Over the summer LAVCA and Coller Capital teamed up to reach out to over 100 global investors for the first LP Survey on Latin American Private Equity. The survey findings were presented in September during the annual LAVCA Summit and Investor Roundtable in New York, just days after we announced 1H2012 data on fundraising, investments and exits.
With a full pipeline of new research findings, and qualitative input from over 300 fund managers and investors networking at the Summit, I had a good opportunity to look for industry trends and themes.
Here are some of the highlights: Latin America looks good compared to other emerging PE markets
Over 70% of respondents to the Coller/LAVCA survey cited macroeconomic growth in Latin America as attractive or very attractive as compared to other emerging PE markets. Just under 60% rated the political climate favorably. While LP perceptions are an admittedly qualitative indicator, the fact that global investors with exposure across EM view the economic and political climate in Latin America favorably is critical for fund managers in the market today.
Investor opinions are backed up by historic fundraising levels in 2010 and 2011, and by a wealth of anecdotal information – LP attendance at the LAVCA Summit, the number of LPs boarding planes to Mexico City, Sao Paulo or Bogota, the increase in global placement agents targeting the region for the first time.
PE investor confidence in the macroeconomic and political environment seems to point to a long-term view of opportunities in Latin America, and a focus on internal demand rather than short-term trends in exports and commodity prices.
Which brings me to theme number two: The consumer is king
Almost 70% of Coller/LAVCA survey respondents cited consumer goods and the retail sector as the most attractive sector for LatAm PE. By comparison, oil & gas, agribusiness and manufacturing all scored below 50%. At the same time, there were more dollars committed to investments in the retail sector in 1H2012 than to any other sector – $760m out of the $2.7bn total – with major deals in Brazil, Mexico and Peru. Education, another sector driven exclusively by internal demand, also had a strong showing in both the Coller/LAVCA survey and in LAVCA mid-year data on investments.
Theme number three: Look to the mid-market for deal flow in LatAm
Almost three-quarters of LPs (73%) see availability of PE deal flow in Latin America as attractive or very attractive as compared to other emerging markets. This has been an ongoing theme driving EM investors into LatAm, where the universe of fund managers competing for deals is dramatically smaller than in China or India. In a related theme, 55% of survey respondents cited entry valuations as a positive in the region.
But as global asset managers have moved into Brazil and other major markets in recent years, competition for large cap deals (defined as $100m+ tickets) has intensified, driving up valuations. As a result, an increasing number of firms are targeting mid-market opportunities, as described in a special LAVCA report on Mid-Market Investing in Latin America published this summer.
Investment data for 1H2012 supports this theme: deals with capital commitments between $25m-$100m made up 22% of total investments in the first half of the year, as compared to 11% of total deals in the first half of 2011.
And while dollars invested in transactions in 1H2012 was on par with the same period the previous year ($2.7b vs $2.6b), the overall number of deals increased significantly, from 65 in 1H2011 to 90 in 1H2012.
Theme number four: Mexico is hot
I already dedicated an executive briefing to this theme in May, so you can access that piece for more insights. But more recent trends support the same theme: Mexico saw a major increase in both the number of new deals closed and the total capital committed to new investments in the first half of 2012 as compared to 1H2011. And we saw record attendance from Mexican GPs and family offices at the LAVCA Summit in September. Anyone who attended the event will have noticed the buzz about Mexico this year.
Theme number five: Exit markets are tough
Respondents to the Coller/LAVCA Survey scored Latin America poorly on exit markets – only 30% saw Latin America as attractive on this indicator as compared to other emerging markets. The opportunity for exits via local capital markets in Latin America has always been shallow in comparison to India or China. But the influx of global strategic investors into the region, combined with increased activity from Latin American business owners and multi-latinas, has driven a relatively dynamic M&A market in recent years. These trends contributed to a record $8.9b in realized exits in the first half of 2011 (albeit half of that attributed to AEI’s divestment of its LatAm portfolio). But exits reported in 1H2012 were just $1b. Managers report that global volatility in capital markets is making it impossible to list great companies ready to IPO.