Region Focus: Regionalism Provides Buzz in Central American Private Equity –

America and all of Latin America – primarily in the areas of high tech and infrastructure.

“We believe that to prosper and survive, [businesses] need to think beyond their own borders,” he says. “Family businesses will have to go regional. The most logical way, when debt financing is either not available or not appropriate, is through private equity. [This] is creating an underlying demand for private equity.”

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Weetman does acknowledge that “Latin America in general is not necessarily on the radar screen of institutional investors.” He also says he doesn’t see that changing any time soon, “because of the returns in the U.S. Why take the extra risk [of investing in Latin America] with similar returns?” Nevertheless, he believes the market potential for private equity in Central America and beyond “is huge,” and over time will be profitable.

CDC will manage the fund and have participation rights in all deals, says Weetman, while the Fund will have both right of first refusal up to $5 million and participation rights, also up to $5 million. CDC acquired mostly minority stakes in small and medium-size technological and manufacturing companies through its first fund and plans to continue this strategy. However, Weetman says his firm will consider deals ranging between $1 million to $50 million with the second fund. “If appropriate, we’re not afraid of a majority stake,” he says. Moreover, CDC is promoting management buyouts across the region through a London-based unit that is dedicated to MBO transactions.

“The fund [might] be a Grand Cayman LP, [for] ease of administration and as a vehicle to attract institutional investors in North America and Europe,” Weetman adds.

Its first fund, the $26 million Central American Investment Facility Ltd. (CAIF) fund, which was launched in 1996, is now fully invested. CDC, formerly the Commonwealth Development Corp., has offices in Costa Rica, Bolivia, Peru, and recently opened an office in Miami.

San Jose, Costa Rica-based Mesoamerica Investments is also “packaging” Central America as a single market in order to attract investors, says Luis Javier Castro-Lachner, a general partner. He says the problems and opportunities were essentially the same throughout Central America and that the regionalism strategy is working.

For example, Mesoamerica and Spanish Telefonica Internacional SA, a major telecom player throughout Latin America, each committed $200 million to a joint venture in an effort to roll up telecom companies throughout the region recently. Castro-Lachner says Telefonica “wouldn’t look at [the markets individually].” Additionally, Mesoamerica and Telefonica created Miami-based company Telefonica Centroamerica to operate the new companies it acquires. Currently it has operations in Guatemala and El Salvador.

Parent company Bain Capital, which has offices worldwide, founded Mesoamerica in 1996 to go after opportunities in a region experiencing high economic growth and increased liberalization. Limited partners included prominent Central American businessmen. Through the original $25 million fund, Bain sought to obtain a controlling interest in the equity of companies where it could play an active role in the formulation of the business’ strategies.

But Mesoamerica faced problems in investing this fund, particularly in determining how to diversify a small fund in several businesses. For example, due diligence became prohibitively expensive.

“We therefore decided to focus on only a few industries (primarily telecom, as the market for long-distance customers calling the U.S. is bigger than in most of South America),” Castro-Lachner says.