July saw the close of Brazil's first megafunds, heralding Latin America's return to relevance in the private equity world. Brazilian firm GP Investimentos (GPI) raised $1.025 billion (€745 million) for its fourth fund, more than four times larger than its $250 million third fund, which closed just last year. Its own partners committed $400 million to the new vehicle. The GP Capital Partners IV fund was briefly the largest ever raised for Latin America, until global investor Advent International closed a $1.3 billion fund just over two weeks later.
This sudden burst of LP enthusiasm is a stark contrast to the investment climate in Latin America in recent years. Excitement about Latin America grew steadily throughout the nineties, and private equity funding followed. But towards the end of the decade, political and economic turmoil caused the flow of capital to dry up. The change was dramatic. According to Venture Equity-Latin America, in 1998 a total of $5 billion was invested in private equity and venture capital deals in Latin America; in 2004 just $630 million was put to work.
“Latin America hasn't been the most compelling market for institutional investors over the years, because there have been a lot of mediocre-performing funds,” says Advent's Latin America chief executive, Ernest Bachrach.
But the region looks to be on the rise again, and Bachrach says the common theme is stability. Argentina, Brazil, and Mexico – which are the focus of Advent's new fund – represent twothirds of Latin America's GNP. All devalued their currencies in the wake of financial crises – and all have since seen those currencies stabilise against the US dollar. In the past few years, Moody's, Standard and Poor's and Fitch Ratings have all upgraded Mexico's currency to investment grade, and Brazil is “just a step away”, Bachrach says. Even Argentina has been able to gain access to the capital markets again.
Politically, Brazil's Workers' Party president Luiz Inacio Lula da Silva has not turned out to be as leftist as some had predicted, and the recent election of Felipe Calderon was “a testament of how well democracy has evolved in Mexico,” according to Bachrach.
This newfound stability has fostered economic growth on several fronts. Rising demand for food and commodities from Asia has benefited Latin America. Additionally, US demand for outsourced services, particularly information technology and call centre services, has begun to overtake India's supply capacity, creating an opportunity for Latin American countries to fill the gap. Brazil in particular has stepped up to the plate, producing call centres and software engineers that have the added advantage of being in the same time zone as US companies.
Advent's new fund will target the booming service sector, especially airport services, financial services and business outsourcing. Growth in these sectors should not be underestimated, Bachrach says. “There is very strong growth in service sectors in Latin America. If you look at the GNP numbers compared to Asia, you think [service sector growth] looks pretty pedestrian. But if you strip out agriculture, you see underneath there are these service sectors that are growing 30 to 40 percent compound per year.”
Returns on some recent private equity-backed deals in the region add weight to Bachrach's claims. A source close to GPI's fundraising said the firm had achieved “triple digit” returns from its last fund. Advent too has built a “significant track record”, Bachrach says.
Advent's new fund has already invested in subsidiaries of Corporativo Javer, a low-income housing developer in Mexico. That sector is booming, says Bachrach, thanks to the rise in per capita income in the country. Although the firm did not disclose the terms of the deal, Advent says it is its largest Latin American investment to date, trumping the $500 million buyout of Brazilian retailer Brasif last year.
GPI has yet to make an investment from its new fund, but the firm's president, co-chief executive and co-chairman Antonio Ribeiro Bonschristiano says the firm is looking at several deals, including some outside of Brazil for the first time in its history.
BLACKSTONE EYES BRAZIL THROUGH PATRIA LINK
Brazilian bank Patria Banco de Negocios is raising a private equity fund with a target of $400 million (€291 million) that will seek deals in Brazil. Patria is using placement agent Park Hill Group, a Blackstone Group affiliate. Patria and Blackstone have an agreement to share resources in their mergers and acquisitions advisory business. Prospective limited partners have been told that Patria may tap Blackstone as a co-investor on larger deals. Blackstone has not previously targeted Brazil for private equity investments. Patria's private equity practice is overseen by Alexandre Saigh, who joined the bank in 1994 after working at Brazilian drug company Drogasil and the investment banking division of JP Morgan.
HM CAPITAL EXITS MEAT PROCESSOR FOR $1.5BN
HM Capital Partners has sold Swift & Company, a processor of beef and pork products, to Brazil's JBS for $1.5 billion (€1.1 billion). JBS is Latin America's largest beef processor. The transaction includes $225 million in cash and the assumption of $1.2 billion of debt, according to a statement by HM Capital. HM Capital and Booth Creek Management Company bought Swift from ConAgra Foods in September 2002 for $1.23 billion in cash and assumed debt. JP Morgan was financial adviser to HM Capital, and Vinson & Elkins provided legal advice.
LAVCA APPOINTS NEW EXECUTIVE DIRECTOR
The Latin American Venture Capital Association (LAVCA) has named a new executive director, Cate Ambrose. Ambrose was previously chair of The Economist's annual roundtable on Latin American private equity, where she chaired annual government roundtables with the presidents of Mexico and Colombia in addition to conferences on financial, economic and business policy in Latin America. She was also chief of advocacy for the United Nations Commission on the Legal Empowerment of the Poor, where she founded the Commission's secretariat and initiated research projects on property rights systems in Mexico, Brazil and Guatemala. LAVCA was founded in 2002.
BRYSAM INVESTS $320M IN MEXICAN FINANCIAL INSTITUTION
New York-based Brysam Global Partners has made a $320 million investment in Ixe Grupo Financiero, a Mexico City-based financial institution. The deal gives Brysam a 28 percent stake in Ixe. The bank will use the investment to finance its expansion into the broader consumer banking market, and to strengthen its balance sheet, representatives of Ixe said in a statement. Brysam focuses on the consumer financial services sector in emerging markets, including Mexico, Russia, India and China.
AUREOS INVESTS $1.5M IN SALVADORAN BUILDING FIRM
Aureos Capital's Emerge-Central America Growth Fund has made a $1.5 million (€1.1 million) investment in Constructora e Inmobiliaria Centroamericana (Conica), a construction company that builds housing projects in the eastern region of El Salvador, according to a statement. The fund was launched in 2006 with commitments from Aureos Capital, the Multilateral Investment Fund, CDC Group and Norfund, the development finance institutions of the UK and Norway respectively. Conica began operations in the housing sector in 2004, focusing on low- to middle-income housing in a region of El Salvador damaged during the civil war of the 1980s. The low-income housing sector has been a popular target for private equity funding in Latin America, as recent macroeconomic trends contributing to a rise in per capita income have caused a spike in demand for new homes that is rapidly outstripping supply.
SME SUSTAINABLE OPPORTUNITIES INITIATIVE LAUNCHED
Emerging market specialist Aureos Capital and the International Finance Corporation, the private sector arm of the World Bank, have launched a fund to improve the environmental and social performance of SME companies in emerging markets, including Sub-Saharan Africa, Asia and Latin America. The SME Sustainable Opportunities Initiative, which has around $3 million (€2 million) to invest, will provide backing from the IFC and other donors for selected Aureos-backed companies. The funding is intended to help companies with projects like reducing carbon emissions, improving energy and water efficiency and HIV/AIDS programmes. Projects being considered include a Kenyan steel manufacturer, a Tanzanian pharmaceuticals company, a paint manufacturer in Nigeria and an aluminium producer in Panama.