Latin American has Brazil, one of the so-called BRIC countries (Brazil, Russia, India & China) as coined by a 2003 Goldman Sachs paper predicting that by 2050 the BRIC economies could be larger than the G6 in US$ terms. And by 2025 they could account for over half the size off the G6. But like Russia, Brazil suffered heavily in the 1998/1999 financial collapse, and when a country suffers so too do its investors. Private equity was no exception. Once Brazil slid in 1999, so did the rest of Latin America. It’s against this backdrop that Christina Kappaz is working to push today’s Latin American reality to the forefront of investors’ minds.
Pushing LatAm centre stage
Christina Kappaz, president of the Latin American Venture Capital Association (LAVCA), talks about how LAVCA is working to get the region’s private equity industry under the local, regional and international spotlight.
May/ June 2007 — Latin American has Brazil, one of the so-called BRIC countries (Brazil, Russia, India & China) as coined by Goldman Sachs. In 2003 Goldman Sachs wrote a paper predicting that by 2050 the BRIC economies could be larger than the G6 in US$ terms. And by 2025 they could account for over half the size off the G6.
Like Russia, Brazil suffered heavily in the 1998/1999 financial collapse, and when a country suffers so too do its investors. Private equity was no exception. Once Brazil slid in 1999, so did the rest of Latin America.
It’s against this backdrop that Christina Kappaz is working to push today’s Latin American reality to the forefront of investors’ minds.
Leaving the past behind
Time heals and the macro environment in Latin America is generally on a positive track. Promised and delivered growth rates mean investors should sit up and take notice.
“Things are beginning to change. About three years ago I was on a panel of investors and one said, ‘we got so badly burnt last time; I just don’t want to hear about Latin America!’ That same investor is now looking seriously at the region,” says Christina Kappaz.
Other investors are taking more than a serious look; this year alone Aureos Capital has raised a $300m fund for the region and Carlyle has $134m, a third of which is already invested in a dedicated Mexico fund. Those fall into the category of publicly announced offerings. New fundraising by Advent International (another regional fund for the firm) is put at around $1bn but is yet to be publicly confirmed. It looks like the region is beginning to get some traction.
Advent and Aureos have positive past history in Latin America and The Carlyle Group’s global expansion strategy, arguably akin to the franchise model, may mean it’s a potentially easier investor for the region to attract. These issues aside, all three are experienced investment houses and their presence can only serve to make investors, both at the limited partner and general partner level, take notice.
But Latin American can’t sit waiting for investors to pick up on the fact that their macro economic story has improved, and so too, in parts, have the micro economic ones. Enter LAVCA as advocate.
“Advocacy is a key piece of what we do. We see our advocacy role as being on two levels; advocacy for Latin American to the investor community, which is why we need data to tell the story to investors to attract more investors’ capital. The second advocacy is on the Latin America investing environment, which involves the scorecard we produce with Economist Intelligence Unit measuring key things that influence the environment for private equity investors, like corporate governance, the tax regime, having the right type of fund vehicle, role of local investors, plus international comparisons. We foster dialogue around this research,” says Christina Kappaz.
Hard data has been hard to come by in Latin America. LAVCA set out to change that and later this year publishes the first volume of deals and exits done by its members, who are asked to submit via the www.LAVCA.org website throughout the year. Kappaz is also working with Thomson Venture Economics to produce a simplified methodology for collecting data on; funds each firm operates, fundraising and investments.
Although useful, LPs need performance data but on a practical level getting GPs in the region to provide this is a case of too much too soon. Christina Kappaz is pragmatic. “In the short term we are not going to risk holding up data collection by waiting for returns data,” she says.
Market sizing that tracking the amount of capital, via funds managed and raised, and investments those funds make is useful to potential investors and service providers looking to service the region. And this data once collected gives a sound basis for additional research, such as the economic impact of private equity surveys carried out by the British Venture Capital Association, the National Venture Capital Association in the US and the European Venture Capital Association.
They have been able to dig into this data to work out what contribution their members make to GDP growth, exports, employment and so forth, all of which forces local and regional governments to factor private equity investors concerns and needs into account when legal and regulatory frameworks come into question.
Incidentally this data has been a useful defence mechanism against the drubbing big buyout funds have received in the global press of late. Although in the US the National Venture Capital Association only looks after venture funds so the big buyout firms, having been caught on the hop, have had to form their own association to fight the battle. For this particular grouping, with their billion dollar funds earning 2% management fees, funding is not an issue.
Paying their way
Getting LAVCA up and running in 2002 involved the provision of seed capital from MIF, the Multilateral Investment Fund operated by the Inter-American Development Bank, which has a remit in Latin America and the Caribbean and in 75% of cases where it issues capital partners with the private sector.
Christina Kappaz notes that the venture capital association business model the world over (with the exception of the buyout grouping just mentioned) follows the same route. First they are publicly funded with grants and gradually that funding route is replaced with membership dues, registrations and sponsorship.
LAVCA has had to work hard at proving it is an association that is worth the private sector supporting. It has done this through its LP/GP roundtable, which is only accessible to LAVCA members, and the micro economic level lobbying it has done. This is carried out at a regional level with investors and local level in helping associations, where they exist, and the industry on the ground where no association is present, in putting private equity’s case to government.
“The Brazilian association of private equity & venture capital was forming at about the same time as LAVCA. Local presence is critical. To grow and support the local associations is part of our mission,” says Christina Kappaz.
That part of LAVCA’s mission is going to get a lot of attention this year after the Inter-American Development Bank’s Multilateral Investment Fund announced in January that it has approved a $500,000 financing to strengthen the venture capital industry in Latin America and the Caribbean.
“LAVCA will coordinate with local venture capital associations to foster development and competitiveness of small and medium-sized enterprises in the region,” said MIF team leader Susana García-Robles. “Programmes to be supported will include research, dissemination of best practices, networking and advocacy to both investors and policymakers.”
The project has a regional focus, but will target Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Mexico, Peru, Trinidad and Tobago and Uruguay, countries with a basic minimum level venture capital development.
“Fund managers, investors, entrepreneurs and small and medium-sized enterprises will be the beneficiaries of a more developed regional venture capital industry. Due to the nascent stage of the industry in the region, it is difficult for private funding alone to support the growth of strong local associations, making public sector support essential at this time,” said Susana García-Robles.
MIF has supported every association in the region. This includes LAVCA, the Brazilian and Mexican associations, and more recently building ones in Peru, Colombia, Argentina and Chile.
Meet & greet
Apart from micro economic lobbying, that LAVCA can support through its scorecard, which shows how attractive each country in the region is for the private equity investor in relation to one another and to developed markets like Israel, Spain and the UK, the local associations provide a focal point for networking. Networking is such an important part of the private equity industry that LAVCA has also undertaken to extend this so that limited partners and general partners network together to foster greater understanding about one another’s aims.
“In September we’ll hold our second LP/GP roundtable. It’s a no pitch environment. Investors appreciate the opportunity to learn about what’s happening in the region; it’s an opportunity for them to talk to fund managers in [Latin America] about the issues they face,” says Christina Kappaz. She goes on to say: “The number of investors active in Latin America is relatively small. We reach out and engage those investing for the first time or those that invested in the past and got burnt.”
About Christina Kappaz:
Christina Kappaz is president of LAVCA’s board of directors, representing the association’s management company Development Capital Networks LLC of which she is a principal. From mid-2002 to June of 2005 she was LAVCA’s interim executive director.
Previous experience includes three years at the World Bank on private sector development programmes and three years at the Inter-American Development Bank focusing on human resources development. And since 1996 she has worked as a consultant. Her projects have included providing technical assistance to a US Mexico Task Force, under the direction of Nacional Financiera of Mexico, to develop a reform package and action plan for developing the venture capital industry in Mexico.
2007 GP/LP Roundtable