Private equity value creation in Latin America
The economic backdrop for this year’s study is much more challenging than the promising conditions we saw in 2012. GDP growth forecasts have been lowered for many of the region’s biggest economies, and stubbornly high inflation remains an issue in Brazil and other countries.
Given this setting, PE invested and raised lower amounts in 2013 than the previous year. Still, amounts remain solidly above 2009 levels and significantly higher than a decade ago, attesting to the continued development of the region.
Exits in brief
The big story in Latin America was the strength of IPO markets. Exits via IPO in our study sample doubled (from three to six), and 38% of IPOs in the region were PE-backed, the highest level ever recorded. The positive trend looks set to continue through 2014.
IPO remains by far the most common route to realization for Latin America’s larger PE portfolio companies, with trade sales predominant in smaller (sub-US$100m) deals. However, this long-standing divergence is narrowing, as some of the barriers to going public (particularly in Brazil) decline.
Sales to PE via secondary buyouts have thus far been relatively rare. In this year’s study, only a tenth of deals exited from the sub-US$100m category were sold to other PE houses. We expect this proportion to increase as smaller houses work more closely with portfolio companies.
Over a quarter of companies have remained in a portfolio for more than six years and holding periods have lengthened considerably since 2011, a cause for concern. Firms, particularly those without a track record, need to demonstrate an ability to exit before LPs will commit to new funds.
The vast majority of sub-US$100m entry enterprise value (EV) deals were acquired from private sellers, reflecting the preponderance of small and medium-sized businesses in the region that are owned and run by founders. By contrast, there is a broader spread of deal sourcing in the over-US$100m entry EV category.
PE is spotting opportunities in a diverse range of sectors. The consumer goods and services sector accounts for nearly a third of realizations, followed by financials and technology. These three sectors benefit from growing consumer demand and overall economic development in the region.
Value creation in action
Organic revenue growth is by far the largest component of EBITDA growth for PE-backed companies in Latin America. In fact, this tendency is even more pronounced in Latin America than more mature markets.
Across our sample, 68.2% of EBITDA growth was driven by organic revenue growth, with less than a third coming from acquisitions and only 3% from cost reduction. There was little variation to these numbers by deal size.
Drilling down, geographic expansion is the primary driver of organic revenue growth, accounting for nearly half of that total. The region’s PE firms are clearly buying smart by selecting businesses in growing sectors.
Growth in the overall market, new products and improved selling techniques also play smaller, but important, roles in organic revenue growth.
Breakdown of organic revenue growth — all deals
Selling and performance
Much of PE’s expertise lies in knowing when to sell. In Latin America, the key trigger is strong business performance, accounting for nearly 50% of exits. Favorable market conditions were a timing trigger in just over a third of exits.
Overall, this suggests that PE owners in the region have an eye on the exit. This preparation is paying off, with exits to both trade and IPO showing strong multiple returns. Comparing the two, multiples are 9.8% higher for IPOs than trade sales.
Despite a challenging economic environment in 2013, PE firms continue to outperform comparable public benchmarks. In our analysis, PE deals returned 2.6 times the Ibovespa index return.