PRIVATE EQUITY SCENARIO IN LATAM MAY 2013 UNIVERSIDAD DE ALCALA BANCO SANTANDER

8/14/2019 PRIVATE EQUITY SCENARIO IN LATAM MAY 2013 UNIVERSIDAD DE ALCALA BANCO SANTANDER

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Master in Finance & Banking

(2012/2013)

THE PRIVATE EQUITY

SCENARIO IN LATIN

AMERICA

Rosado Iturralde, Gabriel

Madrid, Espaa 21/06/2013


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CIFF Business School | The Private Equity Scenario in Latin America1

Index1. ABSTRACT____________________________________________________________________________ 2

2. INTRODUCTION2.1. Purpose of the Study__________________________________________________________ 3

3. ECONOMIC PANORAMA

3.1 Economic Background Overview Latin-America_________________________________ 33.2 Evolution in Present Economic Tendencies______________________________________ 63.2.1 Evolutionary Trends Regulating Panorama_______________________________________ 63.2.2 Latin American economy dominated by Brazil and Mexico _____________________ 73.2.3 Middle Class Evolution in Latin America__________________________________________ 83.2.3.1 Latin America Middle Class Overview Last Recent Years_____________________ 83.2.3.2 BRICs Compared to Latin America Middle Class Growth Evolution _________ 103.3 Last Economic Indicators in Latin America_______________________________________ 123.3.1 Strong Growth and Widening Current Account Deficits _________________________ 123.3.2 Strengthening Regional Financial Sectors ________________________________________ 123.3.3 Uneven Inflation and Monetary Policy Convergence_____________________________ 133.3.4 Improved Sovereign Debt Profile and Fiscal Position ____________________________ 133.3.5 Active Official Intervention in Exchange Rate Markets___________________________ 143.3.6 Leadership Transition and Challenging Governance______________________________ 15

4. PRIVATE EQUITY AND MOST COMMON TYPES OF INVESTMENTS

4.1 Private Equity Firms Definition_____________________________________________________ 15

4.2 LBOs ___________________________________________________________________________________ 184.2.1 LBO Characteristics __________________________________________________________________ 184.2.2 LBO Candidate Criteria ______________________________________________________________ 184.2.3 LBO Transaction Structure__________________________________________________________ 184.2.4 LBO Transaction Figures and Analysis of Performances________________________ 19

5. PRIVATE EQUITY SCENARIO IN LATIN AMERICA

5.1 Background of PE in Latin America________________________________________________ 205.2. The evolution of private equity in in Latin America _______________________________ 20

5.3 Fundraising in Latin America_______________________________________________________ 22

5.4 Returns and Performances in Latin America______________________________________ 245.5 LAVCA Scorings for PE in Latin America__________________________________________ 27

6. RECENT NEWS PE IN LATIN AMERICA _____________________________________________ 31

7. OUTLOOK AND CONCLUSIONS_____________________________________________________ 32

8. BIBLIOGRAPHY ________________________________________________________________________ 35

9. ANNEX __________________________________________________________________________________ 36


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1.ABSTRACT

Private Equity Scenario is increasing its presence in Emerging Markets becausedeveloped countries have more barriers to entry as it is more crowded by funds looking for

benefits. PE in Latin America has been difficult to predict because of the characteristics of

the region. However, with the new economic outlook and the stability of the region over the

last ten years, both politically and economically, countries have begun to show promising

and sustainable growth, getting the attention of several VC and PE funds. In this new

scenario opportunities to invest in high quality, private companies have increased,

supported by socio economic trends that have allowed millions of people to become part of

the middle class, with this activating the economy and the quality of the enterprises. This

paper analyses the private equity outlook and opportunities across the principal countries

in Latin America, focusing in the main causes that the author believes would be relevant

for investors.


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2. INTRODUCTION

2.1 Purpose of the Study

Nowadays with the present characteristics of the global economy, investing firms, pensionfunds and other investing institutions are looking for alternative investment ways than inthe market mainly because it has been too volatile and they are looking for bigger spreadsin other sectors.

The private equity funds and private capital investors get their well-founded andattractive place in this investment scenario, where alternatives are contemplated in whichthe private equity activities have a coarse history of successful transactions through theyears.

Emerging markets such as Latin America and Asia create new possibilities for thiskind of investors that look for better opportunities regardless the location of the investments

but having into account the quality, forecast and profitability of these transactions.

The question of whether Latin America is safe and profitable enough to be centerof investment arises; presenting the main reason of this paper that will show thecharacteristics of this region and will propose reasons to back the role that it has in thePrivate Equity Investments as a strong and potential target.

3. ECONOMIC PANORAMA

3.1 Economic Background Overview Latin-America

Latin America shares a common background, similar political and economicstructures, similar history lines of both problems and commemorations, similargovernments and similar culture.

Being independent from the 1800s the region has had ups and downs and nowadays

they have a potential scale trends, since periods of instability have been surpassed in mostof the countries with exception in some specific cases.

This predictable and not so volatile scenario started in the 90s after severalrecessions where inflation was a key issue and governments started to have more control oftheir political and economic strategies.


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Table 1. Characteristic of Latin America principal countriesSource: Unigestion, World Bank, IFC, CIA, Others.

From the previous times of volatility in the past century Latin America has learnedthat in order to inspire confidence to external investors it has to gain stability, issue that

has been attended for the last decades and it is now perceived to foreign countries andpossible investors. The GDP has been a clear indicator of this matter in which we canobserve that has been stabilizing its growth rate for the last few years. (See Annex 1)

Figure 1. Latin America GDP Growth 1970-2010Source: Unigestion, Bloomberg.

Description of market Countries

Total

GDP

(USD

Bn)

Forecasted

GDP

growth

(2010 -

2020)

Populati

on (in

millions)

Gini

coefficient

of

developme

nt (0=best)

Ease of

doing

business

(Global

rank)

Mature (and largest)

market Brazil 2.5 4% 196.7 0.55 130

Mexico 1.2 2.50% 114.8 0.59 48

Chile 0.2 3% 17.3 0.44 37

Colombia 0.3 4% 46.9 0.59 45

Peru 0.2 7% 29.4 0.52 43

Panama 0.03 6% 3.6 0.55 61

Costa Rica 0.05 4% 4.7 0.45 110

Argentina 0.4 1% 40.8 0.45 124Paraguay 0.02 5% 6.6 0.47 103

Venezuela 0.3 -1% 29.3 0.56 180

Ecuador 0.06 3% 14.7 0.59 139

TOTAL 5.26 504.8

GLOBAL PERCENTAGE 9% 8%

Mature Markets

Maturing Markets

Frontier Markets


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Table 2. Average annual real GDP Growth RatesSource: Bloomberg, IMF, Partners Group.

Some of the major changes in the regulatory and economic framework are:

Central Bank:

In Latin America after some major political changes the Central Banks wereseparated to this class in the 1980s. The pioneers were Chile and Mexico, and then Brazil

by President Fernando Cardoso implemented this strategy (Unigestion, FT. 2012). Anindependent bank allowed a country to control some of the inflation expectations andreduce interest rate volatility, with this, the potential for a currency crisis, after thespeculations against the fixed currency rates most of the countries opted for a floating rateinstead the fixed one. Other countries like Peru, followed the example, and theachievements are now visible in the low levels of inflation in the region over the last 10years, with exception of some countries like Argentina and Venezuela.

Fiscal Target Policies:

Starting the century 21st, Brazil began to look for a fiscal surplus of 3% of GDP(Unigestion, FT. 2012). This goal allowed the country to take a firm budget controlmeasure and boost tax income by reducing evasion. Brazil has now had 6 consecutive yearsof surpluses where tax receipts have exceeded government expenses, allowing to pay downdebt and strengthen its financial health. This has become a trend in the region, withgovernments engaging to pursue fiscally positive policies.

Trade Treatments:

Mexico became a member of NAFTA (North American Free Trade Agreement), atreat proposed by president Carlos Salinas, while other countries pursued free tradeagreements with the world, like Chile with the US and Korea. This set the scenario for moreopen economies willing to compete both domestically and globally. It created new marketsfor local products, as well as the development of global business leaders in some industrieslike manufacturer Embraer or Chilean airline LAN (nowadays LATAM). (Unigestion, FT.2012).

Average annual real GDP growth rates,

in %

1980-

1989

1990-

1999

2000-

2009

2010-

2016E

Latin America & Caribbean 2.10 3.00 3.10 4.40

Brazil 3.00 1.70 3.30 4.70

Chile 3.60 6.40 3.70 4.80

Colombia 3.40 2.90 4.00 4.50

Mexico 2.40 3.50 1.80 3.90

Peru 0.60 3.20 5.10 6.40


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Tax Reforms:

Tax reforms have been instrumental in increasing competition between countries, asin the case that has been previously said in Brazil, reducing evasion and boostingcollections. Also Brazilians reduced to almost zero the remittance of dividends of its

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 asreduced the bureaucratic burden of tax filing by foreigners. Other countries like Panama andMexico also offered some incentive taxation for foreign companies.

Privatizations:

Privatizations of state-owned entities have brought efficiencies to the market andredirected funds to other uses. For example in Telephone Companies, wait times for aninstallation in the 80s could be up to six months. Nowadays performance is better. InMexico appeared one of the main companies of the business tycoon Carlos Slim, TELMEXas result of these privatizations. Later on banks were privatized aggressively.

3.2 Evolution in Present Economic Tendencies

3.2.1 Evolutionary Trends Regulating Panorama

As stated above, the reasons for the regions economic progress over the pastdecades are known: privatization and de-regulation affects several parts of the economy,trade and capital market liberalization as well as prudent fiscal policies, like the Brazilian,

played central roles and enable Latin American countries to restore macroeconomicstability and bring fiscal finances under control, and even surpluses in some cases.

After years of very high inflation in the 80s and 90s, with consumer price inflationas high as 480% year over year in 1995, during the Tequila Recession, policy makersrealized that low inflation was a necessary and mandatory condition for macroeconomicstability. Vital changes to the monetary policy framework were implemented, ranging fromthe reformation of the countries central banks to increased exchange rate flexibility.

These developments enabled monetary policies to be able to fight against consumerinflation expectations, breaking the high inflation expectations and diminish inflationary

trends. Today the result in annual average inflation in consumer prices in most of LatinAmerica is reduced to acceptable levels due to recent stability.


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Figure 2. Inflation Averages Across Latin America 1980-2016E.Source: IMF, World Bank.

3.2.2 Latin American economy dominated by Brazil and Mexico

Leading the charts of the countries is Latin Americas largest economy, Brazil,which in 2012 growth target was 5.5% , nowadays with some revisions in that figure thatsuggest a more conservative figure of around 4.0%.

Brazil, a leading commodities producer, has developed sophisticated manufacturingand technology sectors to complement its traditional industries. In addition, Brazil has

begun reaping the benefits of financial reforms it enacted during the 1990s as is statedabove in the previous section of the present paper.

On the heels of Brazils growth is Latin Americas second largest economy,Mexico, which had in 2012 an estimated growth of around 4% by the IMF, nowadaysrevised around 3%. Mexico is followed by Chile and Peru, which are projected to grow inthe 4-5% range.

The most notable laggard is Venezuela, where fears of more business expropriationsafter the death of Hugo Chvez are, to no surprise, dampening investment activity and

dragging the economy to a projected negative growth rate.

-

0,20

0,40

0,60

0,80

1,00

1,20

1,40

1,60

1980-1989 1990-1999 2000-2009 2010-2016E

Inflation Averages


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Figure 3. GDP Comparison in Latin America.Source: IMF, World Bank, CIA.

Despite the overestimations made in the past differ from the data that isactually coming out in 2013, central banks have been successful in fighting inflationarypressures while avoiding a hard landing scenario, as shown by the lower and more

sustainable GDP growth outlook.

3.2.3 Middle Class Evolution in Latin America

3.2.3.1 Latin America Middle Class Overview Last Recent Years

Latin America is experiencing a dramatic evolution of its middle class. In the last 10years, the proportion of people in Latin America with a daily per capita income (in PPP)

between $10 and $50 a day went from around 20% to 33%. For the first time in LatinAmerican history, in some countries, there are similar number of people in the middle classas in moderate poverty, that would not make us too optimistic since the extreme poverty isa main problem in several countries across the region.

Middle Class has shown a socioeconomic shift largely due to the sustained rates ofeconomic growth in the 2000s that in most countries trickled down and generated higherincomes, this take us to presume that the structure of Latin America is really changing.

47%

23%

4%

6%

4%

0%

1%

8%

0%

6%

1%

Total GDP (USD Bn)

Brazil

MexicoChile

Colombia

Peru

Panama

Costa Rica

Argentina

Paraguay


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Figure 4. Income Distribution in Latin America 2009.

Source: SEDLAC.

Figure 5. Class Composition in Latin America by Income Percentile 2009.

Source: SEDLAC.


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Figure 6. Middle Class vs. Economic Growth in Latin America.

Source: SEDLAC and WDI.

3.2.3.2 BRICs Compared to Latin America Middle Class Growth Evolution

Growth is not exclusive of Latin America, while the industrialized world was facinga tough decade, many emerging economies resisted the global turbulences and continued togrow, lifting people out of poverty and feeding the ranks of their middle class for examplein the BRICs countries.

A comparison in the growth of the Latin American middle class with itscounterparts in BRIC (Brazil, Russia, India, China) countries shows that, even incomparative terms, the early 2000s have been very good for the region. Between 2000 and2009, 50 million individuals were added to the middle class in Latin America bringing thetotal from around 115 million persons to over 165 million.

The growth in the middle class goes beyond the good performance of Brazil: morethan 30 million non-Brazilian citizens of Latin America entered the middle class during thattime.

The growth in the middle class in Latin America reflects dramatic trends that can beobserved in all the BRICs, with the exception of India. In Brazil, Russia and China, themiddle class has achieved impressive growth in a relatively short time. Around 2009, themiddle class consisted of 61 million people in Brazil (up from 39 million a decade earlier),75 million in Russia (up from 31 million), and 83 million individuals in China (a jump from

just 10 million).

Still, these numbers mask strong differences across the BRICs when the middleclass is measured as a proportion of the population.

In Brazil, the emergence of a middle class is not entirely new. In the early 1980s,

the middle class made up more than 15 percent of the population; nowadays it makes upalmost one third. The most spectacular transformation toward middle-class society


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occurred in Russia, where the middle class grew from being one-fifth to more than one halfof the population. On the other hand, in China, the 83 million people defined as middleclass only represent less than 10 percent of the population.

Today, Russia seems to be a true middle class society with a majority of the

population being middle class, while in Brazil and in many Latin American countries,almost two thirds of the population has yet to reach middle class status.

The performance of Russia is, however, eclipsed by the stunning growth of themiddle class in China, where sustained economic growth led to an eightfold increase of themiddle class in a decade. And although China, with less than 10 percent of its population

being middle class in 2009, may not yet be as much of a middle-class society as Brazil orRussia, it has an enormous growth potential.

Among the BRICs, Indias comparatively poorer performance may come as asurprise. Both in relative and absolute terms, the Indian middle class grew significantly lessthan in the other BRIC countries. In 2010, only 9 million Indians had reached middle-classstatus, which is less than 1 percent of the population. These low estimates reflect that,despite a good growth performance in the 2000s, Indias GDP per capita remains below thelevels of the other BRIC countries.

Of all the BRICs, China is forecast to experience the greatest growth of the middleclass, overshadowing the good performance of Latin America. Chinas middle class isexpected to grow from 54 million in 2005 to more than 1 billion in 2030, or 72 percent ofthe population, adjusted for population growth. On the other hand, despite growing inabsolute terms, the Latin American middle classes will gradually lose ground

internationally. While in 2005 the regions middle classes represented more than 40 percentof all the middle classes in low and middle income countries, the forecasted dramatic rise ofthe middle class in China will reduce Latin Americas share to less than 20 percent in 2030.

Even without Chinas contribution, the next two decades will be characterized by amassive increase of the middle class all over the emerging world, from around 300 millionhouseholds in 2005 to almost 1.9 billion.

According to the forecasts, however, the increase is likely to remain modest inSouth Asia, where the middle class is predicted to reach 100 million people in 2030.

In two decades many factors could affect, in one way or another, the parametersunderlying the forecasts. In particular, an average annual growth rate of the Chineseeconomy of 7% between 2005 and 2030 is a key driving assumption behind these results.

These changes are here to stay. Thanks to more sophisticated consumption habits,the middle classes in emerging countries will influence global trade patterns. Domestically,the middle classes will have a growing voice by means of higher purchasing power and bydemanding better education. And with a growing critical mass, they will push forinstitutional reforms and improved service delivery in areas that are beneficial to them.

The magnitude of these changes will depend, however, on the continued growth of

the middle class and on the nature of its demands on the public sector. They will likely bemore dramatic in regions where the middle class will grow the fastest, such as East Asia.


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While it is difficult to forecast these changes with precision, it is possible with some marginof error to assess in which countries the middle classes have been growing and will growthe most. (Rigolini 2013)

3.3 Last Economic Indicators in Latin America

3.3.1 Strong Growth and Widening Current Account Deficits

As was said previously and in conjunction with the increasing middle class andricher economies, growth rates are being set to moderate in 2013 after a strong forecastmade in 2010 where the average GDP across the LATAM region (grew an estimated 5.7%in 2010) was too high to follow nowadays, this principally driven in large part by higherthan expected private consumption fueled by a rapid recovery in job growth and wages andincreased lending to the private sector, that pushed to very optimistic predictions around theworld regarding the growth of LATAM.

The global economic recovery is gaining momentum, setting a positive tone for themajor economies in Latin America. Nonetheless, the pace of growth will be uneven acrossthe region as exports in the most trade-intensive economies remain affected by erraticglobal trade dynamics and competiveness challenges due to appreciating currencies.

Colombia and Brazil will show a recovery trend in the second half of the year,following a marked slowdown in industrial activity in 2012, while Peru and Chile willcontinue to outperform, influenced by shifts in relevant commodity prices and still-robustdomestic demand. Mexicos prospectsremain closely linked to the US business cycle with

a positive growth outlook reinforced by the implementation of micro and macroeconomicstructural reforms. Both Venezuela and Argentina are poised for a steep economicdeceleration, as a result of erratic policy implementation. The core group of countries in thedeveloping Americas is not immune to financial turmoil in Europe, aggressive shifts incommodity prices (gold, copper, oil and soybeans) and uncertain growth dynamics in Asiaand the US. Current account deficits are widening in most countries due to declining exportflows and terms of trade adjustments. (Scotiabank.2013)

Unemployment has continued to trend lower, dropping from 10.0% to 9.4% acrossthe region, mainly because of the stability and also of a big self-employment culture inLATAM.

3.3.2 Strengthening Regional Financial Sectors

Domestic demand has shown a growth in the last few years around 9.6% across theregion, with many economies posting double digit gains, including Brazil, Peru and Chile,showing that the countries are developing infrastructures that enable them to depend littleless from the developed economies regarding technology, production and financing.

Well capitalized and adequately regulated banking sectors are becoming the norm inmost countries in the region. The strength of the financial sector, credible monetaryregimes, stronger domestic demand, coupled with improving labor market conditions have

allowed domestic credit to continue to grow at moderate and manageable rates. Privatepension funds are playing an increasingly relevant role as a local source of financing (and


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institutional investment) in Chile, Peru, Mexico and increasingly Brazil and Colombia.Rising foreign exchange reserves also reinforce the regions preparedness to face adverseglobal financial market shocks, particularly those which may arise once major globalcentral banks withdraw sizable liquidity and monetary stimulus.

The region holds almost US$800 billion in foreign exchange reserves mostly as aresult of large purchases of US dollars in local exchange markets with Brazil and Mexicoaccounting for 70% of the total. (Scotiabank.2013)

3.3.3 Uneven Inflation and Monetary Policy Convergence

Inflation is relatively well-contained within the official targets established bynational authorities across the region save for Argentina and Venezuela. Those countrieswhich have embraced inflation-targeting schemes together with solid institutionalframeworks are successfully containing price pressures. Nonetheless, monetary policyactions have been divergent in the region. Mexico maintains a stable outlook after reducingits reference interest rate for the first time since July 2009, while Colombia will keep a biastowards monetary policy accommodation after an aggressive easing cycle. Peru and Chilemaintain a neutral stance while Brazil and Uruguay have begun to tighten monetaryconditions in response to mounting inflation. The monetary environment in high-incomeeconomies remains accommodative, driven by a pro-growth interventionist bias;nonetheless, any policy shifts in the worlds major central banks will influence monetaryconditions in Latin America. Argentina and Venezuela, refusing to adopt inflation-targetingregimes, are still flirting with hyperinflation. (Scotiabank.2013)

3.3.4 Improved Sovereign Debt Profile and Fiscal Position

Improved Sovereign Debt Profile and Fiscal Position Debt sustainability representsa macroeconomic strength in the outlook for Latin America. Most countries in the regionenjoy a manageable fiscal deficit position and an improved sovereign debt profile, pavingthe way for credit rating upgrades.

The steady development of local sources of financing through improved bankingsectors, developing private pension fund systems and well-regulated local-currency bondmarkets has diminished the need to access external sources of financing. However, bothMexico and Colombia count on a pre-emptive Flexible Credit Line Arrangement approved

by the International Monetary Fund. Long-term equity investors continue to see enormous

potential in sectors connected either to infrastructure or energy and mineral resources.Colombias energy sector, Mexicos automotiveand telecommunication industries, Perusmining segment and even Uruguays forestry sector are notable foreigndirect investmenttargets. (Scotiabank.2013)

We can appreciate the stable fiscal debt structures within most important countriesin Latin America, in the following table:


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Table 3. Stable Fiscal Debt Levels and Attractive Credit Outlook

Source: Bloomberg, IMF, Partners Group.

Figure 7. Stock Market Performance, 2002 - 2012.

Source: Bloomberg, Unigestion.

3.3.5 Active Official Intervention in Exchange Rate Markets

Excess global liquidity and the pursuit of high-yield investment alternatives led tolarge-scale portfolio capital inflows in Latin America, driving currencies to record stronggains vis--vis the US dollar (USD). Central banks have intensified their intervention in

both exchange rate and money markets, aiming to mitigate the adverse economic impactfrom currency volatility and excess liquidity. Central banks in Brazil and Colombia have

been the most active in the region, guiding their currencies to weaker levels against theUSD. Authorities in Peru remain committed to the de-dollarization process, leading to asteady and controlled appreciation of the Peruvian sol. In Mexico, despite recent currencyappreciation, the central bank has refrained from initiating any USD purchase programs. InVenezuela and Argentina tight capital controls have generated informal currency tradingchannels, which we expect to remain in place in the foreseeable future. The Chileancurrency context remains sensitive to commodity price adjustments. (Scotiabank.2013)

Country 2000 2005 2010 2016E

S&P

Credit

Ratings

Outlook

Brazil 66.70 69.10 66.10 58.60 BBB Negative

Chile 13.70 7.30 8.80 8.00 AA- Positive

Colombia 36.30 38.50 36.50 29.90 BBB Stable

Mexico 42.60 39.80 42.70 41.40 BBB Stable

Peru N/A N/A 24.30 16.10 BBB Stable


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3.3.6 Leadership Transition and Challenging Governance

Major economies in Latin America continue to show progress in developingdemocratic institutions and more predictablepolicy environments. Nonetheless, Colombias

peace negotiations, Mexicos fight against organized crime, increasing protectionism and

allegations of corruption scandals in Brazil, Chiles electoral cycle, Peruvian social unrestin the mining sector and erratic government policy-making in Venezuela and Argentina aresome of the political and social challenges the region faces. Mexico has unveiled anambitious process of structural reforms aimed at increasing the pace of long term economicgrowth. Presidential elections will take place in Chile in 2013 and Brazil and Colombia in2014, pushing all national governments to implement a more aggressive pro-growth fiscalstance.

Based on these indicators, economists expect rates to moderate over the coming2013, as the impacts of a sluggish recovery in developed markets, especially in Europe, andthe necessity of monetary tightening across Latin America fastest growing markets assert

themselves, A more real and sustainable scenario is now contemplated.

Latin Americas political and regulatory framework, the positive economic outlookand rising consumer purchasing power as well as the low private equity and medium stockmarket penetration, with a strong performance, make the region an interesting destinationfor investments. (Scotiabank.2013)

4. PRIVATE EQUITY AND MOST

COMMON TYPES OFINVESTMENTS.4.1 Private Equity Firms Definition

This part of the present paper will provide a definition of private equity funds bylisting the following main characteristics (For more details see Annex 2):

1. Act as a financial intermediary, meaning that it takes the investors capital and

invests it directly in portfolio companies:

Defines PE funds as financial intermediaries and differentiates it from angelinvestors and private investment companies that use their own capital.

Typically these funds are organized as limited partnerships, with the venturecapitalists or the buyout firm partners acting as the general partners (GPs) of the fund andthe investors, often pension funds, endowments and other institutional investors, acting asthe limited partners (LPs). Potential agency conflicts between GPs and LPs are addressed bycontractual provisions in the limited partnership agreements.

2. Invests only in private companies. This means that once the investments are made,


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the companies cannot be immediately traded on a public exchange.

It is the most obvious defining feature of private equity and distinguishes it from boththe traditional investment assets of stocks and bonds as well as the other alternative asset ofhedge funds. Figure 8 illustrates the relationship between various asset classes within private

equity and also between private equity and other asset classes.

Within private equity, there are four main subclasses, of which VC and BO are thelargest and most important two. Overlapping circles in Figure 8 indicate where the scopes ofneighboring groups overlap: for example, the mezzanine category comprises both growthequity (that overlaps with later-stage venture capital) and the subordinate debt layer of

buyout transactions (which is often attached to some equity ownership) and thus overlapswith both venture capital and buyouts. Distressed investing, on the other hand, can bethought of as a specialized segment of buyouts that target mature and distressed companies.

In all four cases, portfolio companies of private equity funds are private companiesfor which little public information exists. Thus, information asymmetry is thought to be fargreater in private equity compared with investments in public companies that must fileregular reports with the SEC and also are often covered by Wall Street analysts.

As a result, portfolio values of private equity funds are not marked to market andfund returns are not finalized until the end of the funds lifetime. In contrast, while somehedge funds participate in private equity transactions (especially larger companies that

buyouts and distressed investors invest in), they are primarily investors in publicly tradedassets such as stocks and bonds and their portfolios are marked to market

Figure 8. Four main types PE Investments.

Source: Metrick, Yasuda, Tuck School of Business.

3. Takes an active role in monitoring and helping the companies in its portfolio.

This characteristic is central to the entry reason of private equity and potentially a

key determinant of a given PE funds performance. While all active investment fundmanagers, mutual funds, hedge funds, and private equity funds, select their stocks and are


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evaluated on their ability to pick winners, not all of them actively influence actions of themanagement of the companies they invest in. Except for large block-holders who gain seatson the boards of public companies, public company investors ability to influence themanagement is severely limited. In contrast, private equity investors often condition theirinvestments on contractual provisions, such as board seats, veto rights, and various

contingent control rights, that enable them to influence the actions of the management whilethey hold their investments.

4. A PE funds primary goal is to maximize its financial return by exiting investmentsthrough a sale or an initial public offering (IPO).

Since PE funds are financial intermediaries, they need some mechanism to givemoney back to their investors, which gives rise to this characteristic. Exits can occur throughan IPO, with a subsequent sale of the PE stake in the open market, through a sale of thecompany to another investor (especially to another BO fund), or through the sale of thecompany to a larger company. The requirement to exit and the focus on financial returndifferentiates PE from strategic investments done by large corporations.

While corporations are active both in VC and BO markets, their investment criteriaare different from professional PE because of the lack of need for exits and greater emphasison synergy with their existing operations.

To summarize, PE funds differ from both mutual funds and hedge funds in that theyinvest in illiquid, private companies, and differ from corporations in which they are requiredto return money to investors within a finite investment horizon and therefore have to focuson objectives with a clear path to exits. These functional differences are reflected in the ways

PE funds are organized, in contrast to hedge funds and mutual funds, and PE funds have afinite life, typically 10 years, and a fixed fund size that is determined at the time of the fundinception. Both hedge funds and mutual funds are open-ended and do not have a finite fundlifetime. Within the fund lifetime, investors in PE funds must commit to illiquidity of up to10 years, unlike hedge funds and mutual funds, both of which allow redemptions ondemand, subject to some waiting period.

Because of the illiquidity and the long-term nature of PE investments, reinvestmentsare not permitted or restricted to a modest fraction of the fund size; in contrast, hedge fundand mutual fund investors are offered options to automatically reinvest any dividends anddistributions from funds on an on-going basis. PE fees are often highest first and decline in

later years, because successful managers are expected to raise follow-on funds with new feestreams; hedge fund and mutual fund fees are flat percentages of assets under management,so that total fees would rise over time as assets grow. And finally, despite the common

perception, hedge fund and PE fund carried interest are earned quite differently. In hedgefunds, carry is a fixed percentage (usually 20%) of the market value of the portfolio inexcess of cost basis, and can be earned each year as long as the former exceeds the latter,subject to high watermarks. In contrast, carried interest in PE is earned only on realized basis

i.e., only if investments are exited and cumulative exit values exceed the contractuallyspecified threshold amount. Since exits typically are concentrated in the latter half of thefunds life, PE managers often wait for many yearsbefore they earn any carry from theirfunds. (Olsen, John.2003)


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4.2 LBOs

4.2.1 LBO Characteristics

In a successful LBO, equity holders often receive very high returns because the debt

holders are predominantly locked into a fixed return, while the equity holders receive all thebenefits from any capital gains. Thus, financial buyers invest in highly leveragedcompanies seeking to generate large equity returns. An LBO fund will typically try torealize a return on an LBO within three to five years. Typical exit strategies include anoutright sale of the company, a public offering or a recapitalization.

Table 4. Investment Exit Strategies in LBOs.

Source: Tuck School of Business.

4.2.2 LBO Candidate Criteria

Given the proportion of debt used in financing a transaction, a financial buyers interest in an LBO candidate depends on the existence of, or the opportunity to improveupon, a number of factors. Specific criteria for a good LBO candidate include:

Steady and predictable cash flow

Clean balance sheet with little debt

Strong, defensible market position

Limited working capital requirements

Minimal future capital requirements

Heavy asset base for loan collateral

Divestible assets

Strong management team Viable exit strategy

Synergy opportunities

Potential for expense reduction

4.2.3 LBO Transaction Structure

An LBO will often have more than one type of debt in order to procure all therequired financing for the transaction.

Exit Strategy Comments

SaleOften the equity holders will seek an outright sale to a

strategic buyer, or another financial buyer.

IPO

While an IPO is not likely to result in the sale of the

entire entity, it does allow the buyer to realize a gain onits investment.

Recapitalization

The equity holders may recapitalize by re-leveraging

the entity, replacing equity with more debt, in order to

extract cash from the company.


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Table 5. LBO Transaction Structure.

Source: Tuck School of Business.

It is important to recognize that the appropriate transaction structure will vary from

company to company and between industries. Factors such as the outlook for thecompanys industry and the economy as a whole, seasonality, expansion rates, marketswings and sustainability of operating margins should all be considered when determiningthe optimal debt capacity for a potential LBO target. (Olsen, John.2003)

4.2.4 LBO Transaction Figures and Analysis of Performances

The amount of fundraising and investment activity in the buy-out industry iscurrently at record high levels. These amounts are economically sizeable and affect both theway industries are restructured and the working of financial markets (e.g. the M&Amarket).

Policy makers, investors and academics alike need to know more about this opaqueindustry. One of the most striking facts from previous research is the finding that the final

performance of a private equity fund is related to the final performance of the private equityfund previously raised by the same firm (Kaplan and Schoar, 2005). They find strongevidence among venture capital funds and mild evidence for buyout funds but less data,hence potentially less power, may explain the lesser strength on the buyout side.

A deep study of dataset enables (Phalippou 2007) to analyze a unique andcomprehensive sample containing the gross of fees performance and characteristics of5,965 buyout investments made by 193 private equity firms in 38 countries from 1973 to

2006. Resulting that the value weighted multiple of these investments is 2.3. Hence, buyoutfirms have returned a bit more than twice the money invested before fees.

The overall gross-of-fees performance is relatively low. IRR averages 21% andmultiple averages 2.7 while the average duration of an investment is 4.5 years. Median IRRand multiple are respectively 21% and 1.9. This is a lower bound for true performance whichcannot be computed by Phalippoubecause does not know the timing of intermediate cashflows. Average return is 7% and median return is 17% and returns are widely dispersed and

beta is slightly above 1. Performance has been particularly high in countries like Sweden,the Netherlands and Italy and low in countries like Germany and Italy.

In its study it is found that poorly performing firms have similar chances to end up

OfferingPercent of

Transaction

Cost Of

CapitalLending Parameters Likely Sources

5 -7 Years Payback Commercial Banks

2.0x -3.0x EBITDA Credit Companies

2.0X Interest Coverage Insurance Companies

7 - 10 Years Payback Public Market1.0x - 2.0x EBITDA Insurance Companies

LBO/ Mezzanine Funds

Management (MBO)

LBO Funds

Subordinated debt holders

Investment banks

4 - 6 Years Exit Strategy

50-60% 7-10%Senior Debt

Mezzanine Financing 20-30%

Equity 20-30% 25-30%

10-20%


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in top or 4 bottom performers on their subsequent investments. For top performers,however, past performance is a strong predictor of future performance. These two channelsexplain entirely the persistence effect for experienced/large/old firms while it explains littleof the persistence effect for the other firms. It demonstrates also that, persistence is notachieved by different risk attitudes. Winners do not seem to offer any extra systematic nor

total risk. (Phalippou 2007)

It is also found that the work-load/busy-ness of the firm is significantly related toperformance. The inter-quartile range in busyness is 3 to 10 investments in a year andpredicts a performance spread of 8.4% p.a.

The widely held belief that firms with long track records and a lot of experience aregood investments appears incorrect. The performance of star firms is similar to that ofothers. They may be refusing capital because they do not want their performance to drop

below average. Hence the puzzle seems to be more on why investors think star firm aresuperior investment opportunities, rather than why star buyout firms refuse capital.(Phalippou 2007)

The buyout industry is known for being a boom and burst industry with verypronounced cycles. One explanation could be that in some periods in time manyinvestments are made, firms are then very busy and underperform which in itself wouldreduce capital flows and then improve future prospects. Also, if credit spreads increaseagain then less investments are made, firms are less busy and future prospects are better.

5. PRIVATE EQUITY SCENARIO INLATIN AMERICA

5.1 Background of PE in Latin America

During the pre-reform years, even as international players were mostly out of themarket, there were some private equity investors who were net winners in the market Forthe most part, they were local families, who used their knowledge of local networks, politicsand 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 theexception, not the norm. However, once institutional reforms began in the 1990s, thecomposition of the winners changed. The lower perceived risk of investing in the regionattracted institutional (private equity, large asset managers) and strategic capital (companiessuch 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 thedevelopment of institutional private equity as a viable asset class. (Unigestion 2012)

5.2. The evolution of private equity in in Latin America

As mentioned, the first private equity firms to be formed in the late 1980s and early1990s where those supported by wealthy local families, who, seeing that reforms had opened


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up a whole new set of opportunities, developed platforms that allowed them to leveragethird-party capital to improve their access to such opportunities. This was the genesis offirms like GP Investimentosin Brazil or BISA in Argentina. These firms opened the doorof medium sized companies to private capital and the eyes of foreign investors to theopportunity to invest private capital into promising companies.

As a result, in the mid-90s, the first foreign institutional private equity firms enteredLatin America. Most of these were US-based firms, who opened local offices and secondedUS-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 followedby Texas-Pacific Group and General Atlantic.

In the early 2000s, new entrants began to participate in the market. These newplayers ranged from local firms, such as Exxel, merchant banks such as Deutsche PrivateEquity 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 internetcompanies. Unfortunately for many of them, the Argentine and Brazilian currency crisis of2000-2001, coupled with the NASDAQ market crash, rendered many of their investmentsworthless. It appeared that, again, the region was providing only disillusionment toinvestors. 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 todemonstrate 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 enteredinto protracted recessions in 2007, while emerging markets were able to escape relativelyunscathed. 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 firmsemerged all over the region. The asset class grew dramatically, from just a few firms toalmost 100 by 2011. (Unigestion 2012)


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Figure 9. Timeline of PE in Latin America.

Source: Unigestion.

5.3 Fundraising in Latin America

The success of any fundraising by a private equity sponsor and the time it takes toraise a fund and get to an initial closing depends on a variety of factors, including:

General economic outlook.

Economic outlook of the target sectors of the fund and of the geographic region inwhich the fund will invest.

Track record of the sponsor.

Strength of its (or its placement agents) relationships with prospective investors.

Fundraising in the region has more than doubled since 2007, as private equity indeveloped markets has been maturing and investors were generally looking for betterreturns and diversification away from central economies.


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Figure 10. Geographic Composition of Current Fundraising in PE.Source: Preqin.

Figure 11. PE Fundraising in Latin America, 1993-2011.

Source: LAVCA, Unigestion.

Unigestion reports expect fundraising volumes to stabilize in the range of USD 5 9 billion range per year over the next 5 years. In addition, it is expected that fundraisingwill go primarily to generalist funds, but, in the coming years and as the industry matures,to start veering towards strategy specific funds such as distressed debt or agricultural landdevelopment funds.

An interesting point is that despite this new influx of capital, private equityinvestment as a proportion of GDP remains low in Latin America as compared to otherdeveloped and emerging economies. In addition, with investment amounts ranging over

the last few years in the USD 5 8 billion per year, virtually no capital overhang exists.Both factors are likely signaling that, overall, private equity still has growth potential in


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the region without an apparent risk of overheating. (For more details see Annex 3)

Figure 12. Penetration of private equity in Latin America, % of GDP, 2010.

Source: Ernst and Young, Unigestion.

5.4 Returns and Performances in Latin America

As can be seen in Figure 13.1 and 13.2, investing in public markets in LatinAmerica has, over the last 10 years, provided a way to capture returns and diversify risksin 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, therate of growth in the public markets in Latin America dropped from 46% per year (20022006) to around 7% per year, while correlations with other markets increased, all buteliminating the diversification effect without a corresponding increase in returns. Weexpect that correlations will remain higher than in the past, with a likely reversion to themean over the next few years. (Unigestion 2012, Scotiabank 2013)

Figure 13.1. Latin America Equity Market Performance 2008 - 2013.Source: Scotiabank.


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Figure 13.2. Latin America Equity Market Performance 2008 - 2013.Source: Scotiabank.

Table 6. Correlation between Latin America and other major markets, public market

indexesSource: Bloomberg, Unigestion.

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

Returns for private equity in Latin America, on the other hand, have also beenfairly strong but have appeared to be mostly de-coupled from other regions, particularly inthe observation period from 1997 through 2008.

DateLatam /

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 0.883Increase / (decrease)

in correlation 10% 8% 11%


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Figure 14. Latin America PE Returns Vs. Other Regions, Multiple 1997 - 2008.

Source: Preqin, Venture Economics, Unigestion.

Table 7. Return of Funds in Latin America, different geographies and transactions.

Source:Unigestion.

One of the main reasons private equity market returns remained strong even in thelight of public market return convergence and lower returns is that private companies inthe region, derive most of their revenues from their domestic markets or the regionalmarket, and thus can succeed and grow even as other economies dont grow. In addition,the greater inefficiencies in companies in Latin America allowed and allow private equityfirms to create value in addressing these inefficiencies, providing a way to improve

profitability even under poor macroeconomic scenarios.

In summary, the returns in private equity in Latin America, while certainly exposedto global crises, appear to be driven more by the performance of the regional economythan the global economy, and will certainly offer some level of diversification when


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compared to other regions. (See Annex 4)

5.5 LAVCA Scorings for PE in Latin America

The 2013 LAVCA Scorecard on the Private Equity and Venture Capital

Environment in Latin America reflects ongoing efforts by regional regulators to foster astable climate for investment. Both large and small economies have improved theircapacity to monitor the development of the PE/VC industry, improve transparency anddisclosure laws and create better conditions for local entrepreneurs.

Although there was little movement in the overall regional rankings, six of thetwelve countries showed improvements in their scores this year. All changes were

positive, and even in countries with precarious overall investment climates, scores andrankings remained stable. Improvements in the Dominican Republic allowed it to jumpfrom the bottom of the list to tie Argentina for second to last place, and Mexico andColombia are slowly closing in on Brazil and Chiles leadership positions. Chile continuesto rank number one with a score of 76, followed by Brazil (72), Mexico (67) andColombia (61).

Chile led the regional ranking for the eighth consecutive year, and in 2013improved its score due to the adoption of international financial reporting standards bynon-listed firms. The country heads the region in intellectual property protection, judicialtransparency and perceived corruption. Chile maintains active government support ofSMEs and start-ups, most recently through Start-Up Chile, a program aimed at fosteringentrepreneurship that has positioned the country at the heart of efforts across the region tocreate an entrepreneurial culture. However, a new funds law that would simplify fund

formation, ease tax burdens and create other advantages for the PE/VC industry is stillpending.

Brazil continues to stand out as a pioneer and innovator in PE/VC specificregulation in Latin America. With unique fund structure laws and streamlined restrictionson foreign investment, the country remains in second place in the regional ranking. Arobust self-regulation code aimed at improving fund transparency and disclosure that wentinto effect in 2011 will have its first results reported in 2013, although enforcement and

penalties for non-compliance remain uncertain. Investors and regulators from across theregion are paying close attention to the successes and challenges stemming from these newlaws.

Mexico increased its overall score for the second year in a row due to animprovement in the indicator for entrepreneurship. The time and number of proceduresrequired to start a business were reduced below regional averages, and university andgovernment incubator and accelerator programs continue to expand. Added to this, thenew administration is focusing on competition while promising important reforms in keysectors including telecoms and energy. The Mexican stock market outperformed mostregional exchanges, and the economy has continued to grow while other countries in theregion have suffered slowdowns.

Colombia also increased its score on entrepreneurship, reflecting the active role of

state development banks and growing government support to improve the entrepreneurialecosystem. Bancoldex, the main state development agency, has launched a new credit line


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and program to promote innovation. A local private equity and venture capital association,ColCapital, was also formed this year with the assistance of Bancoldex alongside theMultilateral Investment Fund. Even with this significant progress, the basic PE/VCframework needs improvement, and the country continues to suffer from high levels of

perceived corruption and a complex tax environment.

Peru posted the regions most significant score improvements of 2013, with theimplementation of a long-awaited change by the banking superintendent to reform pensionfund investment laws. The new laws enable PE/VC funds to manage a larger share of thecountrys growing pension assets, causing the score for restrictions on institutionalinvestors to return to its 2011 level. Peru is recognized for being a capable and seriousreformer in the region, with macro level reforms and a commitment to economic stabilityspurring rapid economic growth.

A counterpoint to the good news across the region, Argentina continues todeteriorate in both its macro environment and approach towards private investment. Withno score change this year the country remains near the bottom of the regional rankings,now tied with the Dominican Republic for second-to-last place. With the nationalization ofRepsol-YPF, ongoing legal action by international creditors, tightening currencyrestrictions and a lack of local institutional investors, the country remains broadlyunattractive for PE/VC investment. This negative environment hinders the countrysotherwise vibrant entrepreneurial community, with Argentine start-ups beginning to lookelsewhere for funding and expansion opportunities.

There were few major score changes in small countries across Latin America andthe Caribbean. Changes for 2013 include a score increase for the second year in a row for

the Dominican Republic, which set up its first seed fund last year in collaboration with theInter- American Development Bank. There has been a steady increase in fund managerstaking note of smaller opportunities, particularly in Central America and the Caribbean.With pan-regional investors looking opportunistically at new deal flow and comparativelylow valuations in smaller economies, local governments are beginning to awaken toopportunities to improve their countries respective PE/VC environments.

The full list of scoring criteria is as follows:

Laws on PE/VC fund formation and operation

TAX treatment of PE/VB funds and investments

Protection of minority shareholders rights Restrictions on local institutional investors investing in PE/VC

Protection of intellectual property rights

Bankruptcy regulation

Capital market development and feasibility of local exits

Registration/reserve requirements on inward investments

Corporate governance requirements

Strength of the judicial system

Perceived corruption

Use of international accounting standards and quality of the local accounting

industry Entrepreneurship


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Table 8. LAVCA Scorecard Latin America 2013.

Source: LAVCA Industry data.

Figure 15. LAVCA Overall Score Against PE/VC Investments Latin America 2013.



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Table 9. Ranking LAVCA Scores.

Source: LAVCA data industry.

Figure 16. LAVCA Evolution PE/VC Markets Latin America 2006-2013.



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6. RECENT NEWS PE IN LATINAMERICA.

Actis Joins Mainstream on $1.4 Billion of Clean Energy in Chile.

Latin Americas TOTVS Ventures leads $22m deal for GoodData .

ACON Investments Exits Investment in InverCap.

Gerbera Capital and Mexico Ventures Close Series B for ID90T.

Gvea Invests R$ 1.5b in Vehicle Rental Company, Unidas (em portugus).

Natue, Backed by Project A Ventures, Announces New Investment Deal.

Blackstone, Patria Closer to Buying Brazil Gafisa Unit.

Brookfield Closes Second Brazilian Timber Fund on $270m.

500 Mexico City to Invest in 18 New Startups.

Nulu raises U.S. $ 1.75M to Consolidate in Latin America. Wayra Per Launches Tourism Incubator, Andes Factory.

e.Bricks Early Stage Invests in Fasion & Accessories Social Commerce StartupJuv&You.

Brazilian Banks Intensify Private-Equity Investments.

Promotora Venture Capital Exits Easy Solutions.

RI Happy Aims to Reach IPO by 2015.

Monashees Capital & 500 Startups Back Management SaaS Runrun.it.

CADE Approves the Acquisition of 32.7% of CCRR Participaes by BTGPactual).

Sinimanes Joins NXTP Labs.

Despite Stumbles, a Promising Path for Start-Ups in Brazil

Mexican Hotel Readies IPO

ConfraparsHorizonTI Closes Investment Period with $24.8 Million in CommittedCapital

Project A has 50 million to invest in startups in Germany and Brazil .

Educational start-up Eduk Raises Series A Funding from Monashees Capital.

GP Investments Buys Stake in Switzerlands Apen for $33 Million

Rock Content Announces Abril Participaes Investment

Rocket Internet Ups Investment in Brazils Airu

LarrainVial and Mineria Activa III Launch Mining and Agriculture Funds (en

espaol) MRVs Log will receive an investment of R$278 Million.

Privalia receives EUR 25 million from Belgian fund.

Brazilian Private Equity Fund Kinea Investimentos Invests in Medical DiagnosticsCompany Grupo Delfin.
http://lavca.org/2013/06/14/actis-joins-mainstream-on-1-4-billion-of-clean-energy-in-chile/http://lavca.org/2013/06/13/latin-americas-totvs-ventures-leads-22m-deal-for-gooddata/http://lavca.org/2013/06/13/latin-americas-totvs-ventures-leads-22m-deal-for-gooddata/http://lavca.org/2013/06/11/acon-investments-exits-investment-in-invercap/http://lavca.org/2013/06/11/gerbera-capital-and-mexico-ventures-close-series-b-for-id90t/http://lavca.org/2013/06/11/gavea-invests-r-1500-in-vehicle-rental-company-nations-em-portugues/http://lavca.org/2013/06/11/natue-backed-by-project-a-ventures-announces-new-investment-deal/http://lavca.org/2013/06/11/blackstone-patria-closer-to-buying-brazil-gafisa-unit/http://lavca.org/2013/06/11/brookfield-closes-second-brazilian-timber-fund-on-270m/http://lavca.org/2013/06/11/500-mexico-city-to-invest-in18-new-startups/http://lavca.org/2013/06/11/nulu-raises-u-s-1-75m-to-consolidate-in-latam/http://lavca.org/2013/06/11/wayra-peru-launches-andes-factory-a-startup-set-to-boost-tourism/http://lavca.org/2013/06/11/e-bricks-early-stage-invests-in-fasion-accessories-social-commerce-startup-juvyou/http://lavca.org/2013/06/11/e-bricks-early-stage-invests-in-fasion-accessories-social-commerce-startup-juvyou/http://lavca.org/2013/06/11/e-bricks-early-stage-invests-in-fasion-accessories-social-commerce-startup-juvyou/http://lavca.org/2013/06/11/e-bricks-early-stage-invests-in-fasion-accessories-social-commerce-startup-juvyou/http://lavca.org/2013/06/10/brazilian-banks-intensify-private-equity-investments/http://lavca.org/2013/05/30/promotora-venture-capital-exits-easy-solutions/http://lavca.org/2013/05/30/ri-happy-aims-to-reach-ipo-by-2015/http://lavca.org/2013/05/28/monashees-capital-500-startups-back-management-saas-runrun-it/http://lavca.org/2013/05/27/cade-approves-the-acquisition-of-32-7-of-ccrr-participacoes-by-btg-pactual-em-portugues/http://lavca.org/2013/05/27/cade-approves-the-acquisition-of-32-7-of-ccrr-participacoes-by-btg-pactual-em-portugues/http://lavca.org/2013/05/27/cade-approves-the-acquisition-of-32-7-of-ccrr-participacoes-by-btg-pactual-em-portugues/http://lavca.org/2013/05/27/cade-approves-the-acquisition-of-32-7-of-ccrr-participacoes-by-btg-pactual-em-portugues/http://lavca.org/2013/05/24/sinimanes-joins-nxtp-labs-new-markets-and-mobile-app-ahead/http://lavca.org/2013/05/24/despite-stumbles-a-promising-path-for-start-ups-in-brazil/http://lavca.org/2013/05/24/mexican-hotel-readies-ipo/http://lavca.org/2013/05/24/confrapars-first-fund-horizon-it-closes-investment-period-with-24-8-mm-in-committed-capital/http://lavca.org/2013/05/24/confrapars-first-fund-horizon-it-closes-investment-period-with-24-8-mm-in-committed-capital/http://lavca.org/2013/05/24/confrapars-first-fund-horizon-it-closes-investment-period-with-24-8-mm-in-committed-capital/http://lavca.org/2013/05/24/confrapars-first-fund-horizon-it-closes-investment-period-with-24-8-mm-in-committed-capital/http://lavca.org/2013/05/24/confrapars-first-fund-horizon-it-closes-investment-period-with-24-8-mm-in-committed-capital/http://lavca.org/2013/05/23/project-a-has-e-50-million-to-invest-in-startups-in-germany-and-brazil-em-portugues/http://lavca.org/2013/05/23/project-a-has-e-50-million-to-invest-in-startups-in-germany-and-brazil-em-portugues/http://lavca.org/2013/05/22/educational-start-up-eduk-raises-series-a-funding-from-monashees-capital-em-portugues/http://lavca.org/2013/05/22/gp-investments-buys-stake-in-switzerlands-apen-for-33-million/http://lavca.org/2013/05/22/gp-investments-buys-stake-in-switzerlands-apen-for-33-million/http://lavca.org/2013/05/22/rock-content-announces-abril-participacoes-investment-second-deal-in-three-months/http://lavca.org/2013/05/22/rocket-internet-ups-investment-in-brazils-airu/http://lavca.org/2013/05/22/rocket-internet-ups-investment-in-brazils-airu/http://lavca.org/2013/05/21/larrainvial-launches-a-mining-fund-with-usd-47-million-mineria-activa-iii-en-espanol/http://lavca.org/2013/05/21/larrainvial-launches-a-mining-fund-with-usd-47-million-mineria-activa-iii-en-espanol/http://lavca.org/2013/05/21/larrainvial-launches-a-mining-fund-with-usd-47-million-mineria-activa-iii-en-espanol/http://lavca.org/2013/05/21/larrainvial-launches-a-mining-fund-with-usd-47-million-mineria-activa-iii-en-espanol/http://lavca.org/2013/05/21/log-mrv-will-receive-an-investment-of-r-278-million-em-portugues/http://lavca.org/2013/05/21/log-mrv-will-receive-an-investment-of-r-278-million-em-portugues/http://lavca.org/2013/05/14/privalia-receives-eur-25-million-from-belgian-fund-em-portugues/http://lavca.org/2013/05/10/brazilian-private-equity-fund-kinea-investimentos-invest-in-medical-diagnostics-company-grupo-delfin-em-portugues/http://lavca.org/2013/05/10/brazilian-private-equity-fund-kinea-investimentos-invest-in-medical-diagnostics-company-grupo-delfin-em-portugues/http://lavca.org/2013/05/10/brazilian-private-equity-fund-kinea-investimentos-invest-in-medical-diagnostics-company-grupo-delfin-em-portugues/http://lavca.org/2013/05/10/brazilian-private-equity-fund-kinea-investimentos-invest-in-medical-diagnostics-company-grupo-delfin-em-portugues/http://lavca.org/2013/05/10/brazilian-private-equity-fund-kinea-investimentos-invest-in-medical-diagnostics-company-grupo-delfin-em-portugues/http://lavca.org/2013/05/10/brazilian-private-equity-fund-kinea-investimentos-invest-in-medical-diagnostics-company-grupo-delfin-em-portugues/http://lavca.org/2013/05/14/privalia-receives-eur-25-million-from-belgian-fund-em-portugues/http://lavca.org/2013/05/21/log-mrv-will-receive-an-investment-of-r-278-million-em-portugues/http://lavca.org/2013/05/21/larrainvial-launches-a-mining-fund-with-usd-47-million-mineria-activa-iii-en-espanol/http://lavca.org/2013/05/21/larrainvial-launches-a-mining-fund-with-usd-47-million-mineria-activa-iii-en-espanol/http://lavca.org/2013/05/22/rocket-internet-ups-investment-in-brazils-airu/http://lavca.org/2013/05/22/rock-content-announces-abril-participacoes-investment-second-deal-in-three-months/http://lavca.org/2013/05/22/gp-investments-buys-stake-in-switzerlands-apen-for-33-million/http://lavca.org/2013/05/22/educational-start-up-eduk-raises-series-a-funding-from-monashees-capital-em-portugues/http://lavca.org/2013/05/23/project-a-has-e-50-million-to-invest-in-startups-in-germany-and-brazil-em-portugues/http://lavca.org/2013/05/24/confrapars-first-fund-horizon-it-closes-investment-period-with-24-8-mm-in-committed-capital/http://lavca.org/2013/05/24/confrapars-first-fund-horizon-it-closes-investment-period-with-24-8-mm-in-committed-capital/http://lavca.org/2013/05/24/mexican-hotel-readies-ipo/http://lavca.org/2013/05/24/despite-stumbles-a-promising-path-for-start-ups-in-brazil/http://lavca.org/2013/05/24/sinimanes-joins-nxtp-labs-new-markets-and-mobile-app-ahead/http://lavca.org/2013/05/27/cade-approves-the-acquisition-of-32-7-of-ccrr-participacoes-by-btg-pactual-em-portugues/http://lavca.org/2013/05/27/cade-approves-the-acquisition-of-32-7-of-ccrr-participacoes-by-btg-pactual-em-portugues/http://lavca.org/2013/05/28/monashees-capital-500-startups-back-management-saas-runrun-it/http://lavca.org/2013/05/30/ri-happy-aims-to-reach-ipo-by-2015/http://lavca.org/2013/05/30/promotora-venture-capital-exits-easy-solutions/http://lavca.org/2013/06/10/brazilian-banks-intensify-private-equity-investments/http://lavca.org/2013/06/11/e-bricks-early-stage-invests-in-fasion-accessories-social-commerce-startup-juvyou/http://lavca.org/2013/06/11/e-bricks-early-stage-invests-in-fasion-accessories-social-commerce-startup-juvyou/http://lavca.org/2013/06/11/wayra-peru-launches-andes-factory-a-startup-set-to-boost-tourism/http://lavca.org/2013/06/11/nulu-raises-u-s-1-75m-to-consolidate-in-latam/http://lavca.org/2013/06/11/500-mexico-city-to-invest-in18-new-startups/http://lavca.org/2013/06/11/brookfield-closes-second-brazilian-timber-fund-on-270m/http://lavca.org/2013/06/11/blackstone-patria-closer-to-buying-brazil-gafisa-unit/http://lavca.org/2013/06/11/natue-backed-by-project-a-ventures-announces-new-investment-deal/http://lavca.org/2013/06/11/gavea-invests-r-1500-in-vehicle-rental-company-nations-em-portugues/http://lavca.org/2013/06/11/gerbera-capital-and-mexico-ventures-close-series-b-for-id90t/http://lavca.org/2013/06/11/acon-investments-exits-investment-in-invercap/http://lavca.org/2013/06/13/latin-americas-totvs-ventures-leads-22m-deal-for-gooddata/http://lavca.org/2013/06/14/actis-joins-mainstream-on-1-4-billion-of-clean-energy-in-chile/


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7. OUTLOOK AND CONCLUSIONS

Public equity markets in Latin America do not adequately reflect the sweet spot ofeconomic growth which has consumer related sectors (consumer services, consumer goods,education and healthcare) at its center. Instead, public equity markets are often skewedtowards the more volatile commodity companies and financials.

Latin American countries are highly diverse in terms of GDP composition, naturalresource endowment and institutional and political stability. Therefore, a local presence,local market knowledge and a wide network of local players are key to successfulinvestments in the region.

There is enough room to grow as we can see looking at the PE investment

compared to the GDP as a percentage.

Figure 17. PE Investment as % of GDP, Chance to grow in Latin America

Source: Partners Group, Goldman Sachs.

The private equity industry has been developing in recent years and becoming muchmore local. Most funds no longer operate from New York or Miami, but instead haveoffices in Latin America.

Private equity activity in Latin America is expected to be reinforced in thefollowing months and years, due to the regions sustained economic growth and the factthat there are still some large global funds that have not entered the Latin American marketyet, creating a great opportunity for the region. In fact, surveys by LAVCA in the sectorrevealed that 65 percent of investors expect to initiate or expand their private equityinvestment projects in the region.

A lot of PE funds are being raised and firms are expanding rapidly expecting thenext 10 years to have a positive evolution. We estimate fundraising activity as it follows.


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Figure 18. Fundraising in Latin America, Figures in $USD Bn.

Source: PEHub, Rosado, Gabriel.Note: Took into account correlations between countries and expected GDP growth.

Figure 19. Investments in Latin America, Figures in $USD Bn.

Source: PEHub, Rosado, Gabriel.Note: Took into account correlations between countries and expected GDP growth.

While some funds will inevitably go away, other investment companies are likely tobe founded, although the growth rate might not be as high as what weve seen in the lastdecade, they will grow up around 2013 levels. (See Anex 5)

This positive outlook on private equity opportunities in economies characterized bypolitical stability and strong macroeconomic fundamentals raises interest in Latin America.Among these countries that hold the most potential for PE investments, Brazil would bethe most important one, followed by Mexico, Chile and Colombia. Peru could also be

promising.


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While the Brazilian private equity market is becoming more crowded andvaluations in the large cap space are rising, the country still offers compelling long termopportunities in selective sectors and should continue to be the main private equity marketin the region.

We have to be slightly cautious with Peru and take a wait and see approach in theshort term.

Mexico is attractive on an opportunistic basis. Despite its strong macro-economicfundamentals, Mexico has a high correlation to the USA, which ties the economy to therecovery of the advanced world.

Argentina is currently politically challenged and while it was the worlds 7th largesteconomy in the early 20th century, it has since been severely mismanaged. But its aresource-rich country with low valuations, so I believe theres a lot of upside potential if theeconomy can be managed properly; asset values could rise very quickly if the right policydecisions are made. But fundamentals in Argentina have improved; a regime change in theupcoming elections may create a more favorable investment environment.

The most attractive sectors in Latin America are definitely the energy & naturalresource industries (mining, energy, oil & gas) given that several Latin Americaneconomies are resource-based. Also, the financial services industry, because consumerdemand is quickly growing in Latin America and is expected to continue that way.

Despite growing projections, PE investors will remain conscientious and cautious inthe coming year, as focus has directed to global economic concerns derived from the US

slowdown, Europes economic uncertainty and Chinas potential deceleration. Additionally,the region has its own domestic issues that require close monitoring such as deceleratinggrowth, inflation and currency volatility. Going forward, small and middle market PE dealsshould continue with a major share of the regions activity, as Latin American companiesincreasingly work with PE firms for start-up funding, growth capital, andexpansion/consolidation needs. However, large PE investments are anticipated in resourceintensive sectors. Exits from the funds who invested in the last five/six years are alsoexpected.


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8. BibliographyBrard , Pablo F.G. -Blancas , Daniela. Latin America Regional Outlook The Bank of

Nova Scotia Apr 2013.

Cumming, Douglas and Uwe Walz J.W. PRIVATE EQUITY RETURNS ANDDISCLOSURE AROUND THE WORLD* Lally School of Management and Technology- Goethe-Universitt Frankfurt/Main.

Ferreira, Francisco H. G., Julian Messina, Jamele Rigolini, Luis-Felipe Lpez-Calva,Maria Ana Lugo, and Renos Vakis. 2013. Economic Mobility and the Rise of the LatinAmerican Middle Class. Washington, DC: World Bank. doi: 10.1596/978-0-8213-9634-6.License: Creative Commons Attribution CC BY 3.0

Hernandez, JohnArticle: Viva La Economia Nueva! Latin America Emerges from theFinancial Crisis, Managing Director, Sales and Relationship Manager - Latin America,BNY Mellon Treasury Services 2010.

Judge, Steve- Bailey, Bronwyn. PEGCC. Interim President and CEO andVice Presidentof Research.

Kaplan, S.N., Schoar, A., 2005, Private equity performance: Returns, persistence, andcapital flows, Journal of Finance 60, 1791-1823

LAVCA. 2013 Scorecard The Private Equity and Venture Capital Environment in Latin

America. 2013

Olsen, John - Blaydon Colin and Gagliano, Salvatore. Note on Leveraged Buyoutsunder the supervision of Adjunct Assistant Professor Fred Wainwright and Professor of theTuck School of Business at Dartmouth College. September 2003.

Phalippou, Ludovic - Lopez-de-Silanes, Florencio and Gottschalg, Oliver. ThePerformance of Leveraged Buyout Investments, 2007.

PREQIN.Moving Forward on Shifting Sands. Global Private Equity Report. 2012.

Rigolini, JameleArticle: Latin America's Middle Class in Global Perspective.

Scott W. Naidech, Chadbourne & Parke LLPPrivate Equity Fund Formation.

World Bank. 2013. World Development Indicators 2013. Washington, DC: World Bank.doi: 10.1596/978-0-8213-9824-1. License: Creative Commons Attribution CC BY 3.0

World Bank. 2013. Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group. DOI: 10.1596/978-0-8213-9615-5.License: Creative Commons Attribution CC BY 3.0


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9. ANNEXANNEX 1. GDP IN LATAM

GDP MAPSource: World Bank

GINI COEFFSource: World Bank


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The Gini coefficient, a common indicator of income inequality, measures how much the percapita income distribution within a country deviates from perfect equality. (A Ginicoefficient of 0 represents perfect equality, and a value of 100 perfect inequality.) Trends in

developing countries over the past two decades suggest that many countries have becomeless unequal, but trends differ by region and by income. Inequality in Latin America andthe Caribbean fell notably in almost all upper middle-income countries but remains amongthe highest worldwide.

The Gini coefficient is higher than the Latin America and the Caribbean average in onlytwo other upper middle income countries and in only a few low- and lower middle-incomecountries.

ANNEX 2. GENERAL FUND STRUCTURE

The structure of a private equity fund generally involves several key entities, as follows:

FUND STRUCTURESource: Scott W. Naidech, Chadbourne & Parke LLP

The investment fund, which is a pure pool of capital with no direct operations. Investorsacquire interests in the investment fund, which makes the actual investments for their

benefit.

A general partner (GP) or other managing entity (manager),which has the legal power to acton behalf of the investment fund

A management company or investment adviser, which is often affiliated with the GP or

manager and is appointed to provide investment advisory services to the fund. This is theoperating entity that employs the investment professionals, evaluates potential investment


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opportunities and incurs the expenses associated with day-to-day operations andadministration of the fund.

Other related fund entities, which may be formed to account for certain regulatory, tax andother structuring needs of one or more groups of investors

Private equity funds are structured as closed-end investment vehicles. A fundsgoverning documents generally permit the fund to raise capital commitments only during alimited fundraising period (typically 12 to 18 months), after which the fund may not acceptadditional investor commitments. During the capital raising period, the sponsor seeksinvestors to subscribe for capital commitments to the fund. In most cases, the commitmentis not funded all at once, but in separate capital contributions called on an as-needed basisto make investments during the investment period and to pay fees and expenses over thelife of the fund.

In the US, funds typically raise capital in private placements of interests inaccordance with exemptions from the registration requirements of the federal securitieslaws.

Private equity funds are typically formed as limited partnerships (LPs) or limitedliability companies (LLCs). The principal advantages of using an LP or LLC as a fundvehicle include:

LPs and LLCs are pass-through entities for US federalincome tax purposes and,therefore, are not subject to corporate income tax. Instead, the entitys income, gains,losses, deductions and credits are passed through to the partners and taxed only once at the

investor level pass-through entities

LPs and LLCs are generally very flexible business entities. US state LP and LLCstatutes are typically default statutes, which allow many of the statutory provisions thatwould otherwise apply to be overridden, modified or supplemented by the specific terms ofthe LP or LLC agreement. This flexibility allows partners in an LP and members of an LLCto structure a wide variety of economic and governing arrangements.

The investors in the fund, like the stockholders in a corporation, benefit fromlimited liability. Unlike the partners in a general partnership, as a general matter, thelimited partners of an LP and the members of an LLC are not personally liable for the

liabilities of the LP or LLC. As result, an investors obligations and liabilities to contributecapital or make other payments to (or otherwise in respect of) the fund are limited to itscapital commitment and its share of the funds assets, subject to certain exceptions andapplicable law.


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ANNEX 3. BREAKDOWN OF LATIN AMERICA FUNDRAISING BY COUNTRY

2006-2010

BREAK DOWNSource: Preqin Special Report: Latin America

ANNEX 4. BEST INVESTMENTS OPPORTUNITIES LATIN AMERICA,

SURVEYSource: Preqin Special Report: Latin America


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ANNEX 5. LARGEST LATIN AMERICAN FOCUSED FUNDS 2013

CLIENTSSource: Preqin Special Report: Latin America

PRIVATE EQUITY SCENARIO IN LATAM MAY 2013 UNIVERSIDAD DE ALCALA BANCO SANTANDER

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