By Jason Mitchell
‘Unrealistic’ valuations dampen interest; Reversal of last few years of flows
September 20, 2012 – Private equity investors in Latin America have started to shift their attention from Brazil to Mexico and the Andean region where families and entrepreneurs are more realistic about company valuations.
Brazil attracted a flood of private equity and venture capital money during the past two years, but this year the taps have been turned off, as investors have become much more wary about high company valuations in the country. Only $850 million was raised in Brazil in the first half of this year, a steep fall from the $3.28 billion raised in the same period last year, according to the Latin American Venture Capital Association (Lavca).
Brazil accounted for 45% of the total secured for the whole of Latin America during the first half of this year, compared with 67% for the same period last year. Overall, last year $10.2 billion was raised in Latin America, with Brazil accounting for 80%.
During the first half of this year, many managers have raised funds that allocate to the whole region rather than just to Brazil. For example, during the first half of this year total fund raising for regional funds added up to $1 billion (53% of all fund raising) whereas during the first half last year they amounted to $800 million (only 16% of all fund raising). Last year overall, regional funds added up to $1.2 billion (11.5% of the total raised).
“This year, private equity managers have been slow to invest throughout the emerging markets,” says Patrice Etlin, a managing partner at Advent International and chairman of Lavca. “Latin America – especially Brazil – has been no exception to this. There is a lot of dry powder because of the money raised in previous years, but managers have become much more cautious about committing.
“In particular, there has been an adjustment in investors’ perception of Brazil. The economy is expected to grow by only 1.5% to 1.7% this year, slower than the US. The Bovespa is down 20% in reais terms on its peak last year, 30% in US dollar terms.”
Etlin adds that the gap between what families and entrepreneurs believe a company should be valued at and what private equity managers are prepared to pay has widened. “Brazil has slowed down, and some families and entrepreneurs ask themselves: ‘Why transact under these circumstances?’ Meanwhile, we are starting to see a pick-up in activity in Mexico, which was completely quiet during the past few years. Currently, it has a very active private equity deal pipeline and there is no real competition in that country.”
Colombia and Peru
Private equity managers have also started to look more closely at the Andean markets of Colombia and Peru. These are much smaller than Brazil but they have business-friendly environments and make investors feel welcome. For example, Advent is considering deals in the region with a ticket size between $50 million and $150 million.
PE managers report that many families and entrepreneurs in Brazil have become interested in private equity because the IPO market in that country has dried up. “Many, many discussions with families have taken place but there is still the problem of valuations,” says a leading PE manager. “Families are not prepared to budge yet and managers are being very disciplined about valuations. I think families and entrepreneurs will start to become more realistic at the start of next year.”
Average small cap companies in Brazil are trading on multiples of eight to nine times ebitda in the public markets, whereas families and companies are expecting valuations in the range of 10 to 11 times ebitda, according to Advent. A couple of years ago the spread between families’ and PE managers’ expectations was much narrower and it remains slimmer in Mexico and the Andean region today.
“While we didn’t see a repeat of the $1 billion-plus funds that were raised in the first half of 2011, there were three new closings on funds in Brazil in the first half of this year, totalling $850 million,” says Cate Ambrose, president of Lavca. “At the same time, fundraising for Latin American PE/VC in the first half of 2012 reached $1.9 billion, with over $1 billion committed to pan-regional funds.
“With a 38% increase in the number of deals across Latin America but only a 2% increase in the total amount invested, deal activity also trended towards smaller transactions and reflected an increased focus on the mid-market.”
During the first half of this year, PE managers invested a total of $2.73 billion in 90 separate deals in the whole region compared with $2.66 billion in 65 deals for the same period last year. Brazil made up 83% of the total invested this year compared with 64% for the first half last year, according to Lavca, as the capital raised in 2011 was put to work. During the first half this year, Mexico has seen $228 million invested in nine deals compared with only $84 million committed in five deals during the first half last year.
Overall last year, managers invested $6.5 billion in companies in the whole region in 173 separate deals. Brazil made up $4.1 billion (64%) of the regional total committed, with 90 separate deals. Colombia took the second spot, with total investments of $622 million with 15 deals. In Mexico, a total of $459 million was committed with 22 deals. In Peru, $375 million was invested in two separate deals, and in Argentina only $65 million was invested in 11 separate deals.