LatAm-focused Southern Cross explores options as largest fund struggles

Southern Cross Group raised its largest fund for Latin America investments a few years before economic and political turmoil rocked Brazil, the region’s largest economy. The firm in 2010 closed its fourth fund on $1.68 billion, well above target, raising capital during a fundraising bull market in the region.

Many investments in Brazil made at the market peak in 2012 were battered by currency volatility, which resulted from an economic downturn.

“If you invested in the peak of the market in 2012, even if you were investing in a great company paying good prices, the currency volatility is really creating an enormous challenge,” Cate Ambrose, president of the Latin American Private Equity & Venture Capital Association, said in an interview in 2015.

Southern Cross’s Fund IV is feeling the pain. The firm is now working with Evercore to explore liquidity options for limited partners in its third and fourth funds, three sources with knowledge of the situation told Buyouts.

Fund IV was generating a negative 21.22 percent net internal rate of return as of Dec. 31, 2016, performance information from Washington State Investment Board shows. That compares with a 6.88 percent net IRR and 1.1x multiple the fund was producing for Washington State a year earlier.

Besides Brazil, the fund invested in other Latin American countries like Colombia, Mexico and Argentina.

Fund III, which closed on $751 million in 2007, was a better performer, generating a 4.3 percent net IRR and 1.3x multiple as of Sept. 30, 2016, California Public Employees’ Retirement System data shows.

Fund III has a few assets left and needs more time to exit, two sources said. Fund IV, on the other hand, is challenging because the fund owes LPs money for carried interest the manager took early in the fund’s life — a situation known as a clawback, two of the sources said.

One of the sources said Southern Cross might run a process only on Fund III while it explores options for Fund IV.

Southern Cross did not return a request for comment.

Norberto Morita and Ricardo Rodriguez formed Southern Cross Group in 1998. The firm has offices across the region, including in Buenos Aires, Sao Paulo, Santiago, Bogota, Mexico City and Miami.

Southern Cross’s fifth fund had been targeting $1.75 billion. A Form D filing from November said the fund had raised about $516 million from 51 investors. How much Fund V eventually raised is unclear.

Action Item: Southern Cross’s Form ADV: http://bit.ly/2vKuMkh

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