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Private equity opportunities in emerging markets: Private Equity in Latin America - EY - Global

Private equity opportunities in emerging markets

Private equity in Latin America

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Interest in Latin America continues, driving activity from local funds and global firms alike.

Appetite for transaction activity remains strong

Fund-raising prospects for Latam (Latin American)-targeted funds remain strong, with significant new funds being raised and even more in the pipeline providing the capital necessary for high-quality opportunities.

Transaction activity is also robust and global banks and investment managers have taken stakes in regional institutions with deep local experience and extensive networks of connections. Other global private equity firms are cementing their commitment by setting up local offices for the first time.

Broader concern about rising valuations is leading some firms to expand their activities outside of Brazil to other Latam countries, notably Colombia, Peru, Chile and Mexico.

Nonetheless, Latam has moved from a niche "nice-to-have" portfolio holding to a critical pillar of LP’s diversification models.

LPs see in the emerging markets many of the characteristics that attracted them to the private equity asset class in the first place — chiefly, the opportunity to earn returns that are better than public markets, especially in developed economies. As 2011 continues, we expect this wave of interest to translate into greater activity across the space, including fund-raising, transactions and exits.

Macroeconomic and policy update

Growth rates set to moderate after a strong 2010

Average GDP across the Latam region grew an estimated 5.7% in 2010, driven in large part by higher-than-expected private consumption fueled by a rapid recovery in job growth and wages and increased lending to the private sector.

Domestic demand grew by 9.6% across the region, with many economies posting double-digit gains, including Brazil, Peru and Chile. Unemployment has continued to trend lower, dropping from 10.0% to9.4% across the region.

Based on this growth, economists expect rates to moderate over the coming year, as the impacts of a sluggish recovery in developed markets, especially in Europe, and the necessity of monetary tightening across Latam’s fastest-growing markets assert themselves.

Fund-raising

Encouraging signs from funds on the road

LP interest in Latam is translating into new commitments for local, regional and global funds. Underscoring rising interest in the region, two Latam-targeted funds rounded out the top 10 largest buyout funds closed in 2010 — Southern Cross’ Fund IV and Advent’s Latin America Fund V — each with approximately US$1.6b in commitments.

According to EMPEA, Latam-targeted fund-raising closed out 2010 with US$5.6b in new commitments, an increase of nearly 150% over 2009 levels.* Compared to a decrease of 26% in global private equity fund-raising levels, Latam fund-raising is clearly recovering at a significantly faster rate than global averages.

The near-term outlook for 2011 is extremely positive, and there remains a strong pipeline of funds currently in the fund-raising stage. The largest of these is Gavea’s targeted US$1.5b Fund IV. Other funds currently raising assets include Patria’s US$1b infrastructure fund, P2Brasil, Angra Partners US$500m growth capital fund and The Carlyle Group’s US$500m buyout fund.

* Includes Caribbean-targeted fund-raising

Transactions

2010 marks second-best year in a decade

According to EMPEA, 2010 saw US$6.6b in aggregate private equity deals by Latam-targeted firms, a remarkable 404% increase over 2009 levels. Brazil received the majority of this investment, accounting for 70%, with US$4.6b in new deals.

Investors increasingly look beyond Brazil

Colombia, Chile and Peru top investors’ lists

Concerns about elevated valuations in Brazil have many investors increasing their activity in countries such as Colombia, Peru, Chile, Argentina and Mexico. These economies share many similar characteristics, including a rising consumer class, favorable demographics and a political environment that is favorable toward private equity investment.

According to EMPEA, Latam investment, excluding Brazil, totaled more than US$2b in 2010. One recently announced investment was US-based Riverwood Capital’s investment in Chilean IT services provider Synapsis for US$52m in December.

The company has customers across South America, and the growth capital investment by Riverwood is expected to reach US$100m over the next several years and will be used to fund an aggressive plan of geographic and business-line expansion.

The Synapsis investment dovetails with Chilean President Pinero’s focus on fostering innovation and attracting growth-oriented companies to Chile. Other investments across the region include Aureos Capital’s acquisition of a 40% stake in Peruvian tourism company Condor Travel. The deal is the firm’s 2nd investment in Peru and its 10th in Latam, and it comes on the heels of a similar investment in the sector by Carlyle, when it acquired CVC Brasil a year prior.

In the energy space, Citi Venture Capital International made a US$400m investment in exchange for a 31.9% stake in Colombia’s Transportadora de Gas de Interior (TGI). The gas distributor is owned by Empresa de Energia de Bogota, the country’s second largest electricity transporter.

While we continue to see Brazil as a major focus for private equity funds over the near term, we also expect that attention will translate into increasing activity across Latin America.

The primary beneficiaries will include countries with limited structural challenges that demonstrate to investors an understanding of how private equity firms can deploy both capital and operational expertise to impart profound benefits upon these rapidly developing economies.



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