Executive Briefing: Ranking LatAm Markets: the 2013 Scorecard

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Executive Briefing: Ranking LatAm Markets: the 2013 Scorecard

Last month LAVCA released the 2013 Scorecard on the PE/VC Environment in Latin America, and the results appear scripted to reflect recent headlines from business and mainstream media: Mexico, Colombia and Peru are the investor favorites. Read more

Loving Latin America

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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.

Mexico poised to take its turn in the sun

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By Taina Rosa
The Deal

May 11, 2012 – An investment environment that is improving on several fronts could lead to a banner year for private equity firms in Mexico, according to local firms and trade groups.

On Wednesday, May 9, the Latin American Private Equity & Venture Capital Association, known as Lavca, released its 2012 scorecard, which ranks Latin American markets according to their regulatory environments. 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.

“The country’s score on capital markets development now matches that of Chile and Brazil, thanks to ongoing efforts by the Mexican stock exchange to improve access and increased participation from local pension funds,” said Cate Ambrose, president and executive director of Lavca.

The inclusion of local pension funds has proved critical to the development of private equity in Mexico. The creation of publicly listed trusts known as development capital certificates, or CKDs, in 2009 allowed pension funds to invest in private equity, infrastructure and real estate funds.

According to the Emerging Markets Private Equity Association, Mexican pension funds manage about $120 billion in assets. And since the creation of CKDs, private equity firms in the country have raised $3 billion from local pension funds.

Most private equity firms in Mexico also raise parallel funds with commitments from international investors while raising their CKD funds with commitments from local pension funds.

And even though it is safe to predict that Brazil will take the lion’s share of fundraising commitments in Latin America in 2011 Brazilian firms raised $8.1 billion while Mexico funds raised $363 million. Some Mexican firms are already beating their own fundraising expectations.

In April, Mexico City-based Wamex Private Equity announced the final closing of its second growth equity fund, MIF II, with $160 million, more than the
$150 million the firm expected to raise. “We are very pleased to have exceeded our target under very tight funding conditions. Mexico is surging amongst emerging markets, and we have a rich pipeline for building a portfolio of leading companies,” Wamex managing partner Ernesto Warnholtz said.

The largest locally owned Mexican private equity firm is Nexxus Capital. Founded in 1995, the firm closed a $315 million fund, composed of a $220 million CKD fund and a $95 million parallel fund, in March 2011.

Officials at other Mexican firms on the fundraising trail said that although Brazil still poses tough competition, they expect their new funds to be larger than those they have closed in previous years.

According to data from Empea, some of the private equity firms that are on the road raising funds to be solely invested in Mexico are Macquarie Group Ltd., which is raising $1 billion for its Macquarie Mexican Infrastructure Fund, and Alta Ventures Mexico, which is raising $75 million for its Alta Ventures Mexico Fund I.

More fundraising opportunities eventually lead to more dealmaking, and by the end of 2012, private equity investment in Mexican companies is expected to more than double in comparison to last year. “Private equity investments in Mexico are expected to reach $1 billion this year,” said Arturo Saval, a partner at Nexxus Capital and president of Asociación Mexicana de Capital Privado AC, or Amexcap, Mexico’s private equity association. Saval expects between 30 and 35 transactions to take place in 2012.

According to Lavca data, in 2011 private equity firms invested $459 million in 22 deals in Mexico. That’s a 118% increase over 2010, when $212 million were invested in 19 transactions, all in the middle market.

Private equity firms tend not to announce the amounts they pay for acquisitions. Some of the larger deals to have taken place in Mexico for which terms were announced are Macquarie’s acquisition of a package of 199 telecommunications towers from Mexico City telecom company Pegaso PCS SA de CV for about $36 million in 2011, Eton Park Capital Management LP’s acquisition of Financiera Independencia for $53.5 million in 2010 and Conduit Capital Partners LLC’s acquisition of Impro for $41.3 million in 2009.

Buyout firms have run into some difficulties, mainly skepticism among business owners. To overcome that resistance, Amexcap is focusing on educating local owners on the benefits of taking in a private equity partner. For its annual event, held May 8, the association invited a number of business owners so they could network with the private equity firms in attendance.

“It is true that Mexico’s business owners prefer to have control over their companies, but they are learning that a private equity partner can help companies finance expansion and attract highly competitive management teams,” said Joaquín Avila, managing director of EMX Capital Partners.

Saval agrees. “Business owners’ perception of private equity is definitely changing for the better,” he said.

There’s plenty of room for private equity to grow in Mexico, as the sector represents only 0.02% of gross domestic product. In comparison, in the U.K., to which Lavca gives a score of 96, private equity represents 0.5% of GDP.
In Israel, with a score of 78, private equity represents 0.7% of GDP. The U.S. is not included in Lavca’s report.

And as Darby Private Equity managing director Jaime Salinas told Empea:
“There are more than 30,000 companies in Mexico with revenues between $10 million and $100 million. The opportunity is huge, and funds are not competing at all. We don’t meet our friends or competitors when looking at deals.”

“Mexico is very well positioned for growth. It is an underserved market with great opportunities for dealmaking,” said Scott McDonough, managing director of Alta Growth Capital. “Mexico is poised to have great things happen.”

Venture capital fuels Latin American entrepreneurship

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By Boris Hirmas
Miami Herald

April 29, 2012 – Venture capital has begun playing an increasing role in fueling the Latin American region’s entrepreneurial endeavors.

In its 2011 Scorecard, the Latin American Venture Capital Association estimated that funding for venture capital and private equity deals in Latin America more than doubled from 2009 to 2010, topping $8.1 billion. Of the 12 nations in the region evaluated by the association, Chile, Brazil and Mexico respectively scored highest on a range of criteria that define a favorable investment climate, including political, legal, regulatory, tax and other risk measures.

Latin America (including Central America, Mexico and the Caribbean) is a diverse, dynamic market of nearly 600 million people, almost twice the U.S. and Canadian populations. While the region’s $5.3 trillion 2010 GDP is just a third of those countries’ combined GDP, prospects for the area’s economic growth are bright, due to booming commodity exports and a rising middle class.

A United Nations study revealed that the number of Latin Americans considered “poor” declined from 44 percent of the population in 2002 to 32 percent in 2010. In effect, the region’s market for middle-class consumption grew by 70 million people in just eight years.

For all that progress, Latin American venture capital investing lags behind countries such as the U.S., Europe, Israel and other major economies. That’s partly due to the need for continued entrepreneurship support from governments, financial institutions and regulatory authorities. More fundamentally, however, Latin America’s traditionally risk-adverse business culture must change its mindset to accept failure not as shameful defeat but as the price of eventual success.

Fortunately for the region, signs of entrepreneurship are growing. In a keynote speech at the Americas Venture Capital Conference in Miami last November, serial entrepreneur Wences Casares said that today, when he speaks before university-level business classes in Latin America, the number of students interested in starting their own companies is the highest he’s ever seen.

“Fifteen years ago,” he said, “everyone preferred working for large multinational companies or their governments.”

As founder of two successful online businesses in Latin America, Casares also noted that technology allows startups to flourish with much less capital than more traditional brick-and-mortar businesses. What’s more, Internet-based startups can transcend national boundaries in Latin America, effectively creating pan-regional markets where none existed before.

The Latin American Venture Capital Association has noted that the number of Latin America technology deals funded in the first half of 2011 rose 133 percent versus the year prior to nearly a third of all funded deals, far ahead of any other sector.

Miami serves Latin America as a wellspring of Angel and venture capital funding, thanks to a large expatriate community from the region that understands its history, traditions, culture, challenges and, above all, its potential. Miami’s Angel and venture capital community has much more of a pan-regional view of Latin America’s markets and cross-border business opportunities than in-country investors.

Given this broader perspective, Miami’s Angel and venture capital community can provide Latin American startups with a more nurturing entrepreneurial environment and encouragement that’s free of any national parochialisms that could hinder a new enterprise. For instance, a new venture in Chile aiming to quickly expand to other Latin American countries may receive pushback from its local Chilean investors.

The Miami Angel and venture capital community can also act as intermediaries with venture capitalists in Silicon Valley and elsewhere, providing introductions to Latin American entrepreneurs — along with guidance about navigating the region’s challenging business environment.

That guidance can be vital to winning support in the United States. Latin American entrepreneurs who have traveled to Silicon Valley to pitch venture capitalism there, report a general lack of knowledge about the region. Certainly that’s partly due to the overwhelming number of deals from within the Silicon Valley and elsewhere, where political, legal and regulatory risks are known and stable. After all, venture investing inherently involves high risks, so why add unknowns to the mix?

The answer to that question: Any Latin American entrepreneur making it past the seed stage has already met major challenges posed by their still-maturing Latin American business environment and that entrepreneur has a much greater chances of success. As that environment continues to mature, with risks better known and stabilized, the region itself will become ever more attractive to venture capitalist investments.

Getting Regulation Right: A Work in Process

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Getting Regulation Right: A Work in Process

Last week I took part in a panel discussion on the impact of regulation on emerging markets private equity just days after LAVCA launched the 2011 Scorecard  – our annual ranking which measures regulation and ease of investment for private equity and venture capital in 12 LatAm and Caribbean countries. Chile, Brazil, Mexico and Colombia topped out the 2011 ranking. Read more

Keeping Score In Latin America

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By Sabrina Willmer

The Wall Street Journal, Private Equity Beat

May 20, 2011— Chile, Brazil and Mexico still stand as the most investor-friendly environments for venture capital and private equity in Latin America, according to an annual scorecard published by the Latin American Venture Capital Association.

Each year, the LAVCA Scorecard ranks the business environments for private equity and venture capital of 12 countries in Latin America on a scale of 1 to 100. Scores are based on criteria that include taxation, restrictions on institutional investors, minority shareholder rights, entrepreneurship and capital markets development.

Chile continues to be the most conducive environment for private equity investing helped by its intellectual property protection, judicial transparency and lack of perceived corruption compared to other countries in the region, according to LAVCA. That said, its score fell by one point from last year in part due to the slow and costly process firms must go through to establish private equity funds.

Brazil, which held onto its second place ranking, also witnessed a decrease in its score by three points from 2010. Restrictions on local institutional investors dragged down the score. Brazilian pension funds must serve on the investment committees of funds in which they are investors, leading to a governance conflict, according to the scorecard. On the other hand, the country has encouraged private equity investment through a recent reduction in the tax on foreign-exchange transactions for portfolio investments to 2% from 6%.

Meanwhile, Mexico retained its third place ranking as the regulatory environment in the country continues to improve. In 2009, the country let state pension funds invest in local private equity funds through publicly-traded development capital certificates, or CKDs. Since then, it has become easier for firms to raise CKDs, according to the scorecard. Concerns over the country include inefficient bankruptcy procedures as well as a weak judicial system. Perceptions of corruption and the ongoing drug trade are also worrying.

LAVCA Releases 2011 Scorecard

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LAVCA Releases 2011 Scorecard

The annual LAVCA Scorecard ranks business environments for private equity and venture capital activity of 12 countries in Latin America on a scale of 1-100 (with 100 being the most investment friendly) based on indicators including taxation, minority shareholder rights, restrictions on institutional investors, entrepreneurship and capital markets development.

Chile, Brazil and Mexico lead the annual ranking in the 2011 LAVCA Scorecard.

However, both Chile and Brazil saw small decreases in their overall scores based on a decline in the indicators on laws on fund formation and restrictions on local institutional investors, respectively.

Rounding out the top five countries in this year’s ranking were Colombia and Uruguay, with no change in overall scores.

The sixth edition of the Annual LAVCA Scorecard was produced in collaboration with the Economic Intelligence Unit, the Multilateral Investment Fund and the Andean Development Corporation.

The 2011 LAVCA Scorecard is available for download here.

Click here to read the 2011 LAVCA Scorecard press release.

Chile, Brazil & Mexico Remain Top PE/VC Environments in Latin America

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Chile, Brazil & Mexico Remain Top Private Equity/Venture Capital Environments in Latin America

Annual Ranking Released in 2011 LAVCA Scorecard

New York, May 10, 2011 Chile, Brazil and Mexico lead the annual ranking published by the Latin American Venture Capital Association, achieving top scores in the region on regulation and ease of investment for private equity (PE) and venture capital (VC) investors.

The 2011 LAVCA Scorecard is the sixth edition of the report and reflects progress in major Latin American economies towards regulation that will incentivize PE and VC investment.

However, both Chile and Brazil saw small decreases in their overall scores based on a decline in the indicators on laws on fund formation and restrictions on local institutional investors, respectively.
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2011 LAVCA Scorecard

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Overview

The 2011 edition of the Scorecard on the Private Equity and Venture Capital Environment in Latin America reflects a stable regulatory environment in which the top ranking countries maintain high scores, with Chile (75), Brazil (72) and Mexico (63) repeating in the top three positions. However, both Chile and Brazil saw slight decreases in their overall scores due to adjustments to perfect scores for laws on fund formation and restrictions on local institutional investors, respectively.

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Executive Briefing: On the Road with the 2010 Scorecard

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Executive Briefing: On the Road with the 2010 Scorecard

The circuit of industry conferences geared up in April – LAVCA partnered in the annual meetings of the PE/VC associations in Brazil (ABVCAP) and Mexico (AMEXCAP), as well as at events in Costa Rica and Abu Dhabi and the IFC/EMPEA conference in Washington DC. Each venue presented an opportunity to highlight LAVCA’s 2009 industry data and the results of the 2010 Scorecard on the PE/VC Environment to a different audience of fund managers, investors and public officials, and to take the pulse of the industry. Read more