Feature: Internet Provides LatAm Investment Buzz –

Private equity firms with an intention to invest in Latin America over the next four years clearly agree that the Internet is the great global equalizer.

In a survey conducted at The Economist’s second annual Latin America Private Equity conference earlier this month, 63% of the participants stated emphatically that the Internet and e-business would be the primary investment focus this year, and through 2003. Media, consumer markets and telecom were the other three sectors where survey participants – 70% of whom were either institutional investors or investment professionals for a private equity fund – said they would make a big push in this year.

On its face, this shift doesn’t seem all that unique, as everyone these days has been smitten by the Web. But in Latin America, the change came virtually overnight.

As recently as 1997 there were essentially no Internet opportunities in Latin America, but now private equity firms are leaping into the fray. Everyone from giant Exxel Group, better known for its retail acquisitions, to Advent International, which tends to invest in infrastructure and services, have leapt on the Internet bandwagon. In addition, the region has also attracted new capital – and competition – as key international technology players enter the mix.

For example, Softbank Corp. recently allocated $100 million for Softbank Latin American Ventures (SBLV), its new Internet and telecom fund. Jan Boyer, managing general partner and CEO of SBLV, said being able to leverage its portfolio gives Softbank a head start in competing with start-ups and brand names, like Amazon.com, that Latin Americans already use. Meanwhile, @Ventures, the venture affiliate of CMGI, recently said it plans to assign one-third of its $1 billion international Internet fund to Latin American deals.

Big Dreams, but Little Capital

“Two years ago, investors couldn’t find Latin America on the map,” says Susan Segal, general partner at Chase Capital Partners. “StarMedia unleashed an excitement, a youthfulness, that I haven’t seen in 25 years in working in Latin America.”

Chase-backed StarMedia, Latin America’s biggest Internet portal, listed on the Nasdaq last May.

Linda Rottenberg, co-founder and chief executive of The Endeavor Initiative Inc., says Internet investments are not just a fad in Latin America. “It’s unleashing human capital and creating jobs. Entrepreneurship is growing and seed capital commitments are up.”

Nonetheless, investment amounts in Latin American Internet start-ups remain a fraction of what they are in the U.S., where venture capitalists injected $31.9 billion into Internet-related companies in 1999, for an increase of 354.8% over 1998, when they invested just $7.03 billion. In Europe, that number is $10 billion. By way of comparison, $10 billion represents the entire private equity market in Latin America.

Indeed, there’s no shortage of obstacles to overcome, both economic and cultural. In Argentina, for example, which has the region’s largest per capita income, Internet companies that want to sell financial products to the Latin American market are running into regulations that obstruct the online sales process.

Furthermore, in terms of market penetration, the number of Argentine Internet users is estimated to be between 350,000 and 500,000 with an annual growth rate of 75%, meaning the number of users should pass the one million mark by the end of this year. However, even if those numbers prove correct, that will put only 2.5% of Argentineans online, compared with 37% of Americans. On top of that, Argentineans, along with other Latin Americans, do not have a tradition of remote buying via the Internet, mail order or direct television.

Beyond these local business problems, Latin American private equity funds are facing questions of investment mission.

“With Internet investing, are we doing private equity or venture capital, and [is the latter] what your investors intended for you to do?” asks Mario Baeza, chairman and CEO of TCW/Latin American Partners. “Investing in little start-ups is pure venture. [Meanwhile], infrastructure and the rest still needs equity. There’s still a role for private equity, not just [in] dotcom venture capital opportunities.”

Playing Telecom

Rodrigo Andrade, a partner with CVC/Opportunity of Sao Paulo, outlined CVC’s strategy to build telecommunications as a platform for traditional and new media. He says the Brazilian telecom market will undergo the same consolidation process as telecom has seen worldwide. “Within a few years there will only be a few big players in the Brazilian telecom market,” he says. “Today there are eight, [and] that’s still too many.”

Going forward, CVC/Opportunity intends to expand into non-traditional telecom activities and create an Internet fund this year.

Lance D’Ambrosio, chairman and CEO of Convergence Communications, says as a telecom company his goal “is to be the number-one broadband provider.” Convergence recently received $109 million in a second round private equity financing that D’Ambrosio believes will help the company meet its goals over the next 18 months, which include the creation of a regional brand, development of an Internet protocol project and footprint expansion.

But What About Returns?

But when should private equity investors in Latin America expect returns on investment, and at what rate?

A full 90% of survey respondents expect to achieve the same or better returns on investment this year over last (with 59% expecting returns between 25% and 49%, and 31% expecting returns of 10-24%). Significantly, approximately 62% of participants said they have implemented exits through local sales, and about 15% claimed they have exited through an IPO, showing confidence in the local markets despite a year that, as one panelist put it “began with Brazil’s devaluation and ended with Ecuador’s defaulting on its Brady Bonds.”

“1999 was a bad year,” says Bernard Aronson, chairman of Acon Investments. “[With] coups, currency crises and colonels.” But, he adds, “You can’t talk about Latin America as a whole. Mexico grew 3.5%, [while] Venezuela contracted 7%. Argentina saw its second successful (peaceful) election year; in Ecuador, politicians were forced to leave office. Real wages declined in Brazil, but consumer spending was up in Mexico.”

Remember Your Macroeconomy

Consequently, Richard Schifter, managing partner of Texas Pacific Group/Newbridge Latin America, warns, “Make sure you understand the macroeconomic risks on a [country-by-country] basis.”

Investors agree, political volatility notwithstanding, that the two biggest problems in Latin America are the lack of access to capital markets and the dearth of exits-there was only one local IPO in 1999.

For these and other reasons, potential investors such as Clinton Harris, managing partner of Grove Street Advisors, says that not only is the percentage of money his firm allocates to invest in Latin America small, but “if there are better opportunities elsewhere globally, the money won’t be going to Latin America.”

But a senior investment officer from the IFC rebuts that argument. “We’ve been investing in Latin America for 40 years, when private equity was not even in the vocabulary, and the results are outstanding,” he says. “Twenty years ago, a crisis meant money was leaving the country, but that didn’t happen last year in Brazil.”

“The nearer-term issues are more political than economic. If you identify a strategy, you can deal with those conditions,” Schifter says. Adds Baeza, “Since we got into this business [in 1997], we’ve been sailing with the wind to our face, but the region is big, important, and there’s money to be made. Latin America did not blow up in 1999. [The region] has seen hard times, but everyone has hard times. We’re looking forward to 2000, when we might finally have the wind on our backs.”