LAVCA spoke with Tim Purcell, Managing Partner and Co-Founder of Linzor Capital Partners LP. Based in Santiago, Chile, Linzor manages a $200 million private equity fund that is focused on mid-cap buyouts with a stated interest in industrial, service and retail sectors throughout Latin America. The fund has made 4 investments since its inception in 2006.
LAVCA: How do you differentiate yourself strategically from other funds?
Purcell: Linzor Capital is a control investor that focuses on businesses that it believes can be transformed into profitable and fast growing market leaders. We focus on achieving operational excellence in our portfolio companies. We identify and team up with best-in-class managers to implement strategic plans that can at a minimum double the value of a business in four years. We review dozens of companies before we find one that we think has this potential and we spend a lot of time identifying and recruiting management teams that can deliver for us. We also seek to build a diversified portfolio both by industry and country, but try to balance this requirement with our goal of dedicating a lot of time to each of our portfolio companies.
LAVCA: What geographies are you finding most compelling for investment right now? Why?
Purcell: We are focused on the entire region but so far have made most of our investments in Chile. Chile has a very strong economy and is politically stable. It has a deep financial market and there are a number of interesting sectors to invest in. We are also actively looking for companies in Peru, Mexico and Colombia. In Colombia we recently joined a consortium to acquire control of Colfondos, Colombia’s fourth largest private pension fund.
LAVCA: Tell us about your recent investment in the Chilean education group Santo Tomás. What are the different ways in which you intend to add value, beyond just growth?
Purcell: This is a very exciting company that in the last two years was affected by a very serious shareholder conflict which got resolved with our entry. We have since strengthened the management team and are finalizing a plan to invest heavily next year to increase our infrastructure and grow our admissions. We will be emphasizing less traditional forms of education such as evening school, online courses and executive education and we will be spending money to increase the quality of the education provided by Santo Tomas. Our goal is to be the leading provider of post-secondary education to the growing Chilean middle class. The growth potential in this segment of the market is tremendous, where the percentage of the population that has a degree is around 23%, versus 70% in comparable countries such as Spain and New Zealand.
LAVCA: Last year you invested in 2 Chilean health care companies. What made the sector so attractive to you? Were you concerned about the impacts this would have on your fund in terms of diversification?
Purcell: We like the health care sector in Chile because health care coverage is growing fast, in line with the country’s growing prosperity. We have two healthcare related businesses, a leading insurer and a chain of regional hospitals. The insurance business is a turnaround situation. We brought in a new management team and managed to make the company profitable again in less than a year. The potential for value creation is very significant based only on our ability to improve operations, so delivery is very much in our control. The hospital business on the other hand is healthy and growing organically at double digit rates. Another source of added value is putting these two businesses together and creating an opportunity to improve overall results by developing coverage plans that provide incentives to use our hospitals. In terms of diversification we are not concerned given that our overall investment in this platform does not exceed 25%.
LAVCA: Which of your current portfolio companies is proving to be most difficult with regard to growing earnings? What part of your investment thesis is not panning out?
Purcell: Fortunately our businesses are all performing according to plan. We had a rough few months in the health insurance business this year due to the H1N1 virus, but our hospital business has compensated with increased activity for the same reason. Demand for post-secondary education in Chile is expected to continue growing at double digit rates next year, especially because of financing incentives provided by the government to increase penetration. Our movie theater company has grown significantly this year, especially in Chile where admits have grown 23% through September versus the same period last year. It’s true that people go to the movies more when there is a downturn in economic activity.
LAVCA: Have you levered up any of your portfolio companies? Can you talk about how this fits into your fund’s strategy? Is leverage available?
Purcell: We do have a goal of using leverage to improve expected equity returns. However leverage is not a central component of our investment strategy and therefore we tend to use pretty conservative capital structures. Our focus is much more on operational excellence in our portfolio companies. In terms of access, we have found that banks have remained open this year to help us finance our acquisitions.
LAVCA: $200 million is no small feat for a first time fund. How were you so successful in fundraising? What did you find was the most common reason for LPs to not invest in your fund?
Purcell: Although we are a first time fund, we managed JPMorgan’s private equity business in Latin America for over a decade, including the successful JPMorgan Partners Latin America LP fund. Most of our investors in Linzor I had previously invested with us, so they were very familiar with our strategy and track record, which allowed us to raise the fund in less than six months. At JP Morgan we took great care to keep our LP’s informed of our progress. We also looked for ways to involve our LP’s in our business. For example we had some LP’s (and still do) that were very helpful to us in terms of originating attractive investment opportunities. We were also always on the lookout for co-investment opportunities for our key LP’s. I believe the effort we made to work with our LP’s paid off and they followed us after we set out to create Linzor Capital. Some of the investors we approached didn’t join us because of our small size. We plan to approach many of these names again in the future when we go out to raise a larger second fund.
LAVCA: You recently received a Venture Philanthropy Award from NESsT at the LAVCA Summit. Does your interest in venture philanthropy come into play in role at Linzor Capital Partners? How so?
Purcell: My involvement with NESst and other non-for profit enterprises is not directly related to Linzor Capital. All the Linzor partners and many of our other team members are active in the non profit area because we believe strongly in giving something back to our communities. Specifically in the case of NESst I became interested because they apply to the social enterprise area many of the same principles and techniques that we apply in our private equity business. It’s a very smart way to make a difference and that’s exciting.