The clarity of hindsight has shown us that more than a few early US-based enthusiasts of Latin American private equity were overly ambitious about engaging the industry, attempting to do too much too quickly when they entered the region en masse in the 1990s.
“Especially with Latin American companies opening up to financial investors for the first time, it was very much a different ballgame altogether,” says Luciane Roessler, managing director who heads the M&A and corporate finance practice of middle-market investment bank Trenwith Securities’ Chicago office. She notes that, six or seven years ago, many of the US-based buyout firms active in Latin America were accustomed to investing for control and, in some cases, took a more detached approach to the investment process, spending too much effort monitoring the financials versus providing support as an operating partner.
The sense of alienation that resulted – on the part of both GPs and portfolio company management – combined with the volatility that characterised many markets within Latin America led to that particular door being closed, and for a few years in the early part of this decade, only a handful of US-based firms remained active in the region, like Advent International, EMP and AIG.
However, US-based financial sponsors – be they private equity funds or hedge funds – are showing a renewed interest in Latin American investment opportunities, particularly in the middle market, says Roessler. “We’re seeing a lot of interest from hedge funds – because they can play in this very flexible structure, that’s the type of player that is moving from the US more directly, not on a strategic basis, but on an opportunistic basis,” notes Roessler. “Every time we talk to private equity funds, we’re talking to hedge funds at the very same time.”
While the timing isn’t quite right for raising Latin America-focused funds – in part because of investors’ current craze over Asia – it is a good time for investing, says Roessler. The economies in Latin America are undergoing a high level of specialisation, with the countries developing what they do best, such as Brazil’s strength in agricultural products and Mexico’s recalibration of its focus given the labour advantage that China and India have on the manufacturing front.
“The business landscape is quite favourable for investment, with Brazil and Ecuador vying to become investment grade, although we still need to go through the elections at the end of this year to know what’s going to develop early next year,” notes Roessler.
However, Roessler points out that many countries in Latin America have exhibited a sort of ‘herd mentality’ when it comes to politics: in the mid-1900s military dictatorships were all the rage, and then democracy caught on in the latter decades of the twentieth century. “There have been some hiccups in the process – such as Argentina’s 2002 default – but Brazil and Ecuador are following the same lead: they are two countries that very much want to decouple politics from the economy,” says Roessler.
For these two countries – both of which will also undergo presidential elections later this year – their economies have been performing very well, despite problems on the political front – such as high levels of corruption in Brazil, observes Roessler. “The economies [in Brazil and Ecuador] have been doing extremely well – almost not caring what’s happening on the political side,” says Roessler.
Perhaps if the political conditions improve, these countries will have the best of two worlds, as Roessler anticipates, with the government getting serious, which should further boost local economies – and the backdrop for private equity plays.