The Future of Private Equity and Venture Capital in Latin America

Speakers:

• Ettore Biagioni, Managing Director, Alothon Group
• Martin Diaz Plata, Partner, Capital International Private Equity Funds
• Richard H. Frank, Managing Partner & Chief Executive Office, Darby Overseas Investments, Ltd.
• Scott Swensen, Chairman, Conduit Capital Partners
• Susan Segal, President and CEO, Americas Society/Council of the Americas
• Cate Ambrose, President, Latin American Venture Capital Association (Moderator)

Summary

On December 16, 2009, the Americas Society/Council of the Americas hosted a panel covering the future of Venture Capital (VC) and Private Equity (PE) in Latin America. Panelists discussed the outlook of the private equity and venture capital markets in Latin America through a comparative approach with other regions of the world, highlighting energy, infrastructure, agribusiness, and Brazil’s potential. The event was carried out in partnership with the Latin American Venture Capital Association (LAVCA).

Outlook for Latin America

LAVCA’s Cate Ambrose said that Latin America represented 1 percent of total global PE and VC fundraising in 2008, compared to emerging Asia (9 percent), the United States, (60 percent) and the EU (24 percent). Ambrose forecasted, however, that U.S. participation would likely decrease while other regions, particularly Asia, would play a larger role.

The low penetration of PE and VC in Latin America could imply continuing growth for these sectors. Currently, investment in PE as a percentage of GDP in the region is as low at 0.23 percent, compared to 3.21 percent in the United States and 0.79 percent in the EU. Ambrose said Latin America’s share would likely continue to grow, as it began to do in 2006. PE activity peaked in 2007 and declined in 2008 due to the financial crisis. Now the stable economic outlook is making the region a more attractive destination for investment.

In a recent LAVCA survey, more than 44 percent of the respondents indicated that they would likely increase their allocation in Latin America over the next 36 months and were positive about new opportunities. Interestingly, corporate governance ranked high among investors’ priorities when deciding where to invest. Thirty-three percent of participants indicated it was even more important than the underlying financials of the companies they were investing in. The survey identified Brazil as the most attractive destination, followed by Mexico, Colombia, and Peru.

Brazil, Brazil, Brazil…But Opportunities Abound

Panelists talked about their individual experiences in Latin America. Capital International Private Equity Funds’ Martín Diaz Plata said that, in the region, his firm invested in agricultural companies and is contemplating Brazil’s oil sector. Thus far, their investment strategy has been mostly done through minority stakes. He estimated that, nowadays, Latin America held an 8 to 10 percent market share of worldwide investments with 85 percent of these investments going to Brazil.

Darby Overseas Investments’ Richard Frank said his company’s funds focused on mid-cap companies where they se a huge potential as consumer demand for an expanding middle class expands. They now have offices in Brazil, Mexico and Miami, and may open an office in Colombia.

Alothon Group’s Ettore Biagioni fund is primarily focused in Brazil, where it has been investing for over 50 years. The firm buys control of mid-cap companies, primarily in the service sector. He said Brazil was attractive for them because of the country’s institutional maturity, solid Central Bank, and large population, as well as the lack of competition from other PE funds. Echoing Frank, he tapped the sustained growth of the middle class as additional factor.

Conduit Capital Partners’ Scott Swensen said his firm invests in greenfield projects throughout the region. They recently bought four operating companies in Brazil and Mexico and he added that financing had been made possible thanks to Brazil and Mexico’s development banks (BNDES and Banobras, respectively). He sees increasing opportunities in energy in the coming years as consumption rises as does sustained economic growth.

On a final note, Susan Segal said that the positive economic environment has paved the way for more entrepreneurship in the region. Over the last 10 years, for example, Endeavor Foundation alone has financed entrepreneurs, leading to the creation of over 63,000 jobs in Latin America. This, in turn, has created new and interesting opportunities for PE and VC funds. She noted that early-stage investment remained low, particularly when compared to the United States, but that this fact could change in the future.