By Taina Rosa
(The Deal Pipeline)

October 12, 2012 – In 2011, 38 Latin American-focused private equity firms raised a record-breaking $15 billion in capital commitments, according to Preqin data. With all that dry powder, it is no surprise that fundraising for the region has slowed down.
 
But that doesn’t mean firms are not busy marketing new funds this year. According to Ernst & Young, more than 60 funds focused on Latin America are seeking more than $19.7 billion in new commitments.
 
By the end of the third quarter of 2012, 18 Latin America-focused funds had raised $6.8 billion, Preqin noted. That figure is below the $12.9 billion that private equity firms had amassed in the first three quarters of 2011, but it is still significant and in line with numbers seen in 2010, when, coincidentally, $6.8 billion was raised by the end of the third quarter.  
  
All of which is interesting, but not new. After all, Brazil has been a hot investment target for years.
  
But experts say interest is picking up in countries outside the region’s largest economy.
 
“There are quite a few firms on the road and while Brazil continues to be viewed positively, there is an increased interest to invest outside of Brazil,” said Philip Bass, global markets leader at Ernst & Young.
 
One New York-based placement agent who helped a Brazilian general partner raise almost $1.2 billion for a fund that closed in 2011 said he is getting calls from funds based in Brazil and in other Latin American countries that are interested in raising $300 million to $1 billion from international limited partners.

In fact, the Emerging Markets Private Equity Association’s 2012 investor survey shows that Latin America ex-Brazil, Brazil and China lead the rankings, in that order, with respect to market attractiveness for private equity investments.
 
A closer look at the survey reveals that Latin America ex-Brazil has in 2012 become the most attractive of all the emerging markets for private equity investing. In 2011, Brazil was at the top spot, followed by China and Emerging Asia ex-China, with Latin America ex-Brazil in the fourth spot.
 
Within Latin America, there is also a shift in preferred markets. In May, the Latin America Private Equity & Venture Capital Association, known as Lavca, released its 2012 scorecard, which ranked Latin American markets according to their regulatory environments. That scorecard revealed that Mexico, the region’s second-largest economy, was gaining ground in terms of investor friendliness. Mexico, with a score of 65 out of 100, remained in the third spot behind Chile, ranked No. 1 with a score of 75, and Brazil, in second place with a score of 72. Nevertheless, while the first two countries’ scores remained unchanged, Mexico’s grade went up two notches over last year’s.
  
Although many of the Latin markets have proven to be friendly to private equity investors, the region is not risk-free. Cate Ambrose, Lavca’s president and executive director, noted that there are four main challenges to private equity investments in the region: the lack of human capital in proportion to market demand, difficulties in exiting portfolio companies via initial public offerings, the number of investors competing for relatively few opportunities to make deals valued at more than $100 million, and, mostly outside of Brazil, business owners’ skepticism toward the benefits of taking in a private equity partner. However, she emphasized that these challenges all are a result of the relative youth of the private equity industry in the region.
  
But even with those challenges, Latin America fares well in comparison to other emerging markets.
  
Competition levels and entry valuations are playing an important role in making Latin America more attractive to investors than other emerging markets.
  
“Entry valuations in Latin America have generally been less volatile over prolonged periods of time than in other emerging markets,” said Ralph Jaeger, managing director at Siguler Guff & Company LP. “Based on our observations, pricing has been relatively attractive, with the majority of deals in Brazil in the past five years executed at valuations of 6.5x EV/Ebitda, while deals in Latin America [ex-Brazil] have been executed at valuations between 5.0 to 6.5 x EV/Ebitda,” he added.
  
In addition, while competition is hot in Latin America, it doesn’t come close to what is seen in China’s private equity industry.
  
“The ratio of the number of funds relative to the opportunities that exist is better in Latin America than in other emerging markets,” said a private equity insider who spoke at a late September event in New York. For instance, this person said, while there are probably about 3,000 private equity firms in China, there are maybe about 40 in Latin America.
  
“In China, competition among private equity firms makes it harder to find interestingly priced deals in larger companies. However, attractive investment opportunities exist across China, particularly in the early-stage and growth equity space,” Jaeger said.
  
And India is a difficult market for traditional private equity strategies, according to Jaeger. For one thing, competition for deals on the subcontinent is as fierce as in China. In addition, investors in India often find a “mismatch between private and public company valuations, a difficult exit environment and an increasingly hostile political and fiscal environment,” Jaeger said. He noted, though, that despite these factors, attractive opportunities still exist in India for selective and opportunistic investment managers.
  
Another factor that can explain Latin America’s attractiveness is its relatively healthier gross domestic product growth trends in comparison to troubled developed markets.
  
For instance, Barclays plc predicts that as a whole, Latin America’s GDP will slow to 3.2% in 2012, down from 4.5% in 2011. Growth is expected to rebound to 4.0% next year.
 
Meanwhile, Barclays estimates that GDP growth in developed markets as a whole will remain lower, at 1.3% in 2012 and 2013. In 2011, GDP expanded at the same rate.
  
So which firms are active in Latin America? Acon Investments LLC, for one. The Washington-based buyout shop is in the early stages of raising its fourth Latin American fund, which will likely be mostly invested outside of Brazil, mainly in Mexico and Colombia. The firm expects to raise about $500 million. “The firm’s three previous Latin American funds have provided its investors with a return of 2.9 times their money,” a person familiar with the situation said.
  
In early October, PineBridge Investments made a final close of its Mexican development capital certificate fund, known in Mexico as “certificados de capital de desarrollo,” or CKDs, with almost 2.7 billion pesos ($209 million), the firm said.
  
Colombian private equity firm Altra Investments Inc. made a first closing of $165 million for its second fund, Altra Private Equity Fund II LP, according to a regulatory filing. The firm aims to raise $300 million by the end of October, a source said. Altra, based in Bogotá, invests in the Andean region, particularly Colombia and Peru. Stamford, Conn.-based Stanwich Advisors LLC is the placement agent of the fund.
 
Lima, Peru-based Macrocapitales SAFI SA also closed its first fund, which raised $50 million in August, with another $30 million expected to be raised by early 2013, according to fund manager Pablo Avendaño.

Several Brazilian shops are in the market raising new funds too, proving that global limited partners are still hungry for exposure in the country, despite committing about $10 billion to Brazilian funds in 2011.

Kinea Investimentos Ltda., Banco Itaú SA’s alternative asset manager, closed on a $1 billion reais ($490 million) private equity fund in early October. The fund is actually made up of two vehicles. One, with R$800 million, contains commitments raised from local and foreign institutional investors, while the other R$200 million vehicle contains commitments raised from high-net-worth individuals, explained Cristiano Lauretti, partner and head of private equity at Kinea.
  
Kinea plans to invest it in mature companies with Ebitda between R$100 million and R$200 million. If the opportunity arises to make investments larger than R$200 million, Kinea will call capital from its existing limited partners on a deal-by-deal basis, Lauretti said, adding that the firm plans to take minority positions in companies in consumer-oriented sectors such as healthcare, education and retail.
  
New York-based GTIS Partners’ Brazil Real Estate Fund II closed with $810 million in March. The fund will invest in real estate projects in São Paulo and Rio de Janeiro states.
  
Mantiq Investimentos, which in January spun out of Banco Santander Brasil SA, in February closed FIP Brasil Petroleo, its first fund as an independent firm, raising R$585 million.  
  
São Paulo private equity firm Valora Gestão de Investimentos Ltda. made a final closing of R$500 million for its debut fund in August. The fund, which met its fundraising target, plans to take minority stakes in suppliers of the oil and gas industry in Brazil, said fund manager Paulo Rezende, who had worked at Kinea Investimentos’ private equity practice.
  
Although some of the funds that are in the premarketing stage may not see a final closing until next year, the fact that they are on the road shows that investors’ appetite for Latin America exposure is alive and well.