Avoiding the herd

The boom in private equity investments in Brazil over the past few years has produced a shine on Latin America’s largest economy that has extended to surrounding countries.

“Brazil being the diamond on the crown, people stop looking at the diamond and start looking at the crown,” Christian Warnholtz, partner at Mexican private equity firm WAMEX Private Equity, said at a recent industry conference in Washington DC. Warnholtz added that Mexico in particular was undercapitalised when it came to private equity.

Fellow panellists at the International Finance Corporation’s emerging markets conference, co-sponsored by the Emerging Markets Private Equity Association, said markets like Peru and Mexico offered respite from rising valuations being seen in Brazil.

In Peru, investors were finding better opportunities and pricing, according to Marc Frishman, managing partner at Conduit Capital Partners: “We’re very active in Peru and we see very clearly more and more players entering the market.” 

He said the increase in activity has not led to concerns about inflated prices yet. “We’re still seeing the deal flow…so the inflow of capital into the market actually helps us,” said Frishman. “It provides even more interesting exit opportunities, because once these assets are up and running you can sell them very quickly”.

Deal activity is poised to increase further still as the region continues to benefit from investor interest: the Latin American private equity market achieved record fundraising levels last year of $5.6 billion, according to a recent report from Probitas Partners.

Along with increased interest from global institutional investors, GPs have also been gaining traction with Latin American investors, particularly as various countries overhaul regulation allowing domestic institutions to invest in the asset class. The Blackstone Group, for example, recently said it planned to target 1,200 new investors around the globe and attracted capital into its sixth fund from a Chilean financial institution called Larrain Vial, which launched a fund targeting $700 million that was to be committed to Blackstone VI.

One difference to raising money in Latin America, however, can be the level of GP commitment to funds expected by investors such as Mexico’s private pensions, known as Afores.

“Today, if you go to most of the Afores they’ll say, ‘Okay, minimum [GP] co-investment is 5 percent or 10 percent,’ which is not really a traditional market for private equity,” said Conduit’s Frishman. “I hear from other managers that it’s similar in other sectors as well.”