This week, LAVCA – the trade body for private equity in Latin America – published its summary of activity last year. And the picture was overwhelmingly positive: it suggested that $8.9 billion of capital was invested in the region during 2013, a 13 percent year-on-year increase (even though the number of deals fell slightly, from 237 to 233). This was a six-year high, LAVCA said.
First, a health warning. Deal figures for the region vary so wildly across different sources (a reflection of the difficulty of collecting data in some of these markets) that drawing sensible conclusions about current activity levels is not easy. For our upcoming Latin America Special (to be published next month), we asked a few providers for some 2013 deal data. The Emerging Markets Private Equity Association reported that total deal value for the region in 2013 was $3.76 billion, spread across 77 transactions. Dealogic had a higher, if not entirely dissimilar total ($3.99 billion) – but suggested it was spread across 40 transactions.
Even accounting for the inevitable differences in scope and definitions, these are pretty huge anomalies.
Take Brazil, the region’s biggest economy: LAVCA says total deal value was about $5.8 billion, but Dealogic puts the figure at $701 million – which is by some distance the lowest total in the last six years. So it was either a pretty good year, or a pretty bad year, depending on who you believe.
The latter certainly seems more likely, on the face of it, given the general macroeconomic picture in Brazil recently. The country’s GDP growth rate plunged from 7.5 percent to 0.9 percent between 2010 and 2012. In the third quarter of 2013, GDP contracted by 0.5 percent – and this week, analysts at Nomura predicted that the country could find itself in a technical recession when the Q4 figures emerge. Its stock market is down over 30 percent in the last year.
And while private equity’s success is not necessarily correlated to the macro picture, most local practitioners have been arguing for the last couple of years that high prices – a legacy of all the money that poured into the country during the bumper fundraising year of 2011 – has been proving a barrier to deal-making. Throw in the social unrest and the pressure on the currency we saw last year – not to mention the general deterioration in sentiment towards emerging markets more broadly – and it doesn’t exactly add up to prime conditions for an investment boom. (It’s worth noting that even LAVCA said it was surprised by its own figures…)
But while Brazil clearly has its challenges in the short term, the longer-term trends are surely very much in its favour as an investment destination. It has a large, young population with a growing middle class, and it still needs substantial investment in infrastructure and productivity. All of this represents a sizeable opportunity for private equity. Equally, as its population gets richer, its (largely state-mandated) pension schemes will get richer too – so over time, as they build up their allocations to alternatives (a process that has already begun, as we discuss in our forthcoming Special), they’ll become a big potential source of capital for local and international GPs alike. That will also help to develop the local industry further.
This summer, of course, football’s World Cup (the world’s biggest sporting event, watched – according to some estimates – by half the planet) is coming to Brazil for the first time in over 60 years. The process has been a fairly painful one thus far; the fact that this generally football-mad country has seen hordes of people take to the streets to protest against the unprecedented spending in preparation for the event is remarkable enough in itself. But hopefully Brazil’s time in the sunshine will have a positive impact – and improve the rest of the world’s short-term sentiment toward a market with so much long-term potential.