The private equity market in Latin America has traditionally lagged behind many other areas of the world – but that trend is clearly beginning to change.
As Reuters recently reported, Bain Capital is the latest big equity firm to consider creating a Latin America-focused investment fund, following the example of peers like Carlyle Group and Advent International Corp.
Bain managing director Stephen Pagliuca told Reuters that Bain’s purchase of Telefonica SA’s Latin American call-center business, Atento, in December helped convince the firm of the area’s potential. The article also cites a statistic from the Latin American Private Equity and Venture Capital Association, which recently found private equity and venture capital firms committed $7.9 billion to investments in Latin America last year, a five-year high and a 21 percent jump from 2011.
A report from Thomson Reuters had an even higher figure for private equity and venture capital investment in Latin America in 2012, finding it hit $11.6 billion, the second-highest level in the past decade and more than double the performance of a weak 2011.
It isn’t only big firms like Bain that are making inroads into the region. Global Delivery Report recently interviewed Luis Trevino, a managing director for Beamonte Investments, about his firm’s interest in Latin America. Here are some excerpts from the interview:
On Beamonte’s niche in Latin America: “We launched our first fund for Latin America in January of 2012. We focus on Mexico and Colombia. We invest in SMEs. It’s a niche where big players are not looking right now. You are seeing a lot of growth in such companies. Probably 90 percent of companies in Mexico and Colombia are SMEs, so it’s a big opportunity.
On why Latin America is attracting interest from investors: “You are seeing a new generation of fund managers who are interested in the region, especially Mexico, Colombia and Peru. Really strong macroeconomics and a growing middle class make those countries attractive. Most of these countries have set up corporate and minority rights, and other regulations that make you more comfortable about investments there. Since 2008 the Mexican government has allowed pension funds to invest in alternatives. There is a rising trend in local pension funds investing in managers with track records.”
On which countries are hot: “We believe Brazil is an expensive place to invest now; valuations are really high. In countries like Argentina, it’s really tough to make investments because of the political environment. Chile is primarily known for commodity assets, and we do not invest in those. So Mexico, Colombia and Peru are what is left. Our team knows Mexico and Colombia really well, so we invest in those countries.”
On Mexico’s strengths and challenges: “Mexico needs a more efficient tax code. Another challenge is the restrictions on investing in some industries. Oil and telecomm, for instance, are monopolies. In terms of taxes, it’s not as competitive as it should be. They are also working on labor reforms, which will be helpful. The new administration seems to really understand the issues, and they have a strong agenda for the country. The legislature has done some good things. They created a new kind of corporation called a SAPI that allows you to have minority rights.
From a micro perspective, we need a culture change. Business people there are not used to partnering with private equity funds, or selling the company, or becoming a minority in the company. So that can make it difficult. You really need to know the culture and understand the people to close deals. There is also a lack of transparency in the accounting of these companies. They do not have the financial discipline of a fund manager or a fund like us.
On Mexico’s emerging entrepreneurial culture: “We work mostly with family-owned businesses. We are looking for entrepreneurs. A lot of times you have a business headed by a father who is an old-school entrepreneur, and his children might be next-generation entrepreneurs who want to take the business to the next level. They want more systems in place, more discipline — and that is what we bring to the table. We work with all of our portfolio companies to add value through leadership and talent, to help them get a more efficient capital structure, to have a more reliable business plan, and to invest in innovation.
On Beamonte’s investments: “The last one we closed in February is Integra. It’s the financial arm of one of the largest dealerships in Mexico City, and they do financing for trucks and cars. They focus on SMEs, and do credit and leasing. For SMEs, buying on credit or leasing is often better than buying a car or truck outright.
Our first investment was Citec, which offers services to the pharmaceutical industry. They have a really specific niche in the market. They help big pharma companies with certifications and complying with international regulations. We acquired it last year from a family and put a professional management team in place. In 12 months, we have been able to double the size of the company. And we are looking at growing the company even more through add-ons. We want to consolidate that industry throughout all of Latin America. “
On private equity’s future in Latin America: “Managers are feeling more comfortable taking risk in Latin America. We are taking more risk in the kinds of companies we buy; in our case looking at the lower middle market, for example. You can see a new generation of venture capitalists in the region. It’s a new generation and a new industry, so we will have to wait and see the exits for all of these funds. With successful investments, I think 50 percent is the economy and the environment, and the other 50 percent is the investment team and the management. “