A growing domestic market, rising wages and employment, improved economic and political stability: for many private equity firms these characteristics of the Latin American market are a reason to explore investing in the region.
However, the challenges of tapping into Latin America were key talking points at a Latin American-focused private equity conference in London this week. Crime and corruption, a rigid labour market, a shortage of skills, bureaucracy and undeveloped infrastructure were a few issues mentioned during several panel discussions at the event, which was held by the British Private Equity and Venture Capital Association in partnership with the Brazilian Private Equity & Venture Capital Association and the Mexican Association of PE and VC Funds.
Management teams are not ready for us in the same way some European or US management teams are
The immaturity of the market means there are fewer intermediates in place. There are not that many large investment banking advisors, Stuart McMinnies, a partner at 3i Group, said. “That makes it harder. You get many more introductions from smaller advisors and even individuals,” he said.
Due diligence takes longer too, he said. “Businesses are less sophisticated. Management teams are not ready for us in the same way some European or US management teams are,” he said. 3i carries out more governance and compliance checks than they would do in Europe or the US, he said noting that meant due diligence can take two to three months, rather than five to six weeks in developed markets.
Getting business owners to agree to sell a stake, and accept private equity’s operational improvement suggestions, can be an additional challenge in Latin America, according to Luiz Abreu, chief executive at NSG Capital, a Brazilian private equity firm. “You have to negotiate with the owner and in some cases it can take up to a year or more. The partner has to accept he now has to respect corporate governance, transparency, accountability. If you don’t have the right [person], you are not getting too far,” he said.
As many Latin American targets are relatively immature businesses, a very hands-on operational approach is needed, the panellists indicated. “You can’t really be a passive investor, particularly not in emerging markets and for Mexico this is certainly the case,” Scott McDounough, a managing director and founder of Alta Growth Capital, said. “In many cases, these companies have developed an interesting business model and have shown it works, and now they need some capital and some help to institutionalise. You need to spend time with the team and be willing to do that,” he said.
Fund managers and investors alike also acknowledged the need for local expertise. Knowledge of the local situation is vital, both for GPs and LPs. “We have to be very comfortable with the manager, that he understands all the different [local] cultural, business and legal aspects. We would only want to invest in country funds and even then we have to be very comfortable that the manager has the skill and experience to be able to manage these risks,” said Alex Barr, head of alternative investments at Aberdeen Asset Management.