Private Equity Plans to Extend Funds' Lives in Latin Americaby and
Exits stall as firms try to compensate for currency declines
`No one saw this coming,' says head of regional association
With Latin America struggling through a recession, private equity firms that poured into the region before its economic downturn are expected to extend the life of their funds, according to the head of the Latin American Private Equity & Venture Capital Association.
“The expectation is private equity firms are looking to extend the life of those funds, so, rather than a 10-year horizon or nine-year horizon, maybe it is going to be 11 or 12 years,” Lavca President Cate Ambrose said on Bloomberg’s Deal of the Week podcast.
The most immediate problem facing those funds is the decreasing value of local currencies, Ambrose said.
“No one saw this coming in terms of the spectacular devaluation on the real,” she said.
In a separate interview after the podcast, Ambrose said the effect of currency plunges would be that managers will need to sit on assets “because they will not want to sell them in such depressed valuations.”
Latin American currencies have been weakening since mid-2014, at the same time as company valuations are decreasing amid a fall in commodities and oil prices, negative economic growth and political crises. The Brazilian real declined 26 percent against the dollar over the past year, while the Mexican peso fell 16 percent. Brazil’s Bovespa stock index fell 13 percent.
Private equity firms active in Latin America including Advent International Corp. and Carlyle Group LP, which invested before the devaluations, could post losses if they tried to sell their assets now.
“The exit is always the tricky part of the story in Latin America,” said Ambrose. The region had only 8 initial public offerings in 2015, the least since at least 2004, when Bloomberg started compiling data on listings in the region. Private equity funds sold only $3 billion of their holdings in 2015 in Latin America, the lowest level since 2009, data from Lavca shows. This year the number will probably fall again, Ambrose said.
“Many firms are aggressively putting more money to work today to offset the lower valuations they had a few years ago," Ambrose said.
Carlyle was among the most aggressive buyers in Brazil last year. The firm went in with Rio de Janeiro-based Vinci Capital Gestora de Recursos Ltda. on a $1.1 billion reais ($283 million) deal for one of the universities owned by for-profit educator Kroton Educacional SA, a deal announced in October. In April, the Washington-based buyout firm bought an 8.3 percent stake in hospital-chain operator Rede D’Or Sao Luiz SA for 1.75 billion reais.
Advent, the Boston-based private equity fund that raised a $2.1 billion Latin American fund in 2014, in September bought a 13 percent stake in medical-lab operator Fleury SA in Brazil. In March, Advent announced a capital injection of $800 million pesos ($45 million) in Grupo Financiero Mifel, a Mexican bank serving the mass-affluent retail segment.
Carlyle and Advent officials declined to comment.
The region’s continued economic slump increases the risk for private equity. Total investments in Latin America last year reached $6.5 billion, an 18 percent fall from $7.9 billion in 2014, according to numbers from Lavca that are due to be released March 3. About half of the total invested was in Brazil, a decrease from the usual two-thirds allocated to the country, the report shows. Discounting the local currencies effect, the fall is 9 percent.
Still flush with money after a record $10 billion in fundraising in 2014, private equity firms raised only $7.2 billion last year in Latin America, the report will show.
Gavea Investimentos Ltda., the private equity firm that JPMorgan Chase & Co. is selling back to its Brazilian founders, raised a $1 billion fund in 2014 and only invested 10 percent of it, according to Arminio Fraga, former Brazil central bank president and the firm’s biggest shareholder.
“We’re not closed for business, but we need to find things we really like at the right price,” Fraga said in an interview in Rio earlier this month.
One country Ambrose thinks has a positive story is Mexico, which is “obviously highly correlated to the U.S.,” she said. Mexican pension funds have been “putting a lot of money to invest in the local markets,” she said, while KKR & Co. LP is raising a local fund for energy and infrastructure. Asset manager BlackRock Inc. announced in December it closed the acquisition of Infraestructura Institucional Srl, a Mexican firm that invests in infrastructure.
Still, Ambrose said, U.S. institutional investors looking for opportunities in Latin America are, depending on risk appetite, concerned about raising allocations to Latin America funds.
“A CIO of a large U.S. endowment, who had just staked the hottest fund in Latin America last year, wanted to get a larger allocation into that fund, but there was just nervousness among the people that he reported to about taking a larger stake,” she said, citing the H.I.G. Capital fund. The private equity firm targeted a $685 million fund for the region last year.
“That is why you see the long-term investors like sovereign wealth funds and Canadian pension funds extremely bullish, because they are not as concerned about things like currency effects,” she said.