By Amy Or, Dow Jones Newswires
March 21, 2011— Private equity firms raised a record $8.1 billion for investments in Latin America last year, according to the Latin American Venture Capital Association, at a time when they are earmarking substantially less money for both the U.S. and Europe.
The intense attention to investments in the region, especially Brazil, is already reflected in higher prices for deals.
“There are a lot of private equity firms now active (in Brazil) and it is inevitable that prices will go up,” said Ernest Bachrach, co-head of Latin America for Advent International, a Lavca member based in Boston. “Overall, it seems a little frothy not only in terms of the price-earnings ratios, but also the salaries, living costs, real estate prices. Brazil has both the Olympics and the World Cup coming up, but it is a question of whether it can support the growth people expect of it.”
Advent began investing in the region in 1996. It has 38 investment professionals in Latin America and plans to expand its reach by beefing up investments in Mexico and Argentina and opening a Colombian office. The firm has raised $26 billion, including $1.65 billion in Latin America last year in one of the two largest Latin America-dedicated funds.
HarbourVest Partners LLC, a private equity fund of funds that manages $30 billion in private equity investments, plans to invest a total of roughly $150 million to $200 million in Latin America with three to five private equity managers in the current investment cycle.
“In investing in Latin America, one can’t ignore Brazil, the largest economy in the region. While we are looking to diversify across the region on concerns over pricing and currency appreciation in Brazil, it will probably still be our largest single country exposure,” said Scott Voss, a principal with the Boston firm.
Brazil has been a darling of private equity firms since 2007. The Carlyle Group made three acquisitions there last year totaling $1.6 billion, including $1.2 billion for a controlling stake in Brazilian health-care company Qualicorp.
Apax Partners, Silver Lake, First Reserve Corp., Warburg Pincus LLC and TPG Capital all made their first foray into Brazil last year, Lavca said. Partners Group, KKR & Co., 3i Group PLC, Providence Equity Partners, and Bain Capital LLC are opening local offices or seeking local partners in Brazil, it added.
The $8.1 billion in new funds raised for Latin America last year, which includes $1.68 billion raised by Latin American fund Southern Cross Group, more than doubled the $3.6 billion raised in 2009 and beats the previous peak of $6.4 billion, set in 2008, Lavca said. The not-for-profit association’s membership includes roughly 100 investment firms. Assets held by its members in the region totaled more than $35 billion.
“Many global investors have gone into India and China, and those markets have become relatively crowded and expensive among emerging private equity markets,” said Lavca President Cate Ambrose. “Latin America is less competitive and valuations are attractive, particularly for middle market deals. Investors see political stability in countries like Chile, Brazil, Mexico, Colombia and Peru, strong domestic demand and expanding credit. We are seeing unprecedented interest in the region.”
North America and Europe-focused funds, in money terms, raised much more capital than the nascent Latin American ones. They raised a combined $184.8 billion last year, according to data provider Preqin. Buyout giant Blackstone Group LP’s $15 billion global buyout fund alone was almost double that raised for Latin America.
However, in terms of year-on-year percentage growth, developed markets showed marked decline. Funds raised for investments in the U.S. and Europe fell by 7% and 32%, respectively, Preqin said.
The jump in capital raised for Latin American investments was further evidence that private equity firms are increasingly eyeing less-tapped opportunities in fastgrowing emerging countries, as developed markets’ growth remains timid.
Emerging countries in the Latin America and Caribbean region grew by 5.7% last year and are expected to expand by 4.3% to 5% for the next two years, faster than almost 2.5% for the U.S. and around 2% for Europe.
“The big story is the professionalization of Latin American companies, especially in mid-market businesses where there are a lot of inefficiencies. One focus for private equity firms is corporate governance, for managers to go in and instill best practices,” Ambrose said.
Apart from sourcing deals on their own, international firms are also teaming up with local experts. Blackstone took a 40% stake in Sao Paulo-based Patria Investimentos, J.P. Morgan Chase & Co.’s Highbridge bought a controlling stake in Brazil’s Gavea Investimentos and Carlyle Group earlier this week entered into a joint venture with Peruvian financial group Credicorp Ltd. to invest in Peruvian companies.