Looking down market

Expect private equity firms in Latin America to target businesses catering to the base of the socioeconomic pyramid, writes Suzanne Weinstock.

As the economic crisis finally catches up with emerging markets, territory normally relegated to socially conscious investors in Latin America may look much more appealing to all types of private equity firms.

In recent years, much of the investment in Latin America has sought to take advantage of the exploding middle class drawing capital to retail goods and consumer finance products. Although middle class growth is still expected to be a driver of the region's economies, not all investors expect it to continue at the rapid pace the continent has been enjoying for several years.

“The middle class usually suffers the most in a crisis,” said Joaquin Avila, head of the Carlyle Group's $134 million Carlyle Mexico fund.

Suzanne
Weinstock

As investors become less inclined to bet on discretionary consumer spending, popularity will shift toward sectors taking advantage of low income consumers — the so-called “base of the pyramid”, which in emerging markets comprises the largest portion of the population.

Ignia, a social venture firm IGNIA which specialised in “base of the pyramid” investing in Latin America, has for some time touted the sector as able to produce returns on par with more traditional investments.

Now it seems that mainstream private equity investors in Latin America are giving the sector extra attention as well, looking to tap into the enormous underserved population requiring basic goods and services.

“If you have a business in which you help [the base of the pyramid] in a profitable way, you have a huge marketplace in which, usually, the players are not well organised,” said Avila.

And as people lose their jobs in the face of economic downturn, basic needs industries will outperform, he added. “People will stop buying fancy clothes; nevertheless, they will continue to buy tortillas.”

Ignia co-founder Michael Chu also argues that the base of the pyramid population has historically been more resilient to economic downturns as well as more decoupled from the economy at large, working jobs that rely far less on the dynamics of the global market.

Private equity firms are well known for adapting their strategies to capitalise on changing market conditions, and Latin American-focused firms should be no different. As middle class consumers there buckle down for a tough economic period, expect more capital to flow toward the region's vast low income populations.