By Fernando Carneiro & Ben Holzemer, Spencer Stuart
The past few years have witnessed a major resurgence in private equity and venture capital investing in Latin America, with particular interest in the Brazilian market. This is evidenced by the dedicated funds being raised for the region, the number of firms establishing operations there, and active deal flow in terms of new portfolio investments, secondary trades and exits. All of this activity has been supported by strong economic growth across sectors, improving regulatory considerations, the availability of a substantial number of family-owned businesses as investment targets and increasing liquidity in local capital markets.
While much has been written about the economic, regulatory and governance issues related to private equity investing in the region, a key emerging issue for firms expanding in Latin America is the availability of talent. In the medium and longer terms, finding exceptional portfolio company leadership will be critical to the success of private equity firms operating there, but the more immediate challenge for firms is to build strong teams of investment professionals. The local pool of highly experienced private equity investors is still limited, and those with a traditional private equity background are in high demand and generally well-situated in their current roles.
In light of the talent constraints, what is the most effective strategy for private equity and venture capital firms to build their presence in Latin American markets? There are four primary approaches to establishing investing operations in the region, each with its unique benefits, challenges and talent implications. We highlight and evaluate some of these aspects for each of the approaches below:
1. Establishing significant local operations
The most aggressive and direct approach to the market is to establish significant local operations. In addition to opening offices and hiring support staff, this generally implies hiring a diverse staff of investment professionals, including a senior or managing partner.
Having a broad-based, multi-disciplinary investment team on the ground signals a clear commitment to the local market and can improve a firm’s ability to source, vet, structure and manage portfolio investments, and provide the deep local connections to win the right deals. Despite these benefits, building out significant local operations requires a substantial investment of financial and talent resources, which can increase the pressure to do deals quickly or complicate firm and fund economics. Firms choosing this approach will find themselves competing with local firms for experienced private equity talent, which can make it challenging to build a team with the right mix of investment talent in a timely manner.
2. Establishing limited local operations
Other firms have preferred to take a more cautious approach to entering the market, while still making local hires of investment professionals. This approach provides firms with a local presence, including market knowledge, language skills and connections, but requires firms to assume less risk.
Firms may take a top-down or bottom-up approach, either bringing on a local “rainmaker” with the market credibility and influence to open doors for the firm and close deals or hiring more execution-focused professionals who will work directly with partners or experienced managing directors in overseas offices. An influential local rainmaker is typically provided technical support in the form of analysis, deal-making work and deal sourcing remotely from the home office. Hands-on execution-focused executives, who tend to be more accessible and less expensive than the rainmaker, may require significant support from senior partners abroad to assist in closing deals and integrate them into the firm.
3. Partnering through an established local firm or individual
An alternative to operating directly in local markets is to partner with local operators, providing funding and expertise but working exclusively through the local firm for investing purposes. This approach provides rapid access to the market, deals and relationships, while significantly limiting the investment the firm must make in a team and facilities. However, the firm’s exposure to the market will be limited to the local partner’s targeted sectors, relationships and deals. Furthermore, if the partnership does not last and the firm decides to get into the market directly, it may have lost valuable time to establish a presence and develop important relationships.
4. Investing and managing a portfolio remotely
A number of firms focusing on the Brazilian market have taken the approach of making investments and working with portfolio companies without establishing a local presence. In this approach, one or two partners or professionals based in the U.S. or Europe travel frequently to the region to identify investments and work with portfolio companies, allowing the firm to evaluate the market and deal environment before making a significant commitment of resources, and ensuring the right firm imprint is left on deals and partners. However, remote investment professionals may lack the local cultural experience and language, and potential investment targets and partners may perceive this approach as being a lesser commitment to the market, which could be a disadvantage in competitive deals.
Considering the talent tradeoffs
There is no one-size-fits-all approach for building a presence in Latin America — or one perfect model for building an investment team to address the region. Much depends on a firm’s size, global resources, name recognition and relationships in the region, as well as the strategy the firm is pursuing and types of deals it makes.
Create a cultural link. Regardless of which approach a firm takes, it must figure out a way to link the local operation to the culture of the firm. Without knowledge of the firm, its partners and processes, investment professionals who are new to the firm — whether a rainmaker or an execution-oriented professional — may struggle to build relationships and influence with the partners at headquarters, making it harder for the firm to achieve its goals in the market.
Firms can take different approaches to improve these ties, depending on their strategy for staffing the local operation. For example, an execution-oriented professional can be sent from headquarters to the local office to help a senior dealmaker assimilate into the firm and understand the internal dynamics. Meanwhile, firms hiring executing professionals locally can assign them to spend time in the home office for a year or so, immersing them in the culture and giving them the opportunity to build relationships. Another option is for senior firm leaders to frequently visit the local office.
Find the right sources for talent. Senior investment professionals with a proven track record, strong interpersonal skills, a strategic mindset and a willingness leave their current situation remain scarce, particularly in fast-growing Brazil. Recruiting seasoned private equity executives is further complicated by the timing of “carry packages,” which can bind professionals to their current firm until payout. In light of the scarcity of talent, private equity should consider a variety of talent sources when building a Latin American presence and understand the potential tradeoffs of each:
- Investment professionals from corporate and investment banks, consulting companies and other private equity firms. Many firms make bets on well-connected financial and deal executives from other disciplines such as investment banking, operating roles or M&A advisory services. They bring knowledge of the market and investment strategies, language skills and technical expertise, but may have outsized short-term compensation expectations and may not have experience adding strategic and operational value to a portfolio company.
- Associates at the pre- and post-MBA level, often from competitors or top-tier management consulting firms. Experienced investment professionals can hit the ground running, while less experienced investment talent may be easier to find but require more lead time to generate results. These professionals also can require a significant investment from senior partners to mentor and coach and, if they are successful, may be a retention risk.
- Returning expatriates from Europe and the U.S. Investment professionals who have been working abroad increasingly are willing to return for the right opportunity. While returnees are attractive because of their language skills and Western training, they may not have strong local connections or market knowledge, especially if they have been away for some time.
Firms expanding their presence in Latin America will need to tailor a talent strategy to match its business goals and investment strategy, defining for itself which skill-sets can be leveraged from abroad and which need to be local, and creating a structure to tie the local operation into the culture of the broader global firm.
Fernando Carneiro and Ben Holzemer are consultants in Spencer Stuart’s Private Equity Practice. In addition to their work with clients recruiting investment professionals and portfolio company executives, they are developing a study of trends in portfolio company leadership.