A Credit Suisse affiliate recently closed a $300 million debut fund earmarked for investments in South America, marking the latest example of a heightened interest in that region from private equity firms.
“There’s more means to make deals happen because capital markets have developed to the extent that you can do LBOs,” said Julio Lastres, senior managing director at Darby Overseas Investments. “Now, an LBO player can go in and finance part of the position in local currency at competitive interest rates.”
Atop this solid market foundation are young demographics, booming mining industries, the need for infrastructure upgrades and high commodity prices. “Prices [for commodities] are higher than they’ve ever been and there’s no indication that’s going to change,” said Jennifer Choi, director of research at the Emerging Markets Private Equity Association.
The $300 million fund closed by DLJ South American Partners, a joint venture between a team of investment professionals and Credit Suisse’s alternative investments business, plans to do deals in Argentina, Brazil and Chile. Another Credit Suisse group,
The DLJ South American Partners team wasn’t sure at the outset that it would reach its $300 million target, but toward the end of the fundraising effort the firm had to turn away investors—an indication that interest has grown substantially in the last two years alone. “When we started fundraising at the end of 2006, it was still a process where we needed to make a big effort to get people to take a meeting,” said Carlos Garcia, a managing partner. “By mid-fundraising—say, the second or third quarter of 2007—the region was already getting hot in terms of interest. And by the end of 2007, it was hot.”
In 2007, fundraising for Latin American-focused vehicles across the private equity spectrum—including venture capital, growth equity and buyouts—surpassed its previous peak of $3.7 billion in 1998, according to estimates from the Emerging Markets Private Equity Association. Still, the region has still not garnered as much attention as some of the other so-called BRIC nations, the countries of Brazil, Russia, India and China. Firms specializing in Latin America raised $4.4 billion in 2007—a 66 percent increase from 2006 and a huge uptick from the mere $417 million raised in 2003.
Bolstering the increased interest of late is more financing and exit options in Latin America. More financing options are available in Latin America because the cost of borrowing across most of the region is lower today than what it was five years ago, said Hector Tundidor, director of Ernst & Young’s Florida and Latin America Transaction Support Group. “In addition, the IPO markets are real hot in Brazil,” he said. “Private equity firms looking to invest in Latin America, at least in Brazil, can look to the public markets as a viable exit strategy. This option existed in theory, but in practice it was nonexistent in the past.”
The same day as DLJ South American Partners announced the closure of its debut Latin America fund, Apollo Group Inc., the Phoenix, Ariz.-based education company that runs the University of Phoenix, announced that its subsidiary acquired the Universidad de Artes, Ciencias y Comunicacion, an accredited private arts and communications university in Chile. The Carlyle Group holds a 19 percent interest in Apollo Group, and the buyout shop has been active in other areas of Latin America. In February, it closed its first fund dedicated to Mexico, the $134 million
Miguel Valenzuela, a Carlyle Group principal, said a handful of forces have come together to propel the private equity push in Mexico and Latin America. Aside from regionwide economic stability, sellers and intermediaries are more aware of private equity, creating a pipeline of new deals. Financing is also now more available, with banks willing to lend as much as 4.5x EBITDA for leveraged buyouts. At the same time, there’s little competition among private equity firms. Finally, in the case of Brazil, the exit ramp via IPO has never been more robust. “The amount of interest in Mexico and the region is on the rise,” Valenzuela said. “I think that we will see more competition going forward.”
Perhaps more importantly, there have also been several private equity success stories in Latin America. The Carlyle Group, for example, exited Hispanic Teleservices Corporation for a 3.35x return on its investment after a two years. And
DLJ South American Partners, for its part, is targeting Argentina, Brazil and Chile, partly because its team has experience in these countries. Garcia, based in Buenos Aires, previously led the private investment efforts in South America for DLJ Merchant Banking Partners; and Marcelo Medeiros, managing partner, based in Sao Paolo, previously managed the
The fund intends to cut checks of about $30 million each for control of 10 companies, with no specific sectors targeted. It has done three deals since its formation in December 2006, investing about $81.6 million of its capital. It created Arcos Dorados B.V. to acquire the franchise operations of McDonald’s restaurants in Latin America and the Caribbean; it acquired Fispal, a promoter of food and beverage trade shows in Brazil; and it became the largest shareholder of EBEC, a company that provides courses for Brazilians preparing to take civil service tests. —B.V.