LAVCA heard from Philipp Hein, Investment Manager and Mariana Barcena, Director of DEG, a firm that finances investments by private enterprises in developing and emerging market countries, about their mission driven approach and how the market has changed in Latin America since DEG started investing in the region 50 years ago.
LAVCA: Please give some background on DEG. What is your exposure in terms of geography, sector, and stage?
Hein & Barcena: DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH, a subsidiary of KfW, finances investments by private enterprises in developing and emerging market countries. The portfolio exposure of DEG (being loans, mezzanine products, as well as equity investments) is distributed in the private sector of emerging markets in Africa, Asia, Eastern Europe and Latin America and across almost all sectors (mainly the financial sector, infrastructure, agribusiness, and general industries & services).
LAVCA: How does your mission driven investment approach differentiate you from other institutional investors in the market?
Hein & Barcena: The biggest difference is our developmental approach beyond financial sustainability. DEG is a long term investor in emerging and developing countries and is looking for projects that generate developmental effects for the economy and sectors (employment and income generation, know-how and technology transfer, increase of supply, structural effects, etc.). We place a strong emphasis on improving corporate governance and environmental and social standards in our projects. Furthermore, DEG offers Technical Assistance funds to finance and promote investments in the above mentioned items.
LAVCA: Describe DEG’s portfolio today. How does that compare to allocations historically and how do you expect it to shift over the next 3-5 years?
Hein & Barcena: Our portfolio today amounts to approx. EUR 6bn well distributed among continents, sectors, and products. LatAm stands for approx. 28% of the total portfolio, being 53% of that in the South and 47% in Central America/Caribbean. In the past most of our portfolio was comprised of long term debt instruments. As the financial sector in many of our markets has strengthened over the last decade DEG has increased its risk capital (equity & mezzanine) investments as to accommodate the scarcity in these markets. This trend is likely to continue. DEG provides mezzanine and equity finance directly or through PE funds. Regarding regional allocation, Latin America has always played and will continue to play a significant role for DEG. Africa and so called future markets are of high strategic importance for DEG and will likely grow in the coming years.
LAVCA: How long have you been investing in Latin America? How have you seen the market change during that time?
Hein & Barcena: We have been investing in the LatAm region for over 50 years which underscores our long term commitment to the region. During all this time we have experienced ups and downs and different cycles and we continue to believe in the ongoing growth of the region. As a long term investor we have no pressure to sell in the short term and can smooth out fluctuations and cycles more easily. It’s actually more of an opportunity for us, as we can invest counter cyclical which is part of our role and mandate. Here private equity can play a significant role in providing scarce counter cyclical funding to companies. We have seen an improvement in the stability of the political and economic environment in many LatAm markets over the last decades which also makes LatAm an attractive investment destination for more commercial investors.
LAVCA: What is your typical commitment size? How has that changed over time?
Hein & Barcena: DEG’s average commitment (loans, mezzanine and equity) today is approx. USD 15 million. The range for loans and mezzanine finance usually starts at USD 5 million and goes up to USD 45 million. These amounts have grown since the 1960’s, a time when DEG was much smaller and allocated smaller commitments.
LAVCA: What markets and sectors do you find attractive in Latin America today and why? What are your views regarding exposure to global funds versus regional or country-specific funds?
Hein & Barcena: We invest across all sectors, but in LatAm in particular we like the agribusiness, renewable energy, manufacturing, and infrastructure sectors as we consider them key for the development of the continent.
Global funds usually focus on bigger markets and targets while regional funds are much more able to adapt to the requirements of smaller markets and targets. We like regional schemes for diversification purposes but also invest in country specific funds if the local markets offer enough deal flow to sustain such a scheme.
LAVCA: What is your appetite for investing in first-time funds? Do you have any restrictions/mandates for doing so?
Hein & Barcena: DEG does invest in first time funds as long as we are convinced of the team’s ability to successfully execute the investment strategy and team members have strong individual track records in the PE business, in the sector, and in the country.
LAVCA: How do you work with managers to encourage best practices?
Hein & Barcena: We place high importance on the implementation of an E&S management system at the fund level and therefore support and provide training programs for managers. We like to work in partnership with our portfolio companies and support them in implementing strong internal E&S management systems and compliance with international EHS standards over time. We mostly apply IFC/World Bank Standards but also other sector relevant standards and certifications. The compliance with IFC/World Bank Standards in high impact investments is an important part of our ongoing cooperation and we closely monitor and advise fund activities in this regard. Also related to reporting, accounting and governance we like to implement best practices and see an active role of the AC, where we require representation of DEG.
LAVCA:What are the most important factors you consider/characteristics you look for when selecting fund managers and what advice would you give to managers looking to work with DEG?
Hein & Barcena: There are some basic criteria that should be met, in order for DEG to consider investing in a fund. First, and most important, DEG is looking for very strong alignment with its partners on DEG’s goals and mindset and the relationship component is key. Second, co-investment rights are an important part of our fund strategy. We are active in all of Latin America for many years now, so we know many managers personally and professionally before they approach us for funding and sometimes we actually have co-invested with them before we consider investing in their fund. Third, DEG generally prefers generalist funds over sector specific funds and regional funds over country specific. Fourth, the fund should target small and medium sized companies and not large caps, and target sectors that are of interest to DEG. Finally, DEG needs to participate in the 1st closing.