PE and VC in Latin America increases

November 2013 | FEATURE | PRIVATE EQUITY

Financier Worldwide Magazine

The recent decision by the US Federal Reserve to bring to an end its program of quantitative easing has caused significant unrest across many emerging markets. Nations such as South Africa and India in particular have seen substantial outflows of capital this year as the supply of cheap cash has begun to dry up. Yet despite the portents of doom across emerging markets, fundraising by Latin American private equity and venture capital firms increased by around 100 percent in the first half of the year.

Private equity and venture capital across Latin America grew by all measures throughout H1 2013. Fundraising, investments and exits all rose year on year compared with 2012. In the first half of 2013 firms raised $3.8bn with final or partial closing from 36 different funds; in 2012 $1.89bn was committed through 10 final or partial closings.

According to data released by the Latin American Private Equity and Venture Capital Association (LAVCA) venture investments from international and Latin American firms in the region increased by 69 percent to $151.9m. Fifty-eight deals were funded during this time. “The emergent theme in LAVCA H1 2013 data is in contrast to headlines reporting a flight out of emerging markets in response to expected policy shifts by the US Federal Reserve,” said Juan Savino, director of research for 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.”

Venture capital investments from international and Latin American VC firms, accelerators, and angels also increased in 2013 according to LAVCA data. “The increase in venture capital activity in the first semester was driven largely by Latin American VCs and is another positive bellwether for the long-term development of the investment ecosystem,” said Mr Savino.

Proceeds from exits were also up 67 percent to $1.5bn in H1 2013, compared with the same period in 2012. Significantly, in H1 2013 Mexico saw two exits, both of which were PE backed initial public offerings from hospitality chains. The education sector was also particularly active, generating exits worth a total of $572m.

The data released by LAVCA notes that funds raised in nations such as Colombia, Mexico and Peru have been oversubscribed in 2013 thus far. Notably, in May, Mexican firm Nexus Group’s NG Capital Partners II achieved its $600m hard cap.

Mid-market funds in Peru and Colombia were also oversubscribed by Global LPs. Overall, PE and VC fund managers invested a total of $2.9bn, a 5 percent increase compared with 2012, via 108 transactions, up 19 percent on 2012.

The number of mid-market deals – transactions valued between $25m and $100m – continued to grow throughout H1. Brazil in particular saw almost twice as many deals in 2013 compared with the previous year, rising from 11 deals to 20, and remains the most dominant country in the region. “It’s been really entertaining for us to watch the Brazil vs Mexico story play out in the media,” says Cate Ambrose, president and executive director of LAVCA. “When the growth in Latin America started accelerating in 2007, Mexico was the last country everyone was looking at.”

Indeed, Mexico’s popularity as an investment destination seems to be on the increase, in spite of the slight contraction in the country’s economy in the second quarter of 2013. In Q2 Mexico’s economy shrank by 0.7 percent compared to the first quarter of the year, belying most economists’ predictions of a slight economic expansion. On an annual basis, however, the Mexican economy grew by 1.5 percent, boosted by a number of social and economic reforms which encouraged a number of LPs. Chief among these reforms is President Enrique Peña Nieto’s energy bill which calls for an end to the state monopoly on oil and gas production, allowing the government to share profits with private oil firms. The bill, if approved, could potentially attract billions of dollars of foreign investment while reversing the country’s declining oil output. Given the close ties between the US and Mexico, the US’ burgeoning economic recovery is expected to help Mexico’s economy improve to see growth of around 4 percent in 2014.

LAVCA’s data shows that the number of IT deals completed in Latin America rose by 21 percent in H1 2013, and consumer retail deals also saw an increase of around 44 percent. IT and consumer retail were the two leading sectors by percentage of total investments overall. The energy sector also saw significant increases in H1 2013 compared with the previous year – the first half of 2013 saw $336m invested in the industry, up from the $126m invested in H1 2012.

Richard Summerfield