By Patrick McGinnis
Private equity conferences offer a forum in which investors, be they GPs or LPs, can reflect on the state of their industry. Personally, I have watched the Latin American private equity industry evolve over the last decade in part by attending conferences.
After a bit of reflection, I have compiled a list of what I view as key takeaways from the 2011 LAVCA Summit.
1. The Latin VC/PE Industry is More Diverse Than Ever Before
During both the panels and the networking sessions, I was struck by the diversity of attendees at the Summit. Of course, many of the large and active GP’s in the region such as Gavea, CVCI, and Advent were in attendance. What I found surprising, however, was the diversity of LP’s and newer GP’s, many of who are recent entrants to the region. For example, there were a number of firms in the crowd, such as Portland Private Equity, who are actively focusing on the Caribbean. I also met investors from both US and European pension funds who are looking to increase their commitments to the region. Then there are the venture capitalists, the angel investors, the impact investors, the multilaterals, and the family offices. The sheer breadth of investors and funds operating in the region today is a testament to the growing talent pool that has identified private investing in Latin America as a promising asset class. The fact that the crowd neared three hundred attendees from over 150 organizations, many of whom traveled to New York from around the world to attend the Summit, is a testament to the industry’s growing scale and influence on the region’s economies.
2. While there are Lots of New Faces in the Crowd, The Industry Has Created a Class of Seasoned Leaders
Many of the first generation of private equity funds operating in Latin America was affiliated with large financial institutions. This includes funds such as JP Morgan Partners/Chase Capital Partners, DLJ South American Partners, and Deutche Bank Private Equity. Over time, however, the dominance of institutional firms has given way to a PE market that still includes some institutions but is mostly comprised of stand-alone funds or local affiliates of global PE shops. Concurrent with this shift, some of the most seasoned investors in the region have regrouped as independent entities. The core leadership team of JP Morgan Partners is now working together at Linzor Capital and both the DLJ and Deutsche Bank teams have spun out and are now called Victoria Capital and Alothon, respectively. Thus, even thought there have been many new entrants in terms of firms, a number of managers operating in the region today have long track records. Seeing these familiar names and faces at the LAVCA Summit served as a reminder of how the industry has matured. A number of new firms and strategies have emerged in recent years, but a core base of leaders has paved the way for the industry.
3. Opinions Differ As To Whether to Take a Local, Pan-Regional, or Global Approach to Staffing
Over the decade, the private equity business in Latin America has gone local. More recently, there has been an increase in the number of single country funds in the region. For example, the Nexus Group raised a $320 million fund for Peru while Brookfield is raising a $400 million infrastructure fund in Colombia. These are just two examples of the surge in in single-country funds that have been raised or are in the market. Clearly, Brazil and Mexico have long supported single-country funds, but the prospect of concentrating risk in the smaller economies in Latin America is a newer concept. At the other end of the spectrum, firms like Providence and Apax are investing out of their global funds when doing deals in Brazil and neither firm has opened an office in Sao Paulo, although I wouldn’t be surprised if they did in the future.
In between these two models are the firms such as Advent, Linzor Capital, and Southern Cross, which have offices in several countries and take a pan-regional approach to investing. Given the currency, regulatory, and market risks associated with concentrating investment risks in just one country, it will be interesting to see whether the trend towards single-country funds continues. After all, one LAVCA Summit panelist noted that despite the “romanticism” associated with doing regional deals, the actual number of tangible opportunities was small. If that continues to be the case and the economies within the countries of the region hold up, single country funds won’t be missing out on much versus their pan-regional peers.
4. Brazil is a Big Part of the Story, But It’s Not the Whole Story
Brazil has seen several years of intense fundraising and deal making, so it’s not surprising that PE investors are happy to tell you how much they like investing there. This was clearly a theme at the LAVCA summit. One of the more amusing moments in the conference came when an audience member asked the Brazilian members of one panel to explain “What don’t you like about investing in Brazil?” I think the point behind this question was not so much that PE investors don’t see the risks to investing in Brazil, but rather that Brazil has been dominating the PE conversation in Latin America. Read any newspaper these days and Brazil is mentioned along with the other BRIC nations in articles about international business. Amid the continued focus on Brazil, it’s easy to forget that there is an unprecedented level of deal activity taking place outside of Brazil.
5. Smaller Investment Niches – Such as VC and Impact Investing – Will Continue to Mature
The LAVCA Summit dedicated an entire afternoon of its program to venture capital and entrepreneurship. What became apparent to me during these sessions is that there is and will continue to be a supply-demand imbalance in the entrepreneurial sector in Latin America. Even as more companies requiring risk capital come to the market, there are a limited number of funds operating in the region. The net effect of this reality is that the funds active in Latin America today should get their pick of deals and are positioned for some large payoffs if the venture market takes off. I say, good for them. They are literally building an industry from the ground up and its successes will be due to their willingness to take risks and back innovative ideas, entrepreneurs, and companies.
Growth Capitalism is a regular column in the Latin America PE/VC Report from Patrick McGinnis. McGinnis has been a private equity investor in Latin America and the emerging markets for over a decade, first at Chase Capital Partners/JPMorgan Partners and later at AIG Capital Partners (now PineBridge Investments). Presently, he sits on the Board of Directors of The Resource Group, a global BPO company. He is the founder of Dirigo Advisors and is a co-founder of Real Influence. Fluent in Spanish and Portuguese and an avid traveler, he blogs about travel at www.huffingtonpost.com/patrick-mcginnis. He can be reached at [email protected]