adriana cisneros - roundtable discussion on innovation and vc/pe development in latin america

7/23/2019 Adriana Cisneros - Roundtable Discussion on Innovation and VC/PE Development in Latin America

1/16

February 2012 Volume XI, Number 3

LATINAMERICAVENTUREEQUITY

LATINAMERICA

VENTUREEQUITY

The International

Business InformationSourceTM

www.wtexecutive.com

WorldTrade Executive

In This Issue

INTERVIEWRoundtable Discussion on Innovationand VC/PE Development inLatin America 1

Burrill & Co. Sees Opportunity inHeathcare, Biotechnology andBiofuels in Latin America 7

FINANCEDont Believe the Hype: Brazil IPOsFace Hard Year 1

M&ABTG Pactual Buys Chiles Celn InLatam Push 4

BONDSPetrobras Completes Largest BrazilBond Deal 5

EQUITIESBrazil Share Sales Seen RecoveringAfter 2011 Slump 6

ROUND UPItau to Spend $6.81 Billion to TakeRedecard Private; Inter-AmericanDevelopment Bank Fuels ImpactInvesting in Latin America; GerdauPlans Sale of 40 Pct of Mining Unit; 9

PE COMPETITIONFirst Ever Wharton Latin AmericaPrivate Equity Competition Turnout 16

ISSN: 1936-248

See Roundtable Discussion on page 10

Published by WorldTrade Executive, a part of Thomson Reuters

Roundtable Discussion onInnovation and VC/PE Development

in Latin America

The Americas Society and Council of the Americas, which works withleading international companies to navigate public policy challengesand further business interests in the Americas, recently hosted a privatemember roundtable in Miami on the VC/PE landscape in the region

and opportunities for corporate venturing. There is a lot of positiveenergy in Latin America today. We believe that entrepreneurship andinnovation are critical to long term growth and employment in theregion, says Susan Segal, President and CEO.

The four panelists also spoke to VELA in a roundtable discussion:Moderator: Alyson Sheehan (Thomson Reuters)

Participants: Adriana Cisneros, Vice Chairman, Cisneros Group ofCompanies

Matthew Cole, Managing Partner, North Bay Equity Partners

Dont Believe the Hype: Brazil IPOsFace Hard Year

By Guillermo Parra-Bernal (Reuters)

Brazils once-hyped market for initial public offerings may notrecover as swiftly as some bankers have been expecting, as anunpredictable economy and the risk of overpriced deals scare

investors away.

The hurdles facing tourism company Brasil Travel Turismo,which withdrew its IPO plan this month, and the Brazilian unitof Norways Seadrill, which is reworking the terms of its offering,provide a chilling prelude to a market that many only recentlythought was set for a hot year.

Seen for most of the last decade as a symbol of Brazils buoyant

See Dont Believe the Hype on page 2


2/16

2 February 2012 Venture Equity Latin America

Finance

Venture Equity Latin America

Published by WorldTrade Executive,

A Part of Thomson Reuters

P.O. Box 761 2250 Main St. Suite 100

Concord, MA 01742Tel: 1-978-287-0301 Fax: 1-978-287-0302

Gary A. Brown, Publisher

[email protected]

Editor:Alyson Sheehan,[email protected]

Correspondents:

Elizabeth Johnson,[email protected]

Dan Weil,

[email protected]

Venture Equity Latin America is published 20 times a year

by WorldTrade Executive, a part of Thomson Reuters. Venture

Equity Latin America is a trademark of Thomson Reuters.

Subscriptions are $1495.00 per year. Entire contents copyright

2012 by Thomson Reuters/WorldTrade Executive. Reprinting,

transferring or forwarding contents, in whole, or in part, is a

violation of federal and international copyright laws. To order or

for questions, please call (978) 287-0301 and ask for Subscriber

Services.

capital markets, IPOs have languished in the pasttwo years as prices sank for many names thatwent public. While most markets have graduallyrecovered from the global nancial crisis of 2008,IPOs remain out of favor.

The trend underscores how investors in Brazil arestill reluctant to take on risky bets like IPOs, themechanism that small and sometimes inexperiencedcompanies use to raise capital. Instead, investors aremore willing to pour money into existing equity andbonds, where it is easier to assess risks.

Why bother betting on a company you have neverheard of when you have so many other good namestrading on the stock exchange? said FredericoMisnik, who helps oversee more than $40 million inassets at Humait Investimentos in So Paulo.

Last year, investors drove the benchmark Bovespaindex down 18 percent. Only 11 initial publicofferings were completed in 2011, with eight pricingat the bottom or below the suggested price range,data by Ernst & Young showed.

That is a sharp drop from 2007, when more than 70companies went public, and seven of every 10 dealspriced within the suggested range. In fact, Braziliancompanies raised more funds through IPOs between2006 and 2008 than they did in the two precedingdecades.

Foreigners on the Sidelines

Foreign investors, traditionally the biggest buyersof local IPOs because of their strong shareholdingculture, snapped up more than three-fourths ofsuch deals in 2006-2008, hoping the newly listedcompanies would deliver stellar prots.

But they are slowly moving to the sidelines as theperceived quality of stock market debutants slipped.Foreign investors take of local IPOs fell to 56 percentlast year, and analysts expect that percentage to keepfalling.

A more conservative mood has overtaken markets,and you can be sure that many IPOs will bechallenged, said Paulo Dortas, an Ernst & Youngpartner who specializes in Brazilian IPOs. Investorswont abide by a price or a structure that doesntreect the return they are aiming for.

Investors have also balked at what they deem astimid government efforts to combat ination, whichreached seven-year highs during 2011. The central bank began cutting interest rates in August, after

ve consecutive increases.

Efforts to stem massive gains in Brazils currency, thereal, led President Dilma Rousseffs administration toraise taxes on some nancial transactions, making itmore expensive for foreigners invest in Brazil.

The economic scenario has not been supportive ofIPOs, either, Dortas said.

Continued from page 1

Dont Believe the Hype


3/16

3Venture Equity Latin America February 2012

Finance

Bond Bonanza

The lethargy aficting IPOs in Brazil contrasts withrecord foreign inows into the Bovespa and a frenzyof Brazilian corporate bond sales abroad this year.

A record $7.2 billion of foreign money owed intothe Bovespa in January. Investors bought $15 billionworth of corporate debt sales by Brazilian rms inthe year through this month.

Yet, some industry leaders are still betting big onIPOs.

Edemir Pinto, chief executive ofcer of nancialexchange operator BM&FBovespa, expects up to 40Brazilian IPOs to price this year, almost double thecombined 22 transactions of 2010 and 2011.

Ernst & Youngs Dortas, in contrast, sees no morethan 20 IPOs this year. Investors will use their cloutto push suggested price tags towards a level theyconsider fair, he said.

Bankers at Ita BBA and BTG Pactual, the two largestBrazilian investment banks, remain hopeful thatactivity will bounce back as the year progresses.

Bond sales are leading the recovery, but I amsure that equity follow-ons will resume soon, andeventually IPOs will get their chance, Sandy

Severino, the head of BTG Pactuals global bondunderwriting team, said in a phone interview fromNew York.

Jos Olympio Pereira, co-head of investment bankingat Credit Suisse Group in So Paulo, said in Decemberthat companies could assuage investor concerns byscaling down their fundraising goals.

In the case of Brasil Travel, that strategy did not work.Credit Suisse was one of the four banks handlingits IPO.

Nightlong Efforts

The collapse of the Brasil Travel deal, which originallywas to raise 1.45 billion reais ($842 million), signalsthat investors will keep shunning companies withgreat ambitions but an insufcient track record, poorearnings visibility or vulnerability to a downturn,Humaits Misnik said.

Brasil Travel, the product of 35 mergers over the pastyear, remains an unknown for many investors.

Market sources told Reuters this month that bankersconsidered cutting the IPOs suggested price to 850

reais a share and allowing existing shareholders tobuy up to 50 percent of the deal, up from an initial15 percent threshold.

The company rst cut the price to 1,000 reais from arange of 1,250 reais to 1,650 reais on the day the IPOwas set to price. The next day, Brasil Travel askedregulators to cancel the request to become a publiclylisted company.

What people want right now are plain vanilla deals,and companies with stories they know instead ofthese obscure stories, a Brazil-based banker told

International Financing Review on the condition ofanonymity.

Seadrills Seabras deal could attract a lot of interest,should the company resolve its contractual problemswith state-run oil giant Petrobras, Misnik said.Unlike Brasil Travel, Seadrill is a well-knowncompany with an established track record.

This month, Brazilian meatpacker JBS announcedplans to list its Vigor dairy unit on the So PauloStock Exchange. The 95-year-old company mightbe more likely to entice investors like Misnik backto the IPO market.

Reporting by By Guillermo Parra-Bernal. Additionalreporting by Joan Magee in New York; Editing by ToddBenson and Lisa Von Ahn.

.......................................

On-Line Research Access toBack Issues of

Venture EquityLatin AmericaFor details, please contact

Jay Stanley [email protected]

or (978) 287-0391

........................................


4/16

February 2012 Venture Equity Latin America

M&A

BTG Pactual Buys Chiles Celfn In Latam Push

By Guillermo Parra-Bernal and Aluisio Alves (Reuters)

BTG Pactual, the Brazilian securities rm owned bybillionaire nancier Andre Esteves, is buying Chileanrival Celn Capital for about $600 million as it seeksto win more investment banking and capital marketadvisory business in South America.

Under the terms of the deal, Esteves and his partnerswill pay $245 million in cash and give Celns owners

a 2.4 percent stake in BTG Pactual. The takeover makesBTG Pactual the largest independent investment bankin Latin America, further extending its reach into fast-growing economies like Chile, Peru and Colombia.Since it was formed it 2009, BTG Pactual has been ona deal-making frenzy in Brazil and abroad as Esteves,a 43-year-old nancial wunderkind, strives to turnthe rm into the largest investment bank in emergingmarkets by the end of the decade.

The global agenda for Latin America is gainingrelevance in terms of investment inows, and our goalis to become regional leaders, Esteves told reporters

at the banks headquarters in So Paulos nancialdistrict.

BTG Pactual and Esteves himself have become a symbolof Brazils growing economic might, competing neck-and-neck with big global investment banks in a regionwith bustling capital markets and booming demand forwealth management services.

The bank has the nancial muscle to undertake biggertakeovers going forward as a $1.8 billion stake sale to

a group of investors led by sovereign wealth fundslate in 2010, a low payout ratio and swelling tradingand dealmaking prots, have beefed up cash holdings,Esteves said.

We have enough capital for acquisitions, he said,without elaborating. Esteves spoke besides seniorpartner Prsio Arida, a Brazilian economist creditedwith helping the government tame hyperination inthe mid-1990s.

A source with direct knowledge of the transaction toldReuters that BTG Pactual agreed to pay $600 millionfor all of Celn, which would value the stock portionof the deal at about $355 million. The deal valued BTGPactual shares at about three times book value, saidthe source, who is not allowed to speak publicly onthe matter.

Based on such numbers, the Celn deal would valueBTG Pactual at about $14.8 billion, almost 50 percentmore than the $10 billion valuation it got in December2010, when investors led by buyout rm JC Flowers

& Co, the two largest Asian sovereign wealth fundsand the largest Middle Eastern sovereign wealth fund,bought 18.6 percent of BTG Pactual.

Banking Prodigy

Esteves, a mathematician who started as a computertechnician at now-defunct Banco Pactual at age 21before rising through the ranks to become its managingpartner, sold the rm to UBS AG in May 2006 forabout $3.1 billion. He and some partners bought backPactual for about $2.5 billion in 2009 and formed BTGPactual.

Esteves, alongside senior partners and some of BTGPactuals 1,300 employees, will own 80 percent of therm after the Celn deal. Forbes Magazine calculatesEsteves net worth at about $3 billion.

He and his partners have long considered an initialpublic offering to bulk up the banks capital, butpostponed the plans because of volatility in globalmarkets. Last December, he said an IPO was stillpossible in the medium term, without elaborating.

The global agenda for Latin America

is gaining relevance in terms ofinvestment inflows, and our goalis to become regional leaders,Esteves told reporters at the banksheadquarters in So Paulos fnancialdistrict.


5/16

Venture Equity Latin America February 2012

M&A

See Brazil Bond Deal on page 6

At the news conference, Esteves said BTG Pactualis growing regionally because a flatter and moreintegrated world is demanding regional banks togain a global character. The ability of BTG Pactual tolure more investment inows into Latin America willdepend on us building up a strong regional franchise

with global reach, he said.

The deal, which has been in the works since at leastAugust, may give BTG Pactual the proximity it needs towin investment-banking and capital markets advisorymandates in Peru, Colombia and Chile - thanks toCelns contacts with companies and governmentsthere, Arida said.

Top Brazil M&A Advisor

The purchase still requires regulatory approval. Oncethe deal is completed, Celns 15 main shareholders

will become BTG Pactual partners.

With Celn, BTG Pactual will have 129 billion reais ($75billion) in assets under management and handle about49 billion reais for wealthy investors.

In 2011, BTG Pactual topped merger and acquisitionsadvisory rankings in Brazil for the second year in a row,as its focus on retail and other fast-growing segmentsresulted in $24.05 billion worth of announced deals,according to Thomson Reuters data.

The rm advised on 52 deals last year. About $78.64billion worth of deals were announced in Brazil lastyear, down from $120.61 billion in 2010, while thenumber of agreements rose to 745 from 698.

BTG Pactuals investment-banking unit helped thecontrolling shareholders of brewer Schincariol sell a50.45 percent stake to Japans Kirin Holdings for $2.5billion.

The bank also advised Italian-Argentine giant TechintGroup on its $2.9 billion purchase of a 27.7 percentvoting stake in Brazilian steelmaker Usiminas.

Reporting by By Guillermo Parra-Bernal and Aluisio Alves.Additional reporting by Cesar Bianconi and Brad Haynes;Editing by Todd Benson, Lisa Von Ahn and Tim Dobbyn.

Bonds

Petrobras Completes Largest Brazil Bond Deal


Brazils state-controlled oil company Petrobras sold$7 billion of dollar-denominated bonds of differentmaturities this month, in the countrys largest-evercorporate debt offering.

The Rio de Janeiro-based company sold $1.25 billionof new three-year bonds yielding 3.051 percent, and$1.75 billion of new ve-year bonds at a yield of 3.628percent, sources with direct knowledge of the deal told

Reuters.

Petrobras also sold $2.75 billion and $1.25 billion of itsexisting notes due in 2021 and 2041, respectively, saidthe sources, who declined to speak publicly on theplan. Petrobras will pay interest of 4.796 percent and5.935 percent for both reopenings, respectively.

Brazilian companies, taking advantage of a glut ofcash and strong demand for emerging market debtamong international investors, have sold about $13

billion in global bonds since the start of the year. Thenations three largest listed banks and mining giantVale also sold debt over the past month.

Yields for the existing bonds were trading slightlybelow the price guidance, indicating that buyers couldprot if bond prices gained in future sessions. Bondprices, which trade inversely to yields, gain when riskperceptions over the issuer ease.

It was a cost-effective strategy, much cheaperthan coming up with a new issue, said AlfredoViegas, a director for emerging markets strategywith Greenwich, Connecticut-based broker KnightCapital.

Proceeds from the debt sale will be used to fundPetrobras $224.7 billion, ve-year investment plan - thelargest in the oil industry globally. The plan aims to tap


6/16


Bonds


Brazil Bond Deal

Equities

some of the worlds largest deep-sea oil deposits andalmost triple production by the end of the decade.

The senior unsecured notes will likely be rated A3, theseventh-highest investment-grade rank, by MoodysInvestors Service.

Largest-Ever Brazil Debt Sale

Petrobras sale last year of $6 billion in notes wasthe largest-ever in Brazil at the time. The companyraised about $10 billion from bond investors lastyear, including a sale of notes denominated in Britishpounds.

Investors placed rm bids worth more than $25 billion,in what one of the sources said was a gigantic bookfor a Latin American corporate issue. Venezuelas state-oil company PDVSA sold $7.5 billion of 10-, 20- and

30-year debt in April 2007, in what is still the regionslargest debt sale in global markets.

Petrobras funding plans are usually seen as a proxy forcorporate lending trends in Brazil. The company willborrow about $47 billion from banks, investors and statedevelopment banks by the end of 2014.

About $29 billion of that will go to repay existing andmaturing debt, with the remainder going toward thecompanys investment plan, executives said last year.

The investment-banking units of Banco do Brasil, ItauUnibanco Holding, JPMorgan Chase & Co, MorganStanley & Co and Banco Santander are managing the

deal for Petrobras.

Reporting by Guillermo Parra-Bernal. Editing by JamesDalgleish.

Brazil Share Sales Seen Recovering After 2011 Slump


The mainstream perception is that Brazilian equitiesare cheap and that growth is at least taking place here- in a world that is barely expanding, Kiraly said. Butinvestors will be selective and price-sensitive. Theirreturn wont be hasty.

Initial public offerings and follow-on share salestumbled not only because of concern over Europe, but

also as domestic policy uncertainty crippled demandfor equities.

Throughout the year, domestic and foreign investorsalso balked at timid government efforts to combatination, which reached seven-year highs during 2011.The central bank began cutting interest rates in August,after ve consecutive hikes.

The August cut, which was not expected by any of the

Brazilian stock sales, which took their steepest-everplunge in 2011, will recover this year as risk-takinggains traction and Europes debt crisis shows signs ofeasing, the group representing the local investment-banking industry said this month.

Investors who for most of 2011 piled up cash to cushionthemselves from the deterioration of Europes scal

woes might snap up emerging market stocks andbonds this year, said Alberto Kiraly, a vice president atindustry group Anbima.

Their return will be gradual, he noted, adding thatpricey offerings may fail to lure their attention.Companies in Brazil raised 18.98 billion reais ($10.3billion) from the sale of new and existing shares inthe domestic market last year, 87 percent less than in2010, Anbima said in a report this month.


7/16


Equities

See Opportunity in Latin America on page 8

Interview

20 analysts surveyed by Reuters, kept investors waryof unpredictable policy moves.

Foreign investors participated in 56 percent of equitysales in Brazil, down from an average 70 percent formost of the past decade. The share of foreign investor

participation in IPOs and similar deals should showsome improvement, depending on external marketconditions, Kiraly said.

The amount of capital raised from stock sales is thelowest since Anbima started gathering data for the

indicator in 2006. In contrast, sales of xed-incomeinstruments such as bonds, notes and asset-backedsecurities rose to a record 93.68 billion reais.

Private placements, or sales agreed to by the issuer witha single investor or investment group, accounted for

85 percent of bond sales in the domestic debt market,Anbima noted.

Reporting by Guillermo Parra-Bernal. Editing by MatthewLewis.

Burrill & Co. Sees Opportunity in Heathcare,

Biotechnology and Biofuels in Latin America

By Dan Weil

Burrill & Co., a San Francisco-based private equity/venture capital fund manager that focuses on life sci-ences, has just completed the $125 million rst close ofits initial fund in Latin America: Burrill Brazil Fund I.

Burrill, which opened a Rio de Janeiro ofce in 2009,

plans to ultimately grow the fund to $200 million.The rst capital infusion includes contributions fromBrazilian investors, two major pharmaceutical andbiotechnology companies and two major multilateralagencies in the region.

The rm also has plans for a $40 million fund focusingon Chile. It hopes to close on that by June 30, says JoaoPaulo Poiares Baptista, Burrills Managing Director forLatin America.

Baptista recently took time to chat with VELA aboutBurrills activity. Heres what he had to say.

VELA: What does the market look like for life sci-ences private equity and venture capital in LatinAmerica?What we have found after two years of working hardhere is that the opportunities are slightly different fromwhat you would nd in the U.S. Thats true for Braziland Chile. In the U.S., the focus is on drug discovery,cell therapies and digital health. In Latin America we

are nding more interesting opportunities in healthcaredelivery and healthcare services, not so much in drugdiscovery.

Theres very interesting science and innovation here,but its still at the level of basic research, not so much

applied research beyond an early stage. So weve devel-oped a strategy to deal with those opportunities.

VELA: What kind of things are you looking at inBrazil?

Hospitals and clinics are one thing. One clinic areais service for chronic disease management, such asdiabetes and heart problems. That reduces the cost ofthe disease for health insurance plans. Another area ispreventive medicine check-ups with follow-ups.

Were looking at some biotechnology at a basic level

and biofuels too. Brazil is one of the worlds leadersin biofuels. The level of investment in this area is veryhigh. Our fund is very small. We plan to make invest-ments of $10 million-$15 million. So were looking forbreakthrough technology.

We have found a couple interesting opportunities,but its early. We also have found opportunities in theU.S. for a technology that doesnt make much sensein Brazil.


8/16


Interview


Opportunity in Latin America

VELA: You like to invest as part of a syndicate. Hows

the search for partners going?

Two years ago, we were skeptical about nding co-in-vestors. But we are nding a number of Brazilian fundsand LPs that are interested. We have been contacted byU.S. funds that are starting to look at Latin America.People want to be part of the explosive economicgrowth and explosive growth of the middle class inLatin America.

VELA: Is there a strong scientific community in

Brazil?

Yes. Many people there trained outside Brazil withPh.ds in the U.S. or Europe. The issue is resources. Youcant compare Brazil to the U.S. and some Europeancountries. Its still far from that. But the governmentis offering support and investing more money in thisinfrastructure research programs. Thats helpingresearchers and institutions connect with the market.Biotechnology is a key priority for this government.

VELA: Are you able to fnd many entrepreneurs in-volved in life sciences?

Entrepreneurs, yes, but management, not as much.Thats an issue.

VELA: How does the sophistication of life scientistsin Brazil compare with that of those in the U.S.?

In terms of technical knowledge, very well; in terms ofknowing the market, not so well. In terms of knowl-edge of whats happening worldwide, there are someshortcomings. They know the science itself, but how itis being utilized elsewhere is the issue.

VELA: Do you plan to eventually invest beyond Braziland Chile?

Yes, rst we are focusing on Brazil and then Chile. Butalready we are talking to government-related investorsin Colombia. That country is growing very fast, stabiliz-ing after the violence of previous years and modern-izing its laws and regulatory environment.

What happened in Brazil over the last 10-15 years is thatit realized the importance of venture capital and speci-cally life sciences. Now governments in other countries

are putting together programs to support fund manag-ers like us. Peru and Colombia are the best.

VELA: What are the biggest obstacles for your opera-tions in Brazil?

The bureaucracy is tough. You have to know how tohandle it. Brazil has a very good business environment,but its interest rates are still too high. That means noleverage is possible. Also, the tax structure is verycomplicated. Its expensive to deal with it.

That expanding middle class creates huge demand forquality health service. The private sector isnt ready toprovide this yet. So there are huge opportunities if youhave a proper strategy to get to market.

VELA: How do you see your investments developingover time?

Brazil is reacting fast, so things will evolve quickly.There are great opportunities for us. We can introduceservices with top quality and innovation. At hospitalswe can bring new treatments for cancer from otherparts of the world.

Getting people from universities and research centers

to go from basic research to applied research and tothen nd a way to get to market is the key. It just takesa small push. Its about getting people to think a differ-ent way and establishing a global network.

VELA: When will you start doing deals?

We will probably do two within the next three to fourmonths. Our goal is for a minimum of two deals peryear and up to four. We have a very interesting pipe-line.

The bureaucracy is tough. You have

to know how to handle it. Brazil hasa very good business environment,but its interest rates are still toohigh. That means no leverage ispossible.


9/16


Round Up

See Round Up on page 10

Round Up

Itau to Spend $6.81 Billion toTake Redecard Private

Itau Unibanco, Brazils largest private-sector lender,plans to spend as much as 11.77 billion reais ($6.81 bil-lion) to buy out Redecard, protecting the card paymentprocessors position in an increasingly competitiveindustry, according to Reuters.

Itau Unibanco plans to buy the 49.99 percent of Rede-card it does not already own in a rst step taking thecompany private, according to a securities ling thismonth. The lender will offer 35 reais for each of the336.39 million Redecard shares that currently trade onthe Sao Paulo Stock Exchange.

Redecard shares have surged 84 percent in the past12 months, mainly after a yearlong restructuring planhelped bolster revenue, cut costs and stem market sharelosses to larger rival Cielo and smaller competitors.

The buyout would probably help Redecard face grow-ing competition in the $400 billion-a-year card pay-ment processing industry. Some analysts have voicedconcerns that the entry of more competitors coulddrive fees down and eat away at market share. Cieloand Redecard together control more than 80 percentof the market.

Itau Unibancos announcement came less than a weekafter Redecard posted a bigger-than-expected 31 per-cent jump in fourth-quarter prot, to 456.94 millionreais.

Nine analysts polled by Reuters had forecast 402.2 mil-lion reais, on average.Redecard Chief Executive Ofcer Claudio Yamaguti,who has been at the helm of the company for the pastyear, said this month that it would more than doublecapital spending to 500 million reais this year to winmore customers and improve operational efciency. By Guillermo Parra-Bernal and Alberto Alerigi

Inter-American Development Bank FuelsImpact Investing in Latin America

Over the past 18 months, the Inter-American Develop-ment Bank (IDB) has mobilized approximately $110million in resources from these investors into the regionthrough its loan syndication program and by co-lendingto nance projects that will improve housing conditionsfor low-income populations, benet female entrepre-neurs, help small farmers become more productive

and improve rural communities, according to IDBs

ofcial website.

In 2010, the IDB closed Paraguays rst-ever interna-tionally syndicated loan without carrying political riskor other guarantees, by providing a $40 million A/Bloan to Banco Continental to help fund lending to smalland medium-sized business, an ofcial news releasestates. Also in 2010, the IDB disbursed its rst localcurrency syndicated B Loan in Peru and completed asyndication with the longest tenor ever registered fora nancial institution in Ecuador. In 2011, partneringwith impact investors allowed the IDB to close its rstsyndication in Honduras and the rst-ever subordi-

nated debt syndication in Ecuador.

Since 2010, the IDB has closed 10 transactions with adozen impact investors including Blue Orchard, Oiko-credit, Incon, responsibility, Deutsche Bank SocialFinance and the Calvert Foundation, according to thenews release. Seventy percent of these syndicationshave been in small and vulnerable countries includingEcuador, El Salvador, Honduras and Paraguay. In thesedeals, the IDB has acted as sole bookrunner and leadarranger and invested $146 million of its own resources,according to IDB.

Gerdau Plans Sale of 40 Pct of Mining UnitGerdau SA, the worlds second-biggest maker of longsteel products, plans to sell 40 percent of its mining unitfor about $2.5 billion, Bloomberg News reported, citinga source familiar with the matter.

The Porto Alegre, Brazil-based steelmaker hiredGoldman Sachs Group Inc to manage the transaction,Bloomberg reported, citing the source. The report saidChinese and Japanese rms could be interested in buy-ing the stake.

Gerdau declined to comment on the Bloomberg story,citing a quiet period before the release of fourth-quarterearnings. An external public relations executive work-ing for Goldman said the bank would not comment.Efforts to reach a spokeswoman at Goldman Sachsmedia ofce in New York were unsuccessful.

Gerdau has for the past year sought to sell a stake inthe unit, which has about 3 billion tonnes of iron oredeposits, to either raise more money to develop it or


10/16


Round Up


Round Up

Interview


Roundtable Discussion

bring in a partner with greater expertise in handlingore mines. The steelmaker, which also uses scrap as

the main ingredient for its steel, has yet to reach self-sufciency in iron ore.

Shares of Gerdau posted their biggest jump since lateOctober, gaining 4.5 percent in Sao Paulo trading. By

Guillermo Parra-Bernal and Alberto Alerigi

Faquiry Diaz Cala, President & CEO, Tres Mares

Group

John Price, Managing Director, Americas MarketIntelligence

Finally, what you need is a regulatory and businessenvironment that is supportive of new ideas, and

that does not punish failure, which is conducive torisk-taking.

VELA: Do you have any view of which Latincountries possess the healthiest VC ecosystemsright now?

Matt: Just going by the numbers, Brazil representsroughly 40-50 percent of regional GDP but attractsover 75 percent of PE capital. In terms of VCinvestment going to Latin America, it is probablyattracting close to 90 percent. So, Brazil is 4 to 5 timeshealthier than any other country in the region in terms

of investment dollars on a GDP-weighted basis. Brazilis certainly booming due to the fact that there is localinnovation; a very large and growing technologymarket; general agreement about maintaining a moretransparent regulatory environment; and a risk-taking culture, which encourages entrepreneurs tobuild companies without the fear of failure. The restof the region is catching up, but in my view Brazilis still way ahead.

VELA: VELA has reported that Latin AmericasVC ecosystem needs to have a continuum of angelinvestors, seed capital, early VC, growth capital

and PE. Are there presently any weak links in thiscontinuum, and how will this impact VC in thefuture?

Faquiry: The ecosystem needs to have strongcontinuity. One concern is that we are seeing a greatnumber of angel investors and even incubators buta signicant lack of early stage growth capital, those$5-10 million checks. There is great opportunity forcertain venture capitalists in this space, because they

VELA: What constitutes a healthy VC ecosystem?

Matt:In Latin America, like everywhere else, a healthyVC ecosystem starts with innovation and proprietarytechnology. Another important ingredient is strongentrepreneurs building scalable businesses thatgenerate healthy returns on capital for investors.Then, a third important ingredient is investors, whoare willing to take risk on young companies andunderstand the ins and outs of growing businesses.

One concern is that we are seeing agreat number of angel investors andeven incubators but a signifcantlack of early stage growth capital,those $5-10 million checks. For

entrepreneurs and start-upscoming out of the incubators andaccelerators, who have proof ofconcept, a viable product and areready to grow, fnding that $5-10million growth capital investment istough. And that obviously hindersthe complete VC ecosystem. Faquiry Diaz Cala


11/16


Interview


get to play where there are not a lot of competitors.But for entrepreneurs and start-ups coming out ofthe incubators and accelerators, who have proof ofconcept, a viable product and are ready to grow,nding that $5-10 million growth capital investmentis tough. And that obviously hinders the completeVC ecosystem.

Adriana: I think that there is a third element tothis. While Angel investors and seed capital are avery important part of the VC ecosystem in LatinAmerica, many of the companies in Latin Americaare still run by family enterprises. Transcations areoften executed with business groups that knoweach other. Security is always a concern and plays amajor factor in many or most Latin countries to thisday. This fact will lead to the development of a uniqueVC modelin Latin America, which is something that

we have to be watchful of. I will be curious to seehow this aspect of VC in the region pans out in thenext few years.

John: To add to Adrianas point, you will nd inLatin America that there are angel investors, seedcapital and early VC they are just not called bythose names.

They are the monies of friends and families who believe in your project. That is all well and goodif you have access to those people, but if you donot if you come from a part of society that has

difculty gaining access to those people then thatswhere things break down. Therefore, a lot of or mostinnovation comes out of a smaller segment of societythan it would in a more liquid and structured marketlike the U.S.s.

VELA: Are there ofcial angel networks in placein the region that could help larger segments ofsociety gain access to capital?

Faquiry: There are several angel networks in placeor in the process of being built. Panama has recentlyseeing a very focused angel network, they have

funded a couple of companies. Mexico has someangel networks at times afliated with very earlystage capital. There are a certain number of angelnetworks composed of people with cash, but whomay not necessarily have start-up experience.

Its a two-fold situation: on the one hand, theyare wealthy angels, who are getting together andputting their money into start-ups that they knowthrough their network (so, getting to Johns point,

the best ideas may not necessarily be the ones thatare getting funded); and on the other hand, there areangels in such places as Argentina, Brazil and someothers, who have had exits in the Latin AmericanWeb 1.0. Lets call them Latam Super Angels who arenow coming back to put money into new projects.In this case you have very smart money going intovery good deals.

While its become cool to be an angel investor in theregion, you need a lot more of them in the VC ecosystemto take companies to the next level of development.

VELA: What are the pros and cons of the currentVC phenomenon taking place in the region, wherelocal entrepreneurs import and locally adapt provenbusiness models from developed economies?

John: That has actually been the standard businessmodel of innovation and new product developmentin Latin America going back as far as any of us canremember: from technology to sneakers to jewelry,the norm has been to import what works in morefashionable markets like Europe, the U.S., Japanand Korea. If anything, Latin America is now stableand afuent enough collectively to warrant uniqueproduct development for the region on its own or asthe rst stop of global emerging market roll-out.

VELA: How might a Latin American start-up gaincompetitive advantage if they import a business

model?

Matt: We have found that the best entrepreneurs inthe region have a very good understanding of thenuances of local markets. They are able to developand adapt not only technologies but more importantly business models, which are tailor-made for thosemarkets, which is very difcult for multinationalcompanies (MNCs) to do. More and more MNCs are

You will fnd in Latin America thatthere are angel investors, seedcapital and early VC they are justnot called by those names. They arethe monies of friends and familieswho believe in your project. JohnPrice


12/16


Interview



arranging themselves around product and servicedelivery rather than geographical lines. Therefore,

it is becoming increasingly difcult for MNCs tocustomize products for every single market or,in certain cases, cities within a market. The greatentrepreneurial companies that we see are those thathave a combination of a technology that has been

VELA: Why are natural resources, mining servicesand agribusiness considered good industries for

VC development in Latin America? Are thereothers?

Matt: In all three of those sectors, Latin America isa global player. The region is home to a quarter ofthe worlds arable land, about 30 to 40 percent oftotal mining investment and a big chunk of new oiland gas investment, as well. So, the money is there.The scale is there. Latin America is home to somesizeable homegrown public and private capital.There are some serious companies that operate inall of those spaces, that have money, and that candevelop specic approaches, methodologies andtechnologies around exploration.

Adriana: Something to add to that is that LatinAmerica now has a very important and big client China who has growing inuence in these threesectors. The demand is there, and players in thesesectors in Latin America are very much aware thatthey have to evolve their companies very quicklyif they are going to supply the Chinese with all theresources that they are going to need.

VELA: What are some bottlenecks to entrepreneurial

innovation in Latin America?

Faquiry: To me, fear of failure is the biggest hinderfor a start-up activity. Once Latin Americans get pastthat, they will be free to swing for the fences, butwhile cultural misgivings exist about what mighthappen if they fail, there is going to be a signicantbottleneck.

John: Part of that fear of failure is due to the factthat the risks for both the entrepreneur and theearly nanciers are pretty high. Boiled down to onefactor, the legal environment is feared by most to be

too easily manipulated by those with more money.So if an entrepreneur has a great idea and takes itto someone who might be a useful nance partneror strategic partner, his fear is that that person willsteal his idea, and that his ability to take the conictto court is either going to be beyond his nancialmeans or just impossible.

Therefore, the person with the idea might not havethe condence to go looking for support. Instead,he might take his idea to Silicon Valley or another

adapted and in many cases improved upon and/orproprietary; that have that technology delivered in

a business model, which is directly customized forthe local market; and that have a business that isscalable, either in a large country like Brazil or acrossborders in Spanish-speaking Latin America, to createthe type of potential exit value where investors andentrepreneurs can generate very high returns oncapital. I believe that the tropicalization of venturecapital investing is the most exciting thing happeningin Latin America today.

Adriana: A very advantageous position to play inthis whole game is to have the entrepreneur basedin Brazil, Colombia or Peru as well as an arm of the

operation in the U.S. I have seen very successfulbusiness models where the creative arm is comingout of Latin America and the nancial arm is comingout of the U.S. And it appears to be a very business-healthy relationship to have right now because of theposition of Silicon Valley and emerging countries likeBrazil. I am seeing that trend more and more.

Faquiry: We are basically saying that pan-regional me-too business models, rather than country-specic metoo models, have much more legs to them.

I a c t u a l l y t h i n k L a t i nAmericans have a pretty h ighlevel of resilience that makes

them ideal entrepreneurs. Themost signifcant bottlenecks thatI identify are probably regulation,access to technology, talentand funding sources. AdrianaCisneros


13/16


Interview


environment where he will be better protected.

Adriana: I actually think Latin Americans have apretty high level of resilience that makes them idealentrepreneurs. The most significant bottlenecksthat I identify are probably regulation, accessto technology, talent and funding sources. Thetechnological aspect is particularly important. Thereality is that we do not have enough engineers inLatin America. Some countries are doing somethingto address this. Brazil just launched a governmentprogram through which it plans to send 300,000students who want to study engineering to technicalschools in the U.S. and abroad. The government hascreated large incentives for them so that they returnto Brazil to work as engineers. Some countries, likeArgentina, have a signicant number of engineersavailable. Other countries, like Venezuela, have

none. This educationaldisparity is something thatshould be addressed. If there were a real push fora massivedevelopment of technical schools to theregion, it would guarantee that Latin America wouldcontinue to grow as a healthy VC environment.

VELA: Why do MNCs have a key role to play inthe VC space in Latin America?

Matt: Entrepreneurs should look for MNCs tobuild their businesses around. My theory is that allsuccessful early-stage companies are built on thebacks of large companies. Microsoft was built on the

back of IBM; Google was built on the back of Yahoo;Facebook was built on the back of the HarvardUniversity student database. Small companiesshould look for opportunities to partner with largecompanies in order to help large companies innovate,to provide critical outsourcing services that MNCsare not able or interested in doing themselves, andto bootstrap their businesses, using the resourcesand/or the capital of MNCs, in an environmentwhere VC is scarce. On the other side of the fence,MNCs in Latin America need to do more to supportthe VC ecosystem. It is very difcult to convince alarge company in Latin America to take a risk on a

small, promising technology for a variety of differentreasons. However, MNCs have an opportunity tolearn new tricks by being more open to partnering,creating pilot programs and in other ways supportingemerging companies.

John: From the MNCs point of view, Latin Americais increasingly becoming a market that is competitiveenough that they have to innovate. They cannot just import a product that works in other marketswithout either adapting or tropicalizing it or, even

better, developing a new product. The competitionis not coming solely from other traditional globalcompetitors; it is coming from Latin Americancompanies, which are better than global rms atunderstanding the local markets. Unfortunately,MNCs are reluctant to take on risk over a span of 10or 15 years, which is what innovation requires, andso they are struggling to nd the right formula. Thereare different methods for, on the one hand, isolatingan MNC from some of the risks of innovation but,on the other hand, still retaining ultimate control ofthe output of that innovative process. Those kinds of

legal structures and formulas are only just beginningto emerge in Latin America, and there is a real needfor that emergence from both sides: the entrepreneurneeds the certainty of a strategic exit partner, and theMNCs need a way to innovate within Latin America.

So, this is an exciting new frontier.

Adriana: There are two w ays of lookingat this. One, is trying to understand that the world ofLatin America is changing very quickly, and that theway to innovate has evolved. That is lesson numberone. Then, it is important to understand the expand-ing ecosystem of innovation through incubators inLatin America. Incubators offer a very interestingexercise for both parties.

For VCs, its a neat opportunity to have a dialoguewith a big corporation to see what buttons theywant to push. But more and more, as these modelsof business are developing, MNCs are also lookingto bring a model of strategic incubator into theircompanies. This is something that we are doing atCisneros, as well.VELA: What kinds of entrepreneur-ial innovations are taking place that serve the Baseof the Pyramid (BoP) in Latin America?

Faquiry: We are seeing quite a bit of activity takingplace with nancial services and the delivery of

Entrepreneurs should look for MNCsto build their businesses around. Mytheory is that all successful early-stage companies are built on thebacks of large companies. MatthewCole


14/16


Interview



nancial services via mobile devices at the BoP.This space will probably grow as savings products

continue to grow along with consumers abilityto store money with more efciency. Ultimately,microloans and credit products that are gearedtowards the masses will emerge, and once you havethat, the overall level of poverty in the region willdiminish signicantly.

the way that business is owned and conducted inthe region. Many family-owned businesses would

probably say that they have always been operatingwith a VC mentality, just with a longer time horizon.In general, family-owned businesses tend to projectthirty years forward, and for some of the VC worldthat is actually a good thing, because we have thestomach to wait things out . We dont have to be asimpatient; we see the value in having a longer timehorizon. I think that the mentality of family-ownedbusinesses is always going to be a nice complimentto the VC environment as it develops.

John: Sometimes, taking an idea from conceptto market requires a level of stubbornness that a

manager in a publicly traded company simplycannot commandeer, and that only the top leadersof a family owned enterprise have both the timeand the ability to push through without there beingtoo much questioning. Often, that leads to the ruinof a family-owned company, but it can also lead toinnovative break-throughs.

VELA: What is happening in the VC ecosystems ofArgentina, Chile and Colombia?

Faquiry:Chile is interesting because we are beginningto see the creation of a start-up culture through thegovernments Start-up Chile program. Chileans needthe local funds to be willing to take risk and bringthose companies to the next level. Colombia is doingthings right. There is talk that President Santos mayinitiate a government-sponsored program akin toStart-up Chile. In addition, the Colombian pensionfunds have signicant amounts of money; if theystart putting that money to work in venture deals,we are going to have a very favorable environmentoverall in Colombia.

Adriana: I agree. I too am a big believer in Colombia

and Peru.. People have to really pay attention to whatis going on there, and the appetite to invest in thosecountries should be something that we foster.

VELA: What factors will allow Latin Americanstart-ups to achieve successful exits?

Faquiry: The U.S. market for exits needs to staystrong. At the end of the day, if the start-up market inthe U.S. slows down, we are going to see a signicantslow-down in Latin America, just like we saw at the

Adriana: I agree: that is the one of the mostinteresting sector to be looking at right now.

John: Latin America, with the exception of Chile,is still a very under-banked region of the world,especially at the BoP. There is a signicant number ofvery bankable clients there that own assets but thatare just not banked, and the reason for that is two-fold. First off, the brick and mortar infrastructure ofbanks leaves them very concentrated in the upper andmiddle class neighborhoods of big cities. Secondly,the hierarchical culture of banks, where bankers andbank managers tend to come from the upper echelonof Latin American society, creates a disconnect whentrying to service the working poor. So, historically ithas been non-traditional lenders that have walkedinto the BoP space: retailers, telephone companies,and even now telephone-based lending vehicles.These are the companies that are better at reaching

the masses, and adding nancial services to theircore of business is easy to do. It is denitely the mostexciting area of BoP commerce and where you aregoing to see more and more development.

VELA: What is the role of family-owned companiesin the development of Latin Americas VCecosystem?

Adriana: Regardless of the VC ecosystem in LatinAmerica, families still play a very dominant role in

Regardless of the VC ecosystemin Latin America, families still playa very dominant role in the way that

business is owned and conductedin the region.Adriana Cisneros


15/16


Interview

end of the 1990s. We have to be very careful that wedo not get seduced too much by our own story thatthis time is different in Latin America.

VELA: What are some factors that allow venturesto evolve into sustainable businesses in the longterm?

John: The biggest one is a reliable source of revenue,i.e. that MNC or large Latin American group that isa natural buyer of your services or products. A lot oftimes, Latin American entrepreneurs are afraid to speakto the big Grupos in their own country, because theyknow how much power they can wield in political andjudicial spheres. They actually feel more comfortableselling their services or seeking nancing from aninternational company, but that is not sustainable inthe long run, because Latin America will continue to be

volatile for the foreseeable future and thus MNCs willcontinue to be ckle investors in Latin America. So, thekey to a more sound system is developing trust betweensmall and big companies inside Latin America.

VELA: Are there any technologies unique to LatinAmerica?

Faquiry: We have not seen proprietary technologiescoming out of Latin America, but we do have uniquebusiness models revolving around the service sectorand geared towards the bottom of the pyramid.

Matt: We have seen a lot of innovative companiescoming out of Brazil in the agribusiness sector that havedeveloped new technologies (not always proprietarybut new technologies) regarding production processes,

as well as crop testing and certication. We have seen anumber of very interesting companies in the softwaresector, particularly banking software, coming out ofArgentina and Uruguay. We have seen a cluster ofbusinesses around the mining services sector comingout of Chile. Global venture capitalists are looking toLatin America perhaps not for outright innovation butcertainly for very important product development andmousetraps, and that is part of why the capital is nowowing to the region.

We have not seen proprietarytechnologies coming out of Latin

America, but we do have uniquebusiness models revolving aroundthe service sector and geared towardsthe bottom of the pyramid. FaquiryDiaz Cala

Whether your transaction involves cross-border nance from Europe, the U.S. or emergingmarkets in Asia and Latin America, Practical International Corporate Finance Strategiesis your best source for solid, trusted, timely advice on tax, accounting and regulatory

strategies essential to managing international corporate nance. Topics range from governmentalhurdles for regional tax planning and nancing strategies, to regulatory issues such as antitrust,securities regulation or nancial governance matters.

In each issue you will nd out how to:

u Optimize your international tax planning strategies.

u Successfully organize your business to avoidinternational legal and regulatory pitfalls.

u Manage currency uctuation to reduce your risk.

u Structure your enterprise to take advantage of localincentives and avoid regulatory hurdles.

A concise brieng on tax, accounting and regulatory strategiesessential to managing international corporate nance.

For a FREE THREE issue trial,contact Jay Stanley at

[email protected](978) 287-0391

- or -

For more information go to:www.wtexecutive.comor call (978) 287-0301

WTE WORLDTRADE EXECUTIVEThe International Business Information SourceTM

PRACTICALINTERNATIONAL

CORPORATE FINANCE STRATEGIES


16/16


SubScribeto Venture equityLatin americaa pubLicationofWorLdtrade executiVe, apartof thomSonreuterS

___ Please sign me up for one year of Venture Equity Latin America delivered by email to the

address below at $1495.00/ 20 issues plus the Mid-Year and Year-End Deal Reports which provide

a summary of activity in the region.

___ Check enclosed, made payable to:WorldTrade Executive

P.O.Box 761, Concord, MA 01742 U.S.A.

___ Bill me (fax form to 1-978-287-0302)

___ Please bill my credit card: VISA - MC - AMEX (circle one)

Name on card:_____________________________________________________________

Card number:_________________________________________ Exp. Date:____________

Name: ____________________________________ __________________________________________Title: __________________________ Company: ____________________________________________

Street address: ________________________________________________________________________

City:___________________________State/Province:_________________Postal Code:______________

Country:___________________________

Email :_______________________________________________________________________________

Telephone: ___________________________________________________________________________

Conditions: With this subscription the abovenamed person agrees not to reprint, transfer or forward the contents of any or

all email documents received from WorldTrade Executive, or accessed via the www.wtexecutive.com website to other local

or international ofces within his or her company or to third parties.

Copyright 2012 Thomson Reuters/WorldTrade Executive

PE Competition

First Ever Wharton Latin America Private EquityCompetition Turnout

By Alyson Sheehan

The two-round tournament began with each team ofMBA candidates showcasing their investment idea tothe judges. Two teams were then selected from the rstround to move on to the second one, where they werethen given an original case to analyze and prepare withina 90 minute timeframe. The original case designed by thejudges revolved around a distressed salmon producer inChile, according to the Wharton Journal.

A Wharton team and a Kellogg team were selected toparticipate in the second phase of the competition. In

the end, it was the Wharton team, composed of HenryHeinerscheid (WG 13), Abel Osorio (WG 12), JuanGonzalez-Goicoechea (WG 12), and Jose Luiz GonzalezPastor (WG 12), who won. The team presented the idea ofa buyout of a Peruvian car battery manufacturer in phaseone; in phase two, they proposed a strategy of acquiringthe debt of the salmon producers company to then accessequity through a bankruptcy. Their combined levels ofqualitative and quantitative analyses in both rounds ledto a rst prize check worth $2,000.

In an effort to position itself as a leading business schoolwithin the private equity industry in Latin America, theWharton School of the University of Pennsylvania heldits rst ever Latin America Private Equity Competitionon February 4th at Huntsman Hall on the Philadelphiacampus, according to the Wharton Journal.

The participants of the competition were MBA candidatesfrom leading business schools around the country, includingChicago Booth, MIT-Sloan, Kellogg, Columbia GSB, LondonBusiness School, Harvard Business School, and Wharton

itself. The participants were asked to present originaland actionable investment ideas in Latin America to actitious investment committee, i.e. a team of judges, theWharton Journal continues. The competition was judged byrepresentatives from top private equity rms in the region,including ACON Investments, Mesoamerica Partners,Amzak Capital, North Bay Equity and General Atlantic,as well as the Inter-American Investment Corporation, thePresident of the Latin America Venture Capital Association,and Wharton Professor of Finance, Stephen Sammut.

adriana cisneros - roundtable discussion on innovation and vc/pe development in latin america

Documents