An emerging problem

Emerging markets are always a tough nut to crack. In Latin America, where a private equity ecosystem is developing gradually with plenty of local nuance, firms looking to make inroads are trying to work out whether their best bet is to go with people they know, or roll the dice on new hires who know the local market.

Many of the big firms, including The Carlyle Group and The Blackstone Group, have either brought in or developed partnerships with local talent to head up their fundraising and deal sourcing efforts. Recruiting Brazilian nationals to develop firms’ brands in the region has obvious benefits, given their familiarity with the language, the market and local customs.

“It makes a big difference in opening the doors and getting deals done when you know people from the same network,” says Warburg Pincus managing director Alain Belda. “In places like Latin America, relationships are very important. People you want to work with first like to know where you come from, what you’ve done, and what you stand for.”

Belda, who joined Warburg in 2009 after spending a decade as chief executive of Brazilian aluminium producer Alcoa, leads the firm’s investment efforts in Brazil from its São Paulo office. Most of Warburg’s non-US offices, particularly those in emerging markets, hire a large contingent of local players, sources say. 

But while these local players provide local knowledge, they’ll clearly have virtually no knowledge of a larger firm’s internal mechanics or business culture. “It’s difficult to find teams that are experienced and have the necessary cultural fit which is so important to us,” says 3i’s Asia and Americas chairman and managing partner Robert Stefanowski. “Many years ago, and this was industry-wide, there probably was more of an expat model.  Individuals moved over, planted the flag and then started to hire locally. I think there was always a notion that the bulk of the people in a new market had to be locals.”

3i’s approach to solving this problem is to spend years scoping out a new territory and investigating local teams to find the one that will fit best with the rest of the firm. Even then, after the firm hired Marcelo di Lorenzo to run its São Paulo office, 3i flew in professionals from its London and New York teams to expedite the new team’s assimilation. 

Apax Partners, however, has decided to bypass the local team approach completely, opting instead to develop its Brazil team in New York. According to CEO Martin Halusa, developing its team in-house is more time-consuming – but it allows the firm to “go slow early, not make mistakes, [and] build our reputation,” thus reducing its risk.  “We haven’t gone out and hired a local rainmaker,” Halusa told Private Equity International. “It takes longer to grow your own team… [But] what we take out of the formula is people risk, because we know them very well and we know we can work with them.”

In fairness, the firm’s gradual entry into Brazil is partly a function of its investment strategy. Rather than trying to generate a large pipeline of smaller deals immediately, Apax has instead opted to focus on its core strategy, says Halusa: deals with equity tickets of between $150 million and $200 million. Given there aren’t many deals of this size around (yet), it’s perhaps no wonder the firm has been quiet since making its debut Brazilian investment last year, when it invested $1 billion for a 54 percent stake in integrated information technology company Tivit.

Allowing its team to grow this way as Brazil develops a market for larger equity tickets could pay off for Apax, of course.  But it may also put the firm at a disadvantage as more and more firms get bodies on the ground in São Paulo. The key to success in the region, according to several sources, lies in finding a balance between building a local team and implementing those who are already part of the firm.

“The mixing of people from around the world is important, but obviously the in-depth knowledge of the location is also very important,” Belda says. “The question is; how do you get the culture in place, and at the same time not lose the local access that differentiates us from the guys that travel from New York or wherever?”