The exit climate in Latin America deteriorated last year, according to new research from global consultancy firm EY: in 2013, the number of private equity divestments in the region declined from 28 in 2012 to 20.
On a related note, EY also found that GPs are hanging onto their portfolio companies much longer these days. EY found that over a quarter of the private equity-backed firms in the study have been sitting in GP’s portfolios for more than six years, while holding periods have lengthened ‘considerably’ since 2011.
This is partly due to the fact that GPs are spending more time creating value in the businesses they buy (in particular, an investment thesis predicated on geographical expansion can take time to bear fruit, EY points out).
But it’s also cause for concern, EY warns, especially as far as LPs are concerned. After a peak in 2011, fundraising totals for Latin America have dropped; many firms are now reaching the point where they are running out of dry powder.
In order to convince LPs to invest in their next funds, they’re going to have to start returning some capital to their investors. The exit trend doesn’t suggest this is happening.
There was some good news, however: Latin America’s IPO market saw something of a revival in 2013. There were six private equity-backed listings last year – double the previous year’s figure, and the highest total since 2007.
Barring any external shocks, this trend is likely to continue this year, EY suggests – helped by the fact that PE-backed IPOs in Latin America have significantly outperformed the rest of the region’s stock markets. During the course of 2013, the Sao Paulo stock-exchange Ibovespa and MSCI Emerging Markets Latin America Index were both down 15.5 percent and 13.8 percent respectively, while the average non-PE backed IPO was down 5 percent, according to EY. In comparison, the average PE-backed IPO last year was actually up 2 percent.
And although the IPO route has mainly been employed by larger companies, steps are being taken in Brazil to enable smaller businesses to list more easily. That’s an encouraging development for all those Latin American-based GPs who have an increasingly urgent need to show some good exits.