private equity investing in latin america

Private Equity Investing in Latin America Past and Present

JANUARY 2013

FEDERICO SCHIFFRIN

Senior Vice President, Private Equity

Private equity investing in Latin America has historically been a volatile affair.

However, over the last ten years, as the region has stabilised politically and

economically, countries have begun to show promising and sustainable

growth. Within this new paradigm, opportunities to invest in high-quality,

private companies have increased, supported by secular trends that have

allowed millions to enter the middle class and to begin demanding products

and services which were previously unavailable to them. This paper analyses

the private equity opportunity in Latin America, the universe of high quality

managers as well as the suggested investment approach in the region.

Investing in Latin America I 2

Table of contents

1. Macroeconomic background ...........................................................................................................................3

1.1. Overview of the region ......................................................................................................................................... 3

1.2. Economic history of Latin America ...................................................................................................................... 4

2. Private equity investing in Latin America .......................................................................................................9

2.1. Background ........................................................................................................................................................... 9

2.2. The evolution of private equity in in Latin America ............................................................................................ 9

2.3. Current state of the market................................................................................................................................ 10

2.3.1. Fundraising ................................................................................................................................................................ 10

2.3.2. Returns ...................................................................................................................................................................... 11

2.3.3. Managers .................................................................................................................................................................. 15

2.3.4. Sources of transactions and value creation ............................................................................................................ 17

2.3.5. Exits ........................................................................................................................................................................... 18

3. Unigestion approach to investing in Latin America..................................................................................... 19

3.1. Approach............................................................................................................................................................. 19

3.2. Risks .................................................................................................................................................................... 21

4. Investment recommendations ...................................................................................................................... 22


1. Macroeconomic background

1.1. Overview of the region

The countries in Latin America within our definition of the region1 share a common background, having been

colonies of Spain or Portugal for almost 300 years and gaining independence in the 1800s after protracted battles

for independence. They have struggled to gain a footing and a voice as members of the Western world, veering

constantly in their global alliances and their definition of what their core political and economic beliefs should be.

Consequently, these countries have swung from periods of Marxist governments or military dictatorships, to those

of Darwinian capitalism or populist demagoguery, all of which resulted in structural instabilities that generated

unwanted uncertainty for investors. This, in turn, meant slow declines of the economies relative to the rest of the

world and difficulties in growing their economies on a sustainable basis. This situation started to change towards

the end of the 1980s and beginning of the 1990s, as new democratic governments started to implement

fundamental reforms to their economies. Exhibit 1 is a synopsis of the defining characteristics of the main

countries in the region.

Exhibit 1: Summary characteristics of the region and its countries

Description of market CountriesTotal GDP

(USD Bn)

Forecasted

GDP growth

(2010 - 2020)

Population

(in millions)

Gini coefficient

of development

(0=best)

Ease of doing

business

(Global rank)

Mature (and largest) market Brazil 2,000 4% 190 0.55 127

Mature markets Mexico, Chile 1,500 2% - 3% 130 0.4 - 0.59 35 / 43

Maturing marketsColombia, Peru, Panama,

Costa Rica750 4% - 7% 80 0.45 - 0.59 39 / 36 / 72 / 125

Frontier markets

Argentina, Paraguay,

Venezuela, Ecuador,

Central America

c. 1,000 (1%) - 5% c. 100 0.45 - 0.59115 / 106/ 130 /

172 / NA

Total 5,250 490.0

As % of world 9% 8%

Source: CIA, Ernst and Young, IFC, Other Sources

This paper will attempt to bring to light the opportunities and challenges that lie ahead, as well as provide a

framework for an optimal approach to private equity investing in Latin America.

1 For the purposes of this paper, we will consider as Latin America all countries from Mexico all the way down to Tierra del

Fuego, in the southernmost part of Argentina and Chile, and we will exclude most countries in the Caribbean.


1.2. Economic history of Latin America

Over the last 60 years and up until the early 1990s, a period which we will call “pre-reform”, economies in Latin

America had, for the most part, been highly sensitive to business and economic cycles, going through periods of

booms and busts. This was a result of ever-changing core economic policy and the uncertainty it cast on the

investing climate in the region. The effects of these uncertainties have caused most countries in the region to

suffer from bouts of currency volatility, high inflation, sovereign defaults and political instability. Investing in Latin

America has thus been a task for the brave, a “timing of the cycle” game that few have done consistently well. As

can be seen in Exhibit 2, these cycles were very pronounced and were usually triggered by an internal event

compounded by some external shock.

Exhibit 2: Latin American GDP growth, %, 1970 - 2010

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

GDP Growth Rate (%)

Population Growth Rate (%)

Global

financial crisis

Brazilian debt

default

Brazil and

Argentina currency crisis

Mexico peso

crisis

Source: Bloomberg

Things began to change beginning in the early 1990s with the advent and establishment of democratic

governments. At this point, leaders, empowered by their people, recognised that the only path to sustainable

growth lay in attracting capital investments for growth, and that the main source of capital could only be foreign,

as a lack of domestic savings limited the ability of countries to self-fund the required investments. In order to

establish a stable environment conducive to foreign investment, leading countries such as Chile, Brazil and

Colombia started to pursue market-friendly reforms, liberalising protected industries, opening up borders to trade

and pursuing strong measures to control inflation and currency imbalances.


Some of the major reforms were:

i. Central bank autonomy:

The trend to allow the Central Bank to be free from political will was pioneered by Chile and Mexico, and

then fully implemented in Brazil by President Fernando Cardoso. Having an independent bank allowed a

country to anchor inflation expectations and reduce interest rate volatility, and, hence, the potential for a

currency crisis. Many other countries, including Peru, followed the example, and the results are now

apparent in the low levels of inflation in the region over the last 10 years.

ii. Fiscal targets:

Starting in the early 2000s, Brazil began to target a fiscal surplus (before debt interest payments) of 3% of

GDP. This allowed the country to take strong budget control measures and boost tax income by reducing

evasion and avoidance. The country has now had six consecutive years where tax receipts have exceeded

government expenses, enabling it to pay down debt and strengthen its financial standing. This trend has

become pervasive in the region, with governments endeavouring to pursue fiscally sound policies.

iii. Trade liberalisation:

Mexico became a member of the North American Free Trade Agreement in 1995, while other countries

pursued their own free trade agreements with the world, such as Chile with the US and Korea. This set the

stage for more open economies willing to compete both domestically and abroad. It created new markets for

such products as Chilean salmon, Peruvian cotton and Ecuadorean fruit, as well as the development of

global business champions such as defence and commercial aeroplane manufacturer Embraer or Chilean

airline LAN.

iv. Tax reforms:

Tax reforms have been key to increasing the competitiveness of countries, by reducing distortions and

boosting collections. For example, Brazil reduced to virtually zero the remittance of dividends of Brazilian

subsidiaries of foreign companies, while Chile lowered its corporate tax rate to under 30%. This has

contributed to a sense of stability and predictability for foreign investors, as well as reduced the

bureaucratic burden of tax filing by foreigners.

v. Privatisations:

Privatisations of state-owned entities have brought efficiencies to the market and redirected funds to other

uses. For example, to get a telephone line in Brazil or Peru in the 1980s, wait times could be up to six

months. Today, these lines can be set up within a 2-week period.


The institutional stability that has been created has given way to an unleashing of forces supporting economic

growth. Some of these trends are:

i. Tens of millions of people are now entering the middle class:

Thanks to a number of factors (stability, government development programs, investments), millions of people

in Latin America are entering the middle class and are now able to purchase goods and services that were

previously unavailable to them. For example, in Brazil, citizens who are in the “C class” (see Exhibit 3) can

now access the mortgage markets through a government supported plan called “Minha Casa Minha Vida”,

which provides low interest rates and long repayment periods for borrowers, enabling a whole new segment

of the population to become proprietors of their homes. This trend is unlikely to stop until the deficits of

supply are solved, and will continue to set the foundations for the development of new companies serving

the new consumers. Exhibit 3 shows the growth of the middle class in Brazil from 2006 – 2008 and the

relative change in their share of total consumption.

Exhibit 3: Brazilian growth of middle class, %

Source: TRG, Unigestion

A Upper class

BUpper middle class

classC

Middle class

D&ELower class

5% 5%

24%28%

39%46%

32%21%

2006 2008

Percentage of population by income groups Change

% of total consumption

From 37 m to 44 m

From 60 m to 71 m

22%

45%

27%

6%

Source: TRG, Unigestion


ii. Relatively young population that is getting richer:

As per Exhibit 4, the Latin American region has a relatively young population that is getting richer. This trend

bodes well for long-term investors, who can take advantage and invest on the basis of expected increases in

demand as the population ages and gets wealthier. In addition, young and productive populations in growing

economies produce a “demographic dividend”, which is the result of growth in their spending abilities that

creates ripple effects of wealth across the economy.

Exhibit 4: % of population under 30 years old and income levels, in USD

Source: TRG

iii. Opportunities to address unmet needs in a variety of industry sectors:

Throughout the region, there is increasing demand for goods and services previously unavailable to large

parts of the population. For example in Peru, where the economy has been growing at a real rate of 4% over

the last six years, insufficient supply of goods and services in financial services, telecoms, education and

energy still exist. This creates an opportunity for private investors to buy emerging companies in these

segments, as shown by private equity investments in pipelines (Conduit Capital), schools (Nexxus) and

pharma (Altra).

Over the last 10 years, foreign investors noticed the great opportunities presented by the overall improvements in

the standard of living of the lower and middle classes, and the results showed. As can be seen in Exhibit 5,

Foreign Direct Investments (“FDI”) began to increase in the mid-1990s. and, although cyclical in nature, have

remained at high levels even through the crisis of 2008 and up to this day.

Source: TRG

35%

40%

45%

50%

55%

60%

65%

70%

75%

0 2000 4000 6000 8000 10000 12000 14000

Sub-S Africa

South Asia

Middle income countries

MENA

LATAM

Europe

East Asia


Exhibit 5: FDI into Latin America, 1990 - 2011

6.4 9.6 11.8 11.2

25.0 26.5

38.7

54.661.1

78.769.4

62.4

49.5

37.7

58.964.4 61.7

98.6

114.0

71.4

105.7

137.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: Bloomberg

Going forward, we expect the region to continue to attract a significant share of global FDIs, as structural reforms

continue to be implemented, even as governments change. Countries such as Chile, Peru and Colombia have

maintained their core economic policies even as political parties have taken turns in power.

Also as a result of the improvement in the economic climate, the stock markets in the key countries in the region

have delivered strong returns over the last 10 years. For example, since 2002, the Brazilian stock index grew by

over 23% per year, while the Colombian index delivered 30% growth per year.

Exhibit 6: Stock market performance, indexed, 2002 - 2012

-

,500

1,000

1,500

2,000

2,500

01.1

2.20

02

01.0

4.20

03

01.0

8.20

03

01.1

2.20

03

01.0

4.20

04

01.0

8.20

04

01.1

2.20

04

01.0

4.20

05

01.0

8.20

05

01.1

2.20

05

01.0

4.20

06

01.0

8.20

06

01.1

2.20

06

01.0

4.20

07

01.0

8.20

07

01.1

2.20

07

01.0

4.20

08

01.0

8.20

08

01.1

2.20

08

01.0

4.20

09

01.0

8.20

09

01.1

2.20

09

01.0

4.20

10

01.0

8.20

10

01.1

2.20

10

01.0

4.20

11

01.0

8.20

11

01.1

2.20

11

01.0

4.20

12

Colombia

Peru

Chile

Argentina

Brazil

Mexico

Source: Bloomberg


2. Private equity investing in Latin America

2.1. Background

During the pre-reform years, even as international players were mostly out of the market, there were some

private equity investors who were net “winners” in the market For the most part, they were local families, who

used their knowledge of local networks, politics and the nature of cycles in their respective countries to increase

their wealth substantially by buying good assets in bad times. Only a few savvy foreign investors thrived, but that

was the exception, not the norm. However, once institutional reforms began in the 1990s, the composition of the

“winners” changed. The lower perceived risk of investing in the region attracted institutional (private equity, large

asset managers) and strategic capital (companies such as Telefonica of Spain) to invest, mainly focusing on

companies providing services to the new middle classes. Thus, the slow arrival of institutional investors gave way

to the development of institutional private equity as a viable asset class.

2.2. The evolution of private equity in Latin America

As mentioned, the first private equity firms to be formed in the late 1980s and early 1990s where those supported

by wealthy local families, who, seeing that reforms had opened up a whole new set of opportunities, developed

platforms that allowed them to leverage third-party capital to improve their access to such opportunities. This

was the genesis of firms like GP Investimentos in Brazil or BISA in Argentina. These firms opened the door of

medium sized companies to private capital and the eyes of foreign investors to the opportunity to invest private

capital into promising companies. As a result, in the mid-1990s, the first foreign institutional private equity firms

entered Latin America. Most of these were US-based firms, who opened local offices and seconded US-trained

employees to the region. Advent International entered the market in 1996, buying a credit card administration

company in Brazil called CSU. They were soon followed by Texas-Pacific Group and General Atlantic.

In the early 2000s, new entrants began to participate in the market. These new players ranged from local firms,

such as Exxel, merchant banks such as Deutsche Private Equity and opportunistic firms such as Hicks Muse -

everybody wanted a piece of the pie. These firms bought iconic consumer brands, football teams and even funded

internet companies. Unfortunately for many of them, the Argentine and Brazilian currency crisis of 2000-2001,

coupled with the NASDAQ market crash, rendered many of their investments worthless. It appeared that, again,

the region was providing only disillusionment to investors. It would take a few years for investors to regain faith

in the region.

But investors did come back, and in a big way. By 2005, as Brazil was able to demonstrate years of steady growth

and joined the club of “BRIC” countries, a new wave of private equity fundraising began. This wave accelerated

when developed countries entered into protracted recessions in 2007, while emerging markets were able to

escape relatively unscathed. This gave investors the confidence they needed to increase their allocations to

emerging markets, and, in particular to countries such as Brazil. With this background, Advent and Southern Cross

raised USD 1 billion-plus funds, and new, smaller firms emerged all over the region. The asset class grew

dramatically, from just a few firms to almost 100 by 2011.

Exhibit 7 shows a timeline of private equity in Latin America, including who the participants were, as well as

descriptions of some structural issues affecting the economies of the region throughout this period.


Exhibit 7: A timeline of private equity in Latin America

Source: Unigestion

2.3. Current state of the market

2.3.1. Fundraising

Fundraising in the region has more than doubled since 2007, as private equity in developed markets has been

maturing and investors were generally looking for better returns and diversification away from central economies.

Exhibit 8: Private equity fundraising in Latin America, 1993 - 2011, in USD billion

0.1

0.8 0.8

1.5

3.43.7

1.8

2.6

0.6 0.4 0.40.7

2.3

3.2

4.7

5.8

4.1

8.1

10.3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

USD million

Source: LAVCA

Source: LAVCA

2000 20061998 200720052000 2006 20071994 1995 2008

Pre-1990s:

Private equity being

done by family and family-controlled entities

1994:

Plano Real,

stabilization plan launched in Brazil. Inflation tamed to low double digits

1993:

First, local,

single countryinstitutinoalfunds emerge

1998 - 1999:

Russian crisis;

Brazil devalues its currency

1998:

First local,multicountry funds emerge

1995

1996:

Internationalfirms enter the market

2005:

New bankruptcy law

enacted in Brazil –better protection for creditors, minorities and foreign equity

investors. Brazilian companies start to report under IFRS rules

1990

1990s:

Brazil, Argentina,

Peru and Colombia elect liberal, pro-reform presidents

Pol

itic

al

and

eco

nom

ic e

vent

sP

riva

te e

quit

y in

dust

ry

2001

2001:

Argentina

devalues

2011:

Brazil

successfully transitions to a new president, its fifth since a

return to democracy

2011

2008:

Brazil raised to

investment grade.

2008 - 2011:

Many funds exceed USD 1 billion mark

2008 - 2010:

PE fundraising reaches a high of USD 8 billion per year. New players

exmerge

2002 - 2006

Few private deals being done as a result of bad reputation of industry (Exxel, Hicks)

Valorem (Colombia,

Santo Domingo), Luksic (Chile), BISA (Argentina), Slim (Mexico)

Firm

s

GP Investimentos,

Exxel, CEI

Advent, TPG,

Hicks Muse

Southern Cross

1995:

Banks create

merchant banking units to capitalise on opportunities

DB Merchant

Bank, AIG Capital Partners

Vinci, Axxon,

Linzor, BTG

Southern

Cross, Gavea, GP

GA, GP

Investments,Southern Cross


Looking forward, and from our conversations with limited partners and research analysts, we expect fundraising

volumes to stabilise in the USD 5 – 8 billion range per year over the next 5 years. In addition, we expect

fundraising to be directed mostly to generalist funds, but, over the next few years and as the industry matures, to

start veering towards strategy-specific funds such as distressed debt or agricultural land development funds.

However, an interesting point is that despite this new influx of capital, private equity investment as a proportion

of GDP remains low in Latin America as compared to other developed and emerging economies. In addition, with

investment amounts ranging over the last few years in the USD 6 – 7 billion per year2, virtually no capital

overhang exists. Both factors are likely signalling that, overall, private equity still has growth potential in the

region without an apparent risk of overheating. (see Exhibit 9).

Exhibit 9: Penetration of private equity in Latin America compared to other regions, % of GDP, 2010

0.030%

0.033%

0.070%

0.150%

0.200%

0.300%

0.320%

0.000% 0.050% 0.100% 0.150% 0.200% 0.250% 0.300% 0.350%

Russia

All LATAM

Brazil

China

Europe

US

India

Source: Ernst and Young

2.3.2. Returns

As can be seen in Exhibit 10 (a) and 10 (b), investing in public markets in Latin America has, over the last 10 years,

provided a way to capture returns and diversify risks in a global portfolio, as returns were high and correlations

between Latin America and other economies was fairly low. In spite of this, during the crisis that started in 2007,

the rate of growth in the public markets in Latin America dropped from 46% per year (2002 – 2006) to around 7%

per year, while correlations with other markets increased, all but eliminating the diversification effect without a

corresponding increase in returns. We expect that correlations will remain higher than in the past, with a likely

reversion to the mean over the next few years.

2 Source: LAVCA


Exhibit 10 (a): Returns of public markets, indexed, 2003 - 2012

-

,100

,200

,300

,400

,500

,600

,700

,800

01.1

2.20

02

01.0

4.20

03

01.0

8.20

03

01.1

2.20

03

01.0

4.20

04

01.0

8.20

04

01.1

2.20

04

01.0

4.20

05

01.0

8.20

05

01.1

2.20

05

01.0

4.20

06

01.0

8.20

06

01.1

2.20

06

01.0

4.20

07

01.0

8.20

07

01.1

2.20

07

01.0

4.20

08

01.0

8.20

08

01.1

2.20

08

01.0

4.20

09

01.0

8.20

09

01.1

2.20

09

01.0

4.20

10

01.0

8.20

10

01.1

2.20

10

01.0

4.20

11

01.0

8.20

11

01.1

2.20

11

01.0

4.20

12

SP 500

DJ Stoxx

MSCI LATAM

MSCI Asia

Source: Bloomberg


Exhibit 10 (b): Correlation between Latin America and other major markets, public market indexes

Latam / Europe Latam / USA Latam / Asia

02.03.2003 0.393 0.414 0.353

02.03.2004 0.651 0.526 0.545

02.03.2005 0.683 0.745 0.591

02.03.2006 0.658 0.736 0.587

02.03.2007 0.862 0.814 0.802

02.03.2008 0.855 0.803 0.734

02.03.2009 0.936 0.836 0.834

02.03.2010 0.865 0.863 0.624

02.03.2011 0.793 0.765 0.779

02.03.2012 0.897 0.823 0.883

Increase / (decrease)

in correlation (9 yrs) 10% 8% 11%


in correlation (crisis) 31% 10% 37%

Regional Indexes

Note: Regional indexes are: MSCI EM Latam, Dow Jones Stoxx 600 (Europe), S&P 500 (US), MSCI Asia Pacific (Asia)

Source: Bloomberg, Unigestion

Returns for private equity in Latin America, on the other hand, have also been fairly strong but have appeared to

be mostly de-coupled from other regions, particularly in the observation period from 1997 through 2008, as per

Exhibit 11.


Exhibit 11: Latin America private equity returns vs. other regions, multiple of invested capital, vintage years 1997 to 20083

0.5x

1.5x

0.4x

0.4x

4.5x

2.7x

2.5x

1.8x

1.2x

1.6x

1.1x

1.4x

1.6x

2.4x

2.0x

2.5x

2.3x

1.6x

1.2x 1.

3x

1.0x

1.0x

0.8x

1.8x

1.7x

1.6x

1.6x

1.9x

1.8x

1.5x

1.5x

1.x

1.x

1.x

1.x

1.6x

1.3x

1.1x

1.4x

1.7x

1.7x

1.6x

1.5x

1.4x

1.1x 1.

2x

1.2x

.x

.5x

1.x

1.5x

2.x

2.5x

3.x

3.5x

4.x

4.5x

5.x

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

LATAM

Asia

EMEA

USA

Source: Preqin, Venture Economics

We believe one of the main reasons private equity market returns remained strong even in the light of public

market return convergence and lower returns is that private companies in the region derive most of their revenues

from their domestic markets or the regional market, and thus can succeed and grow even as other economies

don’t grow. In addition, the greater inefficiencies in companies in Latin America enabled and enable private

equity firms to create value by addressing these inefficiencies, providing an avenue for improved profitability even

under poor macroeconomic scenarios.

3 Returns beyond vintage year 2008 are not meaningful given young age of funds. Also, data for LATAM vintage 2006 is not

available.


Exhibit 12: Main revenue sources of companies, % of revenues

Domestic Domestic region

Switzerland 12 44

Netherlands 21 51

Singapore 27 65

Germany 32 67

France 36 68

UK 36 51

Italy 43 77

HK 45 65

Spain 46 65

Canada 57 83

Australia 61 78

Mexico 61 90

India 64 64

Korea 65 79

Taiwan 68 82

US 69 72

Japan 71 79

Brazil 87 90

China 93 94

Source: TRG

In summary, the returns in private equity in Latin America, while certainly exposed to global crises, appear to be

driven more by the performance of the regional economy than the global economy, and will certainly offer some

level of diversification when compared to other regions.

2.3.3. Managers

Over the last five years, Unigestion has scoped the market of private equity managers and concluded that there

are about 100 managers who could be viewed as typical private equity investors. There are three broad classes of

managers:

i. Global private equity firms with local offices:

These are global firms with headquarters in the financial centres of the world, who open local offices in

order to source and execute transactions that fit into their global strategy. Their regional offices are usually

staffed with a mix of locals and foreigners, and will generally invest from a global pool of capital. Examples

of firms (and deals) of this type are Providence (Torresur), General Atlantic (Cetip), Apax (Tivit) and

SilverLake (Locaweb). In addition, there are other global firms like Carlyle and Advent that have raised local

funds to execute their strategy.


ii. Local private equity firms with regional offices

These are pan-regional firms with headquarters in one of the major cities in the region (Sao Paulo, Buenos

Aires, Lima), and smaller offices in other countries of investment focus. Most of these firms are staffed by

locals who have studied and worked abroad, mainly in the US and Europe, and who mix their local contacts

and knowledge with the skills that they learned in the more mature markets. Examples of these types of

firms are Southern Cross, Linzor and Victoria.

iii. Local private equity firms with single-country focus

These private equity firms have a focus on a single country. The investment professionals of these firms are

usually locals who have spun out of banks, family offices or local corporations. Examples of these firms are

GP Investimentos, Gavea and TMG (Brazil), Altra (Peru) and Tribeca (Colombia).

Of the approximately 100 managers in the region, we qualify around 15 as “institutional quality”, defined as

managers who have solid teams, a proven track record and who are focused on markets and industries where

they have deep knowledge (see Exhibit 13).

Exhibit 13: Short list of attractive Latin American private equity managers

Source: Unigestion

Most managers today are generalists, investing across various industries and applying a fairly common playbook

of improving corporate governance, processes and people. As the industry matures, with steadier flows of capital

and less arbitrage opportunities to capture, we will likely see a trend towards greater specialisation in strategies.

This is similar to what has happened in the US, where generalists have had to start focusing on industry or

strategy specific opportunities in order to generate above average returns. Thus, it will not be surprising if, for

example, over the next five years a Brazilian consumer or a Chilean energy fund is raised.

Advent 2014 1,500 Buyout / Generalist All LATAM Yes

Southern Cross 2014 1,500 Buyout / Generalist All LATAM Yes

P2 2013 1,000 Infrastructure franchise builder Brazil / Chile / Peru Yes

Victoria Capital 2015 750 Buyout / Generalist All LATAM Yes

Linzor 2015 400 Buyout / Generalist All of LATAM, except Brazil Yes

Patria 2013 700 Buyout / Generalist Brazil Yes

Gavea 2014 1,500 Minority / Generalist Brazil Yes

Carlyle South American Partners II 2014 1,500 Buyout / Generalist Brazil Yes

Stratus 2014 250 Minority / Generalist Brazil Yes

TMG 2013 300 Buyout / Generalist Brazil Yes

VincI 2014 1,000 Buyouts / Minority / Generalist Brazil Yes

Actis 2015 1,000 Minority / Generalist Brazil Yes

GP Investimentos 2013 500 Buyouts / Minority / Generalist Brazil Yes

Nexxus 2013 250 Buyout / Generalist Brazil Yes

Altra 2015 250 Buyout / Generalist Brazil No

Met

by UNGGeographic focusFund

Year of

expected

fundraise

Expected

fund sizeStage / expertise


2.3.4. Sources of transactions and value creation

Exhibit 14 shows a sample of 34 transactions analysed by Unigestion that were closed in the region over the last

10 years. The results indicate a strong bias towards sourcing and investing into family-owned companies. Such

companies tend to be under-managed, and offer quick value creation opportunities through the improvement of

their operations, the creation of a proper board of directors or the acquisition of competitors. Going forward, we

expect that as companies get larger and become more mature, there will be a shift towards “take-privates” or

secondary purchases from other private equity firms, as is happening more often in some markets in Asia.

Exhibit 14: Type of company purchased and value creation strategy, by # of deals

Value creation Family owned Non-core divisions Listed co's

Organic growth 8 9 0

Consolidation 11 1 2

Turnaround 0 2 1

19 12 3

Type of company

Source: Unigestion, based on a sample of 34 transactions in the region

From a value creation perspective, we analysed a sample of transactions from four different general partners in

four different countries over the last 15 years to understand how value had been created upon the exit of these

businesses. As can be seen, these deals generated a 2.7x multiple of invested capital over an average holding

period of around four years. The majority of value (~80%) was derived from revenue increases and margin

improvements. The remainder was created from leverage, although, to note, companies purchased in Latin

America typically have levels of leverage which are well under 3x EBITDA, considerably lower than one would see

for companies in developed markets. Finally, in the sample we analysed, price to EBITDA multiples contracted

upon the exit of the company. This can be attributed to the fact that as a company matures, its growth rate tends

to decrease, thus lowering its price to EBITDA multiple (which is a function of future growth expectations).

Exhibit 15: Value creation, by source of value

Source: Unigestion

199

▲ +249

▲ +190 ▼ -219

▲ +132 551

0

200

400

600

800

1,000

Equity at entry Revenue increase Margin improvement Multiple arbitrage Leverage Equity at exit

USD m


We believe that Exhibit 15 is representative of how value is being created from private equity transactions across

the region, even though we expect these sources of value to change over the next few years, as detailed below:

i. Value creation next 7 – 10 years

The value creation drivers for the next seven to ten years will remain fairly similar to those existing

today. They will be indicative of a growing, yet still relatively immature market. Returns will be driven by

increases in sales and margin improvements. Key drivers of these improvements will be management

professionalisation, implementation of superior corporate governance and industry roll-ups. As is the

case today, we expect leverage to still play a relatively small role in ultimate returns.

ii. Value creation beyond 7 - 10 years

Beyond these seven to ten years, as the region’s economies mature, returns will be driven by a new set

of drivers. We believe multiple arbitrage, fixed cost reductions and leverage will serve as the primary

value creation drivers. At this point, we expect higher levels of specialisation of managers and a general

increase in fund sizes. Examples of deals we expect to see are large consolidations and more “take

private” transactions.

2.3.5. Exits

Contrary to popular belief, the M&A market in the region has been buoyant. Over the last 10 years, there have

been over 150 IPOs and 1,000 strategic exits in markets such as Brazil, Colombia, Chile and Peru, with companies

as far ranging as airlines (GOL, Brazil), supermarkets (La Polar, Chile) and shopping malls (BR, Brazil). In that

period, there have been at least 40 exits of private equity-backed companies, mainly through sales to strategic

buyers. In 2011 alone, private equity exits totalled USD 10.6 billion, almost tripling the USD 4 billion in exits in

2010. If this trend continues, and fundraising remains at current levels, the volume transacted will provide ample

room for private equity firms to exit their investments in a timely and profitable manner. In Exhibit 16, we have

highlighted 11 of the most notable private equity backed-transactions that have happened over the last six years.

Over the next few years, we expect that exits are going to continue to be driven by strategic sales, as

consolidations in certain industries continue to take place and also as global companies acquire a footprint in the

region.

Exhibit 16: Private equity exits, last six years

Source: Unigestion

Strategy

Supermarket chain Chile Retail Family-owned Pan-LATAM Consolidation IPO 8.1x

Consumer products Argentina Consumer Strategic seller Pan-LATAM Turnaround Strategic buyer 7.5x

Real estate developer Brazil Real estate Family-owned Brazil-focused Consolidation IPO 6.6x

Energy generation Brazil Energy Listed Brazil-focused Turnaround IPO 3.x

Mine operator Dominican Republic Mining Strategic seller Pan-LATAM Turnaround Strategic buyer 3.x

Mine operator Mexico Mining Strategic seller Pan-LATAM Growth Strategic buyer 4.8x

Rail and logistics Brazil Logistics Strategic seller Brazil-focused Growth IPO 4.1x

Restaurants Brazil Consumer Strategic seller Pan-LATAM Growth IPO 9.9x

Outsources services Brazil Business services Family-owned Pan-LATAM Growth Strategic buyer 2.8x

Cinemas Argentina Retail Strategic seller Pan-LATAM Turnaround Strategic buyer 2.4x

Exchanges Brazil Financial services Privatisation Pan-LATAM Growth Strategic buyer 4.5x

Company Country Industry Firm typeExit

MultipleExit type

Source of

transactions


3. Unigestion approach to investing in Latin America

3.1. Approach

Over the last five years, Unigestion has been following the Latin American market for private equity and has

developed a view of the best approach to investing in the region. When deploying capital as primary investors,

the two main high level questions to answer when choosing a general partner should be: what geographic focus

should a firm have (pan-regional or singly country), and what types of deals should it pursue (buyouts, minority or

specialised).

To answer these questions, and per Exhibit 17, we have analysed the returns of different funds pursuing different

geographies and strategies to understand if there was any performance bias towards any one or combination of

factors. In reviewing the data, there appears to be more consistency in funds which have a pan-regional focus,

which take control or significant minority positions in companies. Put another way, the only funds which have

delivered less than 2x cost have either been single country focus or minority investments.

Exhibit 17: Returns of funds with different geographic and types of transactions focus

Source: Unigestion

To try to answer why we believe pan-regional focus is likely a better approach, we analysed to what extent key

Latin American countries were correlated to each other. This would help answer whether there is a clear

diversification benefit by investing in a pan-regional fund versus a single country-focused fund. We performed an

analysis of 3-year rolling average correlation of the respective public markets of each country in the region for the

period 2003 - 2012, as per Exhibit 18.

Type of Source of

transactions differentiation

Pan-LATAM pre-fund Pan-LATAM Buyout Focus on non-Brazil 1990 2.2x 23%

Pan-LATAM Fund I Pan-LATAM Buyout Sourcing 1996 2.3x 25%

Brazil-focused Fund II Brazil Buyout / Minority Sourcing 1997 2.0x 10%

Pan-LATAM Fund II Pan-LATAM Buyout Operational involvement 1998 3.2x 32%

Brazil-focused Fund I Brazil Minority Picking right sectors 1999 4.3x 28%

Argentina-focused Fund II Argentina Buyout N.A. 2000 0.1x 0%

Pan-LATAM Fund II Pan-LATAM Buyout Sourcing 2001 2.7x 54%

Pan-LATAM Fund II Pan-LATAM Buyout Operational involvement 2003 2.5x 27%

Pan-LATAM Fund I Pan-LATAM Buyout Operational involvement 2005 3.5x 54%

Brazil-focused Fund III Brazil Buyout / Minority Sourcing 2005 2.6x 55%

Pan LATAM (Ex-Brazil) Fund II Pan-LATAM Buyout Focus on non-Brazil 2006 2.0x 41%

Brazil-focused Fund IV Brazil Buyout / Minority Sourcing 2007 1.2x 7%

Brazil-focused Fund I Brazil Buyout/Control Operational involvement 2008 2.2x 29%

Colombia-focused Fund I Colombia / Peru Minority Operational involvement 2009 1.6x 17%

Fund Focus VintageGross Multiple

of Fund

Gross IRR

of Fund


Exhibit 18: Correlation of public markets within region, rolling 3 year average, 2003 - 2012

Bra /

Col

Bra /

Chile

Bra /

Arg Bra / Per

Bra /

Mex Col / Per

Col /

Chile

Col /

Arg

Col /

Mex

Per /

Mex

Latam /

Europe

Latam /

USA

Latam /

Asia

02.03.2003 0.245 0.408 0.042 0.199 0.343 0.074 0.166 0.294 0.269 0.113 0.393 0.414 0.353

02.03.2004 -0.081 0.115 0.104 0.497 0.380 0.090 -0.097 -0.045 0.043 0.183 0.651 0.526 0.545

02.03.2005 0.271 0.537 0.241 0.299 0.605 0.206 0.062 0.291 0.277 0.166 0.683 0.745 0.591

02.03.2006 0.235 0.309 0.53 0.28 0.630 0.020 -0.038 0.066 0.320 0.16 0.658 0.736 0.587

02.03.2007 0.608 0.582 0.750 0.323 0.710 0.253 0.493 0.607 0.552 0.069 0.862 0.814 0.802

02.03.2008 0.488 0.765 0.827 0.577 0.819 0.256 0.492 0.480 0.408 0.641 0.855 0.803 0.734

02.03.2009 0.806 0.634 0.862 0.710 0.851 0.723 0.593 0.767 0.770 0.695 0.936 0.836 0.834

02.03.2010 0.625 0.600 0.774 0.673 0.710 0.441 0.525 0.597 0.452 0.638 0.865 0.863 0.624

02.03.2011 0.426 0.502 0.657 0.448 0.719 0.339 0.299 0.427 0.405 0.188 0.793 0.765 0.77902.03.2012 0.691 0.743 0.710 0.564 0.670 0.407 0.607 0.507 0.593 0.488 0.897 0.823 0.883


in correlation (9 yrs) 12% 7% 37% 12% 8% 21% 15% 6% 9% 18% 10% 8% 11%


in correlation (crisis) 159% 88% 42% 15% 13% 1165% N.A. 820% 73% -57% 31% 10% 37%


Note: Regional indexes are: MSCI EM Latam, Dow Jones

Country indexes Regional Indexes

Note: Regional indexes are: MSCI EM Latam, Dow Jones Stoxx 600 (Europe), S&P 500 (US), MSCI Asia Pacific (Asia)


From the data above, we can make several observations. The first is that countries have varying degrees of

correlation with each other, with highs of 0.6 – 0.8 for correlations between Brazil and Chile, and Brazil and

Argentina, and lows under 0.5 for the correlation between Peru and Colombia, which seem to be the least

correlated countries within the region. The second observation is that correlations between countries within Latin

America have increased over the last decade, and, finally, that during a crisis (for example 2007 – 2009),

correlations increased significantly such that all countries become correlated with each other, particularly the key

countries. Thus, the varying correlations could offer a first argument in favour of a pan-regional approach.

A second reason that could be making pan-regional funds more consistent is that they can address different

sectors across countries where their levels of development are different, and avoid potential traps of investing at

the wrong point in the cycle in a sector in a specific country. As can be seen in Exhibit 18, a study by the IMF and

Credit Suisse analysed the attractiveness of different industries on a country by country basis – the varying

degrees of attractiveness of similar sectors in different countries can be notorious. A good pan-regional fund will

likely have the ability to choose better investing conditions across countries.


Exhibit 19: Relative sector prospects, by country

Country TotalOver

65s

School

Age

Working

Age

Real GDP

PPP (2009)

Household

utilities

and fuels

Food and

beverage

Financial

servicesHousing Telecom Tech Health Education Transport Leisure

Peru 6 19 -4 9 8'723

Mexico 6 20 -2 8 13'542

Chile 9 21 -6 6 14'299

Brazil 4 21 2 -4 10'456

Colombia 6 21 -4 -4 8'206

Venezuela 8 23 -1 -1 12'496

Argentina 5 11 3 3 14'126

Population growth (2014 vs. 2009),

% and Real GDP, in USDRelative sector prospects

Source:IMF, US Census Bureau, Credit Suisse, TRG

Results shown in quintiles: 5 (dark blue) means highly rated, 1 (white) is lowly rated

As far as the types of deals that render better results, our analysis concluded that exercising control or having

strong minority rights makes a difference. Firstly, this allows the private equity firms to drive change where

change needs to happen, usually in such things as corporate governance, financial and accounting processes and

strengthening of management teams. Second, through control or significant minorities a private equity firm will

be able to force a sale when it believes that the time to exit is right. This is in contrast to the oft seen situation

where a family wants to hold on to an asset for extremely long periods of time. Finally, we believe that at times

of crisis, having the ability to make cuts and react to the changes is fundamental, and only through direct control

and supervision can these changes be identified and executed.

3.2. Risks

We have identified a number of risks that should be addressed when investing into the region.

Cyclicality and the risk of entering “at the top” of the market. Given the interest in the region, many

investors will enter as followers, investing into a market at a point where assets are fully priced to future

expectations. However, we have taken comfort that this risk could partially be mitigated by adhering to a

diversified approach to the region, mainly by investing with pan-regional funds. In addition, we believe that

fundamentals are now much stronger than they were ten years ago, which has, as shown in 2008, served as a

cushion to shocks and a spring to growth beyond a crisis.

Political and economic instability. The region has historically been politically unstable, which has led the

economic climate to become unpredictable. In fact, history has shown that changes in government can result in

massive policy alterations, which could drastically affect foreign investment, the most recent example being the

expropriation of YPF by the Argentine government. On a pan-Latin American basis this risk can be reduced.

Countries like Peru, Colombia, Brazil, Mexico and Chile all have had 20 years of uninterrupted and peaceful

political transitions without core economic policy changes.

Global economic slowdown. A general slowdown in the world economy, particularly in Europe, which

together with China and the US, consistently represent almost 30% of overall exports from the region, represents

a risk to the Latin American economy. While a slowdown will definitely have an effect on the region, exports still

represent around 15% of overall GDP, with the balance of GDP comprised of internal consumption. By way of

comparison, 50% and 30% of Germany’s and China’s GDP, respectively, are exposed to export markets, making

them more generally vulnerable to global slowdowns.


4. Investment recommendations

Throughout the paper, we have presented evidence of Latin America as an interesting investment destination. We

have also presented data that shows that there are institutional quality managers that have historically been able

to produce good returns. In conclusion, we believe that the optimal approach when making primary and secondary

investments on firms that predominantly have the following characteristics:

i. Pan-regional funds that cover and invest in several countries, resulting in a higher

diversification offered by their exposure to somewhat uncorrelated economies and who can

capture value in interesting sectors across different countries.

ii. Firms who can have control or significant minority positions that enables them to drive

meaningful changes in the companies acquired.

Contact Information If you are an institutional investor: [email protected] If you are a consultant: [email protected] If you are a journalist/press agency: [email protected]

__________________________________________________________________________________

Important Information

This document is addressed to professional investors, as described in the MiFID directive and has therefore not been adapted

to retail clients.

This document has been prepared for information only and must not be distributed, published, reproduced or disclosed by

recipients to any other person. It is a promotional statement of our investment philosophy and services. It constitutes neither

investment advice nor an offer or solicitation to subscribe in the strategies or in the investment vehicles it refers to. Some of

the investment strategies described or alluded to herein may be construed as high risk and not readily realisable investments,

which may experience substantial and sudden losses including total loss of investment. These are not suitable for all types of

investors. The views expressed in this document do not purport to be a complete description of the securities, markets and

developments referred to in it. To the extent that this report contains statements about the future, such statements are

forward-looking and subject to a number of risks and uncertainties, including, but not limited to, the impact of competitive

products, market acceptance risks and other risks.

Data and graphical information herein are for information only and may have been derived from third party sources.

Unigestion takes reasonable steps to verify, but does not guarantee, the accuracy and completeness of this information. As a

result, no representation or warranty, expressed or implied, is or will be made by Unigestion in this respect and no

responsibility or liability is or will be accepted. Unless otherwise stated, source is Unigestion.

All information provided here is subject to change without notice. It should only be considered current as of the date of

publication without regard to the date on which you may access the information.

Past performance is not a guide to future performance. You should remember that the value of investments and the income

from them may fall as well as rise and are not guaranteed. Rates of exchange may cause the value of investments to go up or

down. An investment with Unigestion, like all investments, contains risks, including total loss for the investor.

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