Latin America’s private equity industry boomed during the first six months of this year, with a steep rise in the levels of fundraising, investments and exits, despite recent outflows of capital from global emerging markets.
Firms raised $3.8 billion with final or partial closings for 36 separate funds, a 100% increase on the first half of 2012, during which $1.89 billion was committed through 10 final or partial closings, according to the Latin American Venture Capital Association (Lavca). Overall, private equity and venture capital fund managers invested a total of $2.9 billion, a 5% rise on the first half last year, through 108 transactions, a 19% increase on last year.
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Proceeds from exits were up 67% on the first half last year, to $1.5 billion. "We saw record levels of fund raising in 2010 and 2011, and starting last year and continuing into this year that money is being put to work," says Patrice Etlin, Lavca chairman and managing partner at Advent International, the Boston, Massachusetts-based manager currently deploying its fifth fund, capitalized at $1.65 billion. "Despite the macroeconomic environment in Latin America not being so good recently, there are good investment opportunities in Brazil as company valuations have started to ease."
He adds that the IPO market in that country is closed, so business owners are more open to the possibility of taking on outside investors. The real has depreciated, making company valuations lower in US dollar terms, but the main reason why privately owned company valuations have declined is the lower multiples – such as price-equity ratios – that are being seen for publicly traded companies in Brazil.
Concentration
"Mexico has a more concentrated economy than Brazil, meaning that there are fewer transactions at the high end," adds Etlin. "Peru and Colombia have smaller economies, so ticket sizes are lower. Only Brazil has the really large transactions and a diversified economy, so will drive the overall numbers."
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| Patrice Etlin, Lavca chairman and managing partner at Advent International |
He adds that it is only during the past two years that an equity story has emerged in Mexico, as more companies have undertaken IPOs and a greater country-specific allocation to Mexico from global hedge funds and emerging market funds has taken place. He feels that is creating a virtuous circle that will lead more companies to come to the market and help to foster greater private equity activity, in the same way as Brazil six or seven years ago. "The emergent theme in Lavca’s data is in contrast to headlines reporting a flight out of emerging markets in response to expected policy shifts by the US Federal Reserve," says Juan Savino, director of research at Lavca. "We have seen an uptick in private equity and venture capital activity across the board in Latin America with an increasing universe of global and local investors taking part."
Savino adds that a number of the managers that did partial closings during the first nine months of this year are expected to carry out final closings by the end of 2013. The two most important trends among fund raisings were that a growing number of smaller funds were raised and that many of the smaller funds were destined to Peru, Colombia and Mexico, highlighting how limited partnerships are increasingly favouring those countries over Brazil.
Return to market
Lavca points out that many of the biggest private equity funds in Latin America were raised during the 2010 and 2011 period and managers such as the Carlyle Group, Gavea and Southern Cross could be expected to return to the market during the next couple of years.
The number of mid-market deals – between $10 million and $100 million in terms of ticket size and $30 million and $100 million in terms of company revenue – continued to grow, with almost twice as many in Brazil this year compared with last. Global limited partners oversubscribed mid-market funds in Peru and Colombia and showed strong interest in Mexico, encouraged by the government’s reform agenda.
Brazil continued to dominate capital committed, accounting for around 70% of deals. Venture capital investments from international and Latin American venture capital firms, accelerators and angels – ranging from seed to expansion – also increased this year, with $151.9 million across 58 deals, a 69% increase in capital committed and a record number of early-stage deals in the region. Brazil accounted for 85% of venture capital deals coming out of the region, although there was strong angel investment activity in Mexico, Chile and Colombia.
"The increase in venture capital activity in the first half was driven largely by Latin American VCs and is another positive bellwether for the long-term development of the investment ecosystem," says Savino.
The number of IT deals in Latin America was up 21% in the first half, while there was a 44% jump in consumer retail, both leading sectors by proportion of total investments overall. The energy sector was also well represented in the data, with $336 million invested, up from $126 million during the first half last year.