislocations continue to make the operating environment increasingly challenging.  Despite this, the industry has yet to see an exodus of capital.  Indeed, fundraising figures and LP surveys confirm that investors continue to fund new vehicles and are maintaining or increasing their commitments.
 
The reasoning is clear.  While cyclical volatility is increasing, the secular trends that have made the emerging markets so attractive over the last decade remain as true today as they were in 5-10 years ago: the portability of capital and labor, global demand for commodities, the rise of the middle class across the emerging markets, increased political stability, the reduction of trade barriers, and other large-scale trends currently reshaping the world.
 
For entrepreneurs and family owners, it’s in such challenging environments where PE’s value-add becomes its most compelling.  Above and beyond simple injections of capital, the operational expertise and financial discipline that PE brings can enable savvy entrepreneurs to weather difficult macro headwinds.  This was evidenced in the large number of companies that firms in the developed markets ushered through the recession to successful exits, and while the nuances of Latin America’s markets differ in significant ways, those same underlying principles — alignment of interest and good governance — will continue to work in favour of positive outcomes for current deals and continued investment across the region.
 
Daniel Serventi is an Ernst & Young Transaction Advisory Services Partner based in Buenos Aires, Argentina since 2007.  He leads the Transaction Advisory Services practice that EY has in South America.  Daniel has industry expertise in Utilities and Oil & Gas sectors.
 
Daniel specialises in providing transactional and consulting services to power generation and electric utilities companies, among other industries.  The main consulting engagements performed by Daniel in power generation and electric utilities companies include, among others, litigation advisory services for AES Group, M&A lead advice services provided to EDF Group, consulting restructuring services rendered to AES in Argentina, rate review advisory services rendered to EDERSA (Argentina’s Regional power distribution company).
 
He also leaded many due diligences in Argentina (most of the privatisation processes) as well as in other countries in the region, such as Peru, Bolivia, Chile.  TAS main clients served by Daniel include: The AES Corp., Suez Tractebel, Electricité de France, Duke Energy, Grupo Dolphin/Pampa Holding, among others.

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