Nearly five years after The Carlyle Group's move into Mexico, it is too early to call the franchise expansion a definitive success, in light of a weaker-than-expected fundraising, slow capital deployment and personnel turnover. But insiders, including at least one LP in the Mexico fund, say that a disciplined approach and “one-and-a-half exits” show the fund is on the right track.
In December 2003, Carlyle hired locals Luis Téllez and Joaquin Avila to establish a Mexico City office and raise Carlyle Mexico Partners, one of the first buyout funds dedicated to the US's southern neighbour. Téllez had served in numerous high-level Mexican government positions including chief of staff to President Ernesto Zedillo. Avila was co-head of Latin America at Lehman Brothers and one of the highest officials at Banco Santander Mexico.
Targeting $250 million, the fund attracted capital from investors including US pensions the New Mexico State Investment Council and the California Public Employees' Retirement System, as well as World Bank division the International Finance Corporation.
But in early 2007, Carlyle Mexico held a final close on only $134 million following the 2006 loss of Téllez, who became secretary of communications and transportation to newly elected President Felipe Calderón.
In an interview with PEI, Avila attributed the fundraising troubles to three primary factors: being a firsttime fund, a bad track record of private equity in Mexico in the 1990s, and booming private equity markets in other regions at the time.
Despite Mexico's promising macro-economics and the advantage of limited competition, few investors were willing to make a bet on the fledgling, non-BRIC market.
Duncan Littlejohn, Paul Capital Partners' São Paulo office chief, notes that in 2003 “there was very little jurisprudence, history, success cases … [Today] you're really still talking about a dozen managers and probably then you were talking about even fewer.”
The fund's investment pace appears somewhat sluggish with only three acquisitions to date. “Yes, I wish we could have invested a little faster,”Avila says.
However, he notes, the fund has already enjoyed “oneand-a-half” exits. He is pleased with the fund's “fantastic” rate of return from these.“We are paid here to have returns, not necessarily pace,” says Avila.
In 2005, Carlyle Mexico acquired stakes in private university Universidad Latinoamerica and contact centre company Hi spanic Teleservices Corporation. The fund then purchased direct seller Arabela in October 2007.
Carlyle Mexico fully exited Hispanic Teleservices in 2007 and partially exited Universidad Latinoamerica in a sale to Apollo Global, a joint venture between for-profit education company Apollo Group and Carlyle's $605 million Carlyle Venture Partners III fund.
Avila says that 99 percent of businesses inMexico are familyowned, creating a host of complications. The group lost a deal after a year of negotiations due to a feud over a family Cadillac, for example.
As of 31 December 2007, Carlyle Mexico had a net IRR of 16.2 percent and an investment multiple of 1.3x, according to CalPERS. Though early in the fund's lifecycle, the figures indicate solid performance.
The fund is currently roughly 60 percent invested, said Avila.
Aldus Equity partner Richard Ellman, investment advisor to the New Mexico State Investment Council, expects the fund to be close to 75 percent invested within two months.
“They have returned a significant amount of capital to their investors, their pipeline looks good and the outlook for returning more capital looks extremely good so overall our impression of how the fund is performing is extremely positive,” says Ellman.
NEA CHALKS UP FIRST DEAL IN REGION
US venture firm New Enterprise Associates and global investment bank Goldman Sachs have led a $66 million Series C venture round for Brazil-based telecom company Spring Wireless. The deal represents NEA's first in Latin America. NEA and Goldman were joined in the financing by two existing investors: publiclytraded Brazilian holding company Ideasnet and Darby Technology Ventures, a venture fund of Franklin Templeton Investments' private equity arm Darby Private Equity. Additional Spring Wireless shareholders include technology giants Intel and Ericsson. The shareholders intend to take Spring public on Nasdaq in a 2009 initial public offering.
ONTARIO TEACHERS BET ON CHILEAN INFRASTRUCTURE
The Ontario Teachers' Pension Plan and Morgan Stanley Infrastructure have purchased Chilean electric company SAESA Group from New Jerseybased Public Service Enterprise Group for $887 million. Teachers' and MSI will each own 50 percent of the company, which has an enterprise value of $1.3 billion. The pair have also assumed $400 million in existing company debt. SAESA is the secondlargest electricity distributor in Chile in terms of geographic coverage. MSI closed its most recent infrastructure fund on $4 billion in May. Teachers' has C$108.5 billion ($107.1 billion; €73 billion) in assets under management and launched its infrastructure portfolio in 2001. The pension focuses on long-term investments with low-risk, inflation-linked returns.
ARGENTINE SECONDARIES DEAL FOR PAUL CAPITAL
Paul Capital has made its first secondary investment out of the São Paulo office it opened a year ago. The firm invested $45 million in a portfolio of seven companies owned by Argentine private equity firm Pegasus Capital. Pegasus retains control of each company. The portfolio is Paul Capital's first consisting entirely of Latin American assets. Of the seven companies, two are in the consumer finance sector. The remaining five companies are retailrelated with growth driven by Argentina's burgeoning middle class. Paul Capital closed its ninth private equity secondaries fund on $1.65 billion in May, which includes an emerging markets allocation of up to 20 percent.
AIG INVESTMENTS OPENS IN COLOMBIA
AIG Investments will open an office in Colombia in the last quarter of 2008 to pursue investments in Colombia and Peru from the firm's second Brazil special situations fund. The firm will put in place a team of two investment professionals, headed by senior vice president Claudia Arango, plus support staff in the country where parent AIG currently has insurance operations. AIG Investments has made one investment in Colombia to date. In March 2007, the Brazil fund invested $38 million in flower distributor Falcon Farms. AIG Investments' Brazil fund closed on $692 million in April 2008. Up to 30 percent of the capital can be deployed in “secondary markets” including Mexico, Colombia, Peru and Chile.
GP INVESTMENTS HITS ROAD WITH FUND V
GP Investments, the publicly listed São Paolo private equity firm, has begun marketing its fifth fund, chief financial officer Allan Hadid said on the firm's second quarter earnings call. The firm closed Fund IV on $1.3 billion in October 2007. GP began marketing the fifth fund when the previous one was 75 percent invested, said Hadid, who declined to state the fund's target. If additional capital is needed before Fund V is available, GP has $600 million on its balance sheet available for acquisitions. Those investments could then be transferred to the fund at a later date or remain on the balance sheet. GP is looking at Peru, Columbia, Chile, Argentina and Mexico for investment opportunities. Mexico, where GP opened a small research office last year, is a key geography for the firm going forward.
EVERCORE PARTNERS WITH G5 IN BRAZIL
Evercore Partners has agreed a partnership with Brazilian investment banking boutique G5 Advisors to jointly advise on cross-border transactions involving Brazilian companies. The firms will work together on cross-border M&A and related transactions between Brazilian companies and companies located outside South America. Evercore and G5 may also choose to partner on transactions involving other South American countries. Based in New York with offices in Los Angeles, San Francisco, London and Mexico, Evercore consists of an advisory business, as well as an investment management unit including institutional asset management, private equity and venture capital.