The LAVCA research team is finalizing data on 2014 LatAm PE activity, and results point to the second highest fundraising year on record, despite regional growth projections of under 2% for 2015. Why?
First, the numbers. In November Advent International closed on the largest ever PE fund for the region, with commitments for US$2.1b and investor demand far exceeding that figure. There were also US$1b+ closings for Brazil-only vehicles from Gávea and Pátria, and an oversubscribed pan-regional fund from Acon Investments at US$515m. Brazilian mid-market vehicles included funds with partial or final closings from Carlyle, Modal, and Bozano, and in Mexico managers closed on a half dozen new CKDs backed by local pension funds, totaling just over US$1b.
PE managers were marketing these funds in the midst of major headwinds – the collapse of commodity and oil prices, currency depreciation, public market volatility, political uncertainty, and slow growth.
But beyond the economic and market cycles, LPs looking at the long-term opportunity and underlying trends in Latin America have remained committed to the region, and PE managers are targeting sectors and strategies that remain highly attractive in the current environment.
In 2013, 49% of all PE/VC deals closed in the region were in technology related businesses, and a quick review of 2014 transactions shows the trend is still going strong. Advent is currently closing an investment in Allied, a marketer of technology products in Brazil; KKR acquired Aceco TI, a Brazilian data center business; and Riverwood, a firm that was oversubscribed in 2014 for a US$1.1b EM technology fund with heavy exposure in LatAm, bought Brazilian payment processing solutions company Conductor in November.
GPs focused on the middle class consumer strategy are specifically targeting education and, in 2014, healthcare, with Bain Capital staking US$850m in Brazilian health insurance operator Intermedica, three healthcare deals in Mexico from General Atlantic, EMX Capital and Northgate Capital, and one in Colombia from Ashmore.
New opportunities are opening up in construction and infrastructure in Brazil and other markets (as reported by the FT recently), as budget conscious governments create space for private capital. In Colombia, Ashmore committed US$66m to the new Bogotá airport, and the local pension funds joined Advent in acquiring the Ocensa gas pipeline. Logistics and transportation have been popular plays, with Altra Investments backing a Peruvian transport company and Aqua Capital executing on a roll up of cold storage and transportation businesses in Brazil.
And Capital Group saw synergies in infrastructure and electronic payments, acquiring an electronic toll collection company in Brazil.
At LAVCA we have been keeping a watch on any activity in distressed or turnaround investing; this strategy has been marginal in LatAm to date, but could be expected to evolve going forward.
Another driver for LPs and GPs doubling down on Latin America is the counter-cyclical nature of PE investing. Today public markets are cheaper than historical averages and private valuations are inevitably correlated. One pan-regional manager that closed multiple deals in 2014 confirmed for me that he is seeing more reasonable valuations across the board — assets have become cheaper.
The same idea was well reported in a recent Valor Economico article, with major players in Brazil speaking to the opportunities created by currency depreciation and the overall slowdown.
It is also worth remembering that Latin America is entering this cycle following several years of extraordinary wealth creation and capital formation, with pension funds and family offices sitting on growing reserves that they look to deploy domestically and internationally. Pension funds are seeking to co-invest with private partners in infrastructure and other projects, and family offices are ready partners for both local and foreign PE investors seeking deal flow.
Most importantly, investors committing capital to Latin America over the last eight years have clearly been betting on long-term trends rather than on cycles. The opportunity in the region compares favorably with other emerging markets when viewed over a ten-year horizon, which is why it is such a good fit for long-term investors comfortable with illiquid asset classes. Those investors see positive demographic trends, consumption, technology, expansion of credit, and an ongoing strengthening of institutions, transparency and governance in stable democracies.