All is (nearly) quiet on the Latin American private equity front.
Fund raising is sluggish to nonexistent and deal activity today is a far cry from a year ago when just-signed deals?albeit usually Internet-related?seemed to be announced on a daily basis.
“What took three months now takes six to nine,” said Sebastian Valdez, vice president of BancBoston Capital?s Latin American division.
Deal making has definitely slackened, and most GPs are hunkering down to develop the companies in which they have already invested. Although, just as in the U.S., several portfolio companies have shut down their operations, others continue to downsize their staffs.
Ironically, just weeks after receiving a third round of financing, São Paulo, Brazil-based Submarino.com, a major Latin American online retailer of Spanish- and Portuguese-language books, CDs and toys, announced in April it was laying off 25% of its workforce. This was the dotcom that last year received $71.3 million in a second round of financing in what was then believed to be the largest private investment in a non-U.S. e-commerce venture. TH Lee.Putnam Internet Partners(THLi) was the lead investor of that round, with Europ@web, the Internet group launched by LVMH chairman Bernard Arnault, as co-lead.
Gary Nusbaum, managing director and head of the Latin American group at E.M. Warburg Pincus & Co., and an investor in submarino.com, said, however, that the company “could break even over the next 12 to 18 months. They have a very attractive brand,” he added, “and enough money now to get to where they need to be. They?ve scaled back and are focusing on Brazil.”
Perhaps more problematic for private equity firms investing in Latin America, particularly U.S.-based companies, is raising money for new funds. Most firms have little to show institutional investors from the first round of funds in the mid-1990?s. One recently reported new $100 million regional fund, allegedly called the Electric Equity Fund from Brazilian firm Pactual Electra Capital Partners even turned out to be pure rumor, Pactual said.
Varel Freeman, a senior partner with Baring Private Equity Partners (BPEP), asked, “From the [original] funds raised in ?95-?96, how many re-flows are there? How much money is back in investors pockets? Who has big returns? Is it that Latin America is terrible? That people invested in the wrong deals? That the wrong GPs are investing? Or that LPs aren?t patient enough? It?s a little bit of everything,” he concluded.
Still, a handful of GPs, including BPEP, have launched funds recently, or announced intentions to. BPEP has hit the road to try and attract third-party investors to its new fund, Latin America Partners I, which has a target amount of $300 million.
Advent International launched its second fund, the Latin American Private Equity Fund II, with a target of $500 million, in December.
In January, Dallas-based Hicks, Muse, Tate & Furst Inc. launched its fifth investment vehicle, the Hicks, Muse, Tate & Furst Equity Fund V. Company officials said they would use up to 30% of the fund?s capital in Latin America and Europe. (Although at the time, Chairman and Chief Executive Thomas Hicks admitted his firm had to lower its expectations from a $4.5 billion to roughly a $3 billion close due to depressed public equity markets and smaller alternative asset allocations among existing limited partners.)
More recently, Washington, D.C.-based Darby Overseas Investments Ltd. and Banco Bilbao Vizcaya Argentaria SA (BBVA) also jointly launched a new regional fund recently with an emphasis on Mexico, Brazil and Argentina called the Darby-BBVA Latin American Investors (DBVA) fund, with a target amount of $250 million.
Freeman described the feedback his firm is getting on his new fund as “bi-polar.”
“It?s either ?We don?t want to talk about Latin America,? or ?We?re interested, but how do we make money there?? LPs who have several commitments have expressed disappointment [profits] are not moving faster,” he said.
Another GP who asked not to be named said, “Some [LPs] complain we?re not investing fast enough. They should be glad we haven?t made some of the mistakes others did in 2000.”
Freeman continued, “Limited partners want to see their money back. [Yet] private equity has to be very patient capital. Investments won?t be liquid before two-to-four years, and the volatility in Latin America means there?s a constant juggling act. There are economic and political cycles (economic cycles that include the U.S. and Asia), and cycles in different industries. You have to select industries, businesses and management teams that can work through the cycles.”
On top of these issues is capital allocation, for private equity as an asset class and emerging markets. This is particularly relevant because valuations in the U.S. public equities market are “better,” as one GP said, after the correction. This makes it harder for emerging market funds to raise money.
Not Just A Regional Thing
Still, these problems are “not specifically unique to Latin America: peers have reached target allocations for private equity. They?re waiting for capital to return,” said Pierre Piché. Piché is the director of Latin American investments for CDPQ Capital International, a subsidiary of Caisse de Depot et Placement du Quebec, a major Canadian pension fund manager that has invested in Compass Capital Cayman, Monterrey Capital Partners SC, Patrimonio Investimentos e Participacóes Ltd., Exxel, and others. Most recently, the LP signed up to invest as much as $70 million in the $300 million Latin American fund jointly being raised by New York-based buyout firm Fenway Partners and Violy, Byorum & Partners, a New York investment bank specializing in Latin American mergers and acquisitions.
Piché said he has been investing in Latin America for five years, and considers his portfolio to be “still young.”
“Like with other emerging markets, investors should probably not expect to have broad-based, continuous economic growth in Latin America. You have to be extremely discriminating, but there are pockets of opportunities,” he said. “We have a number of clients. We tend to present private equity investing overall as diversified over countries and industries,” rather than as a specific Latin American strategy.
GPs admit they have learned from their experiences in Latin America to consider each country individually while aiming at the region as a whole. Another eye-opener has been the continued lack of capital markets, which have shrunk over the past five years as companies have moved their trading to New York or been bought out by multinational corporations.
Still another hard lesson has been what industries to invest in and when. Private equity players realize scale is a problem, that it takes huge money to support a brand and build a market presence. How many of these portfolio companies have been big enough to be sold to strategic buyers? Only a few.
“There has very definitely been a learning curve,” said Freeman. “A lot of funds didn?t have the fundamentals right, or the right execution. [But] I believe the next crop of funds will be [more effective]” he said.
Contact H.M. Werner: firstname.lastname@example.org