Playing politics

What is the biggest opportunity and threat for investors in Latin America at the current time?
Private equity investment in the region is still very low relative to more developed markets and to other emerging markets, such as the emerging Asian markets. According to the Emerging Markets Private Equity Association, private equity investment in Latin America in 2007 was less than 0.25 percent of GDP, compared to over 0.5 percent in the emerging Asian economies, and over 3 percent in the US. Much of this investment took place in Brazil, the largest economy in the region. This represents an opportunity for private equity to continue to flourish, particularly in countries where there is less competition for deals.

Political uncertainty continues to trouble some countries in the region, limiting the ability of those countries to access private equity now, or even for the foreseeable future in some cases. While this doesn't generally represent a significant threat to countries that enjoy more business-friendly political environments, it does have the potential to alter some trade patterns in the region, and provide an added degree of uncertainty.

Which types of businesses are you keen to invest in and why?
We are focused on businesses that should benefit from increasing local consumption, driven primarily by a growing middle class segment in the region. To date we have invested in several companies that provide outsourcing services to local and multinational businesses. They offer a solution whereby companies can contract business services under long-term contracts, treating them as operating expenses, rather than having to invest heavily in capital expenditure in non-core businesses. In addition to these business services we are interested in other sectors that should hold up well in a slower economic environment, including certain segments of consumer goods, retail, logistics and education.

Is private equity well established and recognised among Latin American SMEs, or is it just scratching the surface?
I would say it is a nascent asset class in the region. Aureos's model is a very decentralised one, where we have senior local teams based in each of the main economies that we operate in. In Latin America this includes Mexico, Colombia, Peru, Costa Rica and El Salvador. We believe this model is key to identifying SMEs with growth potential and to creating value in those companies. Without the local presence and a well recognised local team it is difficult to identify the right opportunities and to convince those companies, which are generally family owned, to open up their shareholding to a new partner.

What are the most promising exit routes for investments?
Most of the companies that we invest in are medium-sized businesses, therefore the most likely exit route is trade sales. From the time of our initial screening of a company we focus on the most likely exit route, and structure the transaction accordingly, typically including drag-along rights if we are a minority investor, as well as preferential cash flow rights to the fund. In our subsequent management we focus the business toward areas with higher growth potential and margins, which will be of more interest to a strategic buyer.