Although for the most part the rewards of private equity investing in Latin America have yet to be realized, and the region remains as full of barriers as an obstacle course, there are those private equity firms who continue to find investment opportunities.
Citicorp Venture Capital Latin America is one such firm. Over the past several years, very few leveraged buyouts have been done in the region because it is so difficult to access leverage, said Bruce Catania, managing director of CVC Latin America. In fact, as far as Catania knows, his firm, in partnership with Chilean investment group Prospecta, was the only organization to perform an LBO in Latin America in 2001.
CVC/Prospecta acquired Chilean company Sociedad Punta de Lobos (SPL), “the most important salt company in South America,” for $100 million in June. SPL is more than 90 years old, and is a major player in the U.S. East Coast de-icing market. It is also South America’s largest salt producer and exporter.
“There was very little debt on the company,” said Catania, who became head of CVC Latin America in September 1997. So CVC put up $30 million, and Prospecta put up $70 million, while also bringing on just as much debt, refinancing the debt after the closing.
“I think you have to be creative in structuring to get a deal done in the region because there are so many obstacles,” he said. “There aren’t bridge lenders, for example.”
Catania attributed the success of SPL on its low-cost mining operation, which has one of the lowest production costs in the world, and the high quality and purity of its salt. SPL owns salt reserves that are vast enough to supply world demand for at least 100 years.
SPL, Catania said, has highly qualified management partners led by Jose Yuraszeck, who along with his team of executives, were instrumental in developing ENERSIS from a small, privatized power distribution company in Santiago into the largest energy conglomerate in Latin America. (Additionally, Prospecta is a group formed by the former senior executives of ENERSIS.)
With regard to Sociedad, Catania said it’s an exceptional asset.
“We thought it was a very under-utilized asset. We thought there was a lot you could do with it to improve its performance,” Catania said. “There were markets that the company didn’t attack. And there were aspects of its cost base that we were able to take out very quickly. Lastly, the asset just happened to come on the market when there were few bidders.”
He also said, although the auction process took some time, CVC/Prospecta was able to negotiate a deal and close it in 60 days. Prospecta could not be reached for comment.
Catania is working with SPL to further develop its presence in the de-icing market beyond the U.S. East Coast. The company is also entering the chemical and water-softening segments, and is working to develop the human consumption market beyond the Chilean market either through acquisitions or investments that would provide a very competitive access to other markets.
“There are good quality companies in the region,” Catania says. “The region now is being capital starved. And so your ability to negotiate attractive investments today is there.”
The recent past was more difficult, because the industry went through a bubble that was also reflected in private equity in Latin America. Today, however, “most of the private equity money that was splashing around out there is gone. There are many fewer sources, so you’re able to do transactions on terms that are very attractive.
“If you pick the right industries and the right countries, there are probably interesting things to do,” he says.
In fact, one-quarter of CVC Latin America’s portfolio is invested in Chile, a market many GPs and LPs have considered too small to be worth the effort of investing there. But Catania disagrees. To him, it’s not only less volatile than other Latin American countries, it also is an investment-grade country where private equity firms can access leverage. There are local debt markets.
“It may be small,” he said, “but there are very, very high-quality opportunities, so I think it’s an overlooked market.”