Case Study: Advent's
Latin American Private
Equity Funds By John Pike
VELA recently spoke with Advent executives, Ernest Bachrach, head
of Advent‘s Latin American Investment program, and Paul Ferrari,
manager of communications for Advent. Bachrach oversees Advent’s
Latin American Private Equity funds I, II, III and IV. The first fund
began in 1996. The most recent fund, LAPEF IV, is capitalized at $1.3
billion, making it the largest fund raised for investment in the region,
says Ferrari. According to their website, Advent has the “strongest
local presence of any private equity firm in Latin America,” with 22
investment professionals working out of offices in Mexico City, São
Paulo and Buenos Aires.
Advent
Bachrach says SEC regulations prohibit him from publicly
disclosing the funds’ performance, thus making
independent verification difficult, but he says Advent’s
Latin American portfolio companies have grown
significantly faster than the underlying economies,
showing average revenue and EBITDA CAGRs (compound
annual growth rates) of more than 30 percent
and 25 percent respectively. Bachrach says the funds
invest primarily in Mexico, Brazil and Argentina and
to a lesser extent, Uruguay, Colombia, Chile and other
Latin American countries. “I have a bias towards service
businesses,” says Bachrach . He says that service
businesses generally are more “cash generative, less
capital intensive” and able to potentially grow faster.
Sectors he favors include financial services, airport services
including food and beverage concessions within
airports and business outsourcing.
Bachrach says today is a better time to invest in private
equity in Latin America than it has been during much
of the last two decades. He recounted how in the early
1990s some Latin American industries were privatized,
thus facilitating economic growth and encouraging a
large amount of private equity to flow into the area. But
he says various problems arose for investors around
1994 and 1995 which damaged investments, including
the Tequila Effect and the assassination of a Mexican
presidential candidate. Lower returns were the result for
many Latin American portfolios, though Advent fared
well because of its strategy of taking controlling stakes
in high-growth, cash generative service businesses, he
says. Then the investing climate continually improved
in the late 1990s (along with much of the world) with
the development of the internet. Bachrach says during
this period the amount of private equity funding in Latin
America peaked. But then when the surge of internet
activity deflated, so did the investments and returns.
He says the years 2003 and 2004 were lean for Latin
American private equity investment. The majority of
portfolios lost money. He estimates that perhaps only
two or three portfolios, including funds managed by
Advent, earned profits for their investors out of possibly
as many as thirty.
By 2003 and 2004, Bachrach says Latin American
investors had become “hesitant” after mostly losing
money a couple years earlier. But starting in 2005 and
2006, portfolio managers began to revisit investing
possibilities in the region. And he says there are a
few reasons private equity returns will be better now
than in years past. One reason is that in prior years,
corporate governance in Latin American companies
was less developed than it is now, and many private
equity managers mistakenly believed they could have
more influence running the firms even if they only had
a minority stake.
Bachrach says investors now fully understand that to
have a significant influence in running a Latin American
company, a majority stake is often required. Minority
positions tended to be “unrewarding.” Bachrach says
by bringing in the business and financial expertise of
the private equity firms, the value of the company can
then be increased. “Advent prefers to be very active
in companies.” Bachrach adds that a further benefit
of majority ownership is that it is easier to exit the
company, as it facilitates the sale to a strategic buyer,
which typically will consider buying only a majority
stake.
Another reason the climate is now more favorable in
Latin America is that the capital markets are more active
and better suited for firms to go public, says Bachrach.
He adds that the purchase price for companies has
increased recently, from being discounted a few years
ago.
Another factor Bachrach finds favorable today in Latin
America is Brazil’s strong agricultural industry, which
is an important driver within the continent. “Brazil’s
agricultural industry is key. Brazil is feeding China.
And the Chinese people are eating more.” Brazil has
the largest sugar industry and produces it at the lowest
cost, he says. Brazil is also strong in pork.
Bachrach adds that many of the Latin American
currencies are stable, with much of their country’s debt
in dollars, so they owe less real value to the United
States because the American currency has depreciated.
The democracies are also stable and inflation is limited.
“There is a better economic picture overall.”
Although the general climate for private equity firms
in Latin America today is “a little better,” Bachrach
acknowledges an American recession will have a
negative effect there too. “For raising private equity, it
is a favorable environment for established investment
groups who have a proven strategy and track record
and unfavorable for non-established firms.”
According to Ferrari, Advent has raised a total of $2.2
billion in private equity funds for investment in Latin
America and has backed 34 Latin American companies
with a combined enterprise value (currently/at exit)
of $5.7 billion. Selected investments includes Dufry
(SWX: DUFN), the global travel retailer; Gayosso,
Mexico’s largest funeral services company; Viena, the
leading casual dining restaurant chain in Brazil; Neuvo
Banco Comercial, Uruguay’s leading commercial bank;
La Mansión, a leading Mexican restaurant operator;
Milano, the largest discount clothing retailer in Mexico;
and Brasif, the No. 1 Brazilian travel retail operator,
acquired by Dufry and subsequently floated on the São
Paulo and Luxembourg stock exchanges.
For more, see the Advent Exits Surety Bonder Provider
article in this issue.