Latin America

Latin America Q3 2017 Insight

Latin American private capital has faced mixed results so far in 2017. Capital invested in Brazil is on track for a second consecutive year of growth, reaching US$1.9 billion so far this year. The country’s macroeconomic improvement and resurgent public markets—including five PE-backed IPOs in Q1-Q3—have recaptured investors’ attention, although lingering political uncertainty may still prompt a wait-and-see approach from LPs. In contrast to Brazil, Mexico has faced increasing uncertainty: controversial NAFTA renegotiations are underway and the country faces presidential elections in 2018. This uncertainty may have contributed to the 40% decline, year-on-year, in total capital invested. Similarly, deal count in Mexico fell 49%, year-on-year, mostly due to a slowdown in venture capital investments. Perhaps the brightest spot in the region has been Argentina. The government has sought to simplify the tax code, and passed a new entrepreneurship law aimed at facilitating the creation of small businesses and providing incentives for venture capital investors. It will take time for these measures to have a noticeable effect, but they point to an improving private capital landscape in the country.

View all Q3 2017 Data Insights here.

Views from the Field: Argentina

For investors who have endured nearly two decades of hardship in Argentina, new developments in one of Latin America’s largest economies point to better days ahead. The country was once a leading destination for private equity when the asset class emerged in the region in the 1980s. However, after facing chronic economic challenges and growing competition from other regional markets, conditions for investment in Argentina declined significantly. The culmination of its woes came at the turn of the century, when the country defaulted on its public debt during a crippling financial crisis. The deep recession dealt a severe blow to foreign investors, who all but deserted the country.

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Brazil Q3 2017 Insight 

Investments in infrastructure have driven private capital activity in Brazil in the first three quarters of 2017. Accounting for more than 70% of the US$1.9 billion invested in the country, deals in renewable energy, oil & gas distribution and highway concessions have put infrastructure investment in Brazil on track to reach record high levels. Buy-and-build strategies have proven especially popular, as exemplified by platforms like Actis’s Echoenergia, Denham Capital’s Rio Energy and Pátria Investimentos’ Entrevias. On the lower end of the deal size spectrum, technology companies, excluding consumer platforms, have attracted increasing amounts of capital as Brazil’s venture capital ecosystem has grown. Fintech and agtech verticals, which play into Brazil’s well-developed agribusiness and financial sectors, may provide especially attractive opportunities. Perhaps the most crucial development in Brazil so far in 2017 has been the revitalization of the public markets. The seven disclosed private equity-backed public market exits so far this year—including five IPOs—have already surpassed the total for the last two years combined. Public markets have provided fund managers with a strong exit option, sending a clear signal to LPs reexamining prospects in Latin America’s largest market.

View all Q3 2017 Data Insights here.

Private Equity in Mexico

For decades, Mexico remained under the radar as private equity investors with an interest in Latin America poured their money into Brazil. Headline risk around corruption and the war on drugs, a relatively small pool of fund managers, and the high concentration of large, family-owned businesses potentially restricting deal flow were among the many factors that had deterred greater investment. However, the tide appears to be turning—particularly with the entrance of the local pension funds (or Afores), which in 2009 were given the freedom to invest 10% of their assets into private equity under new regulations. Since this time, fund sizes for the more established general partners in the region have grown, while the total number of private equity and venture capital funds operating in the market has multiplied. In the eight years leading to 2016, Mexico-dedicated funds had raised nearly US$8.7 billion, with an additional portion of the US$12.7 billion raised by regional funds earmarked for the market.

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Legal Reforms Against Corruption in Mexico

On July 18, 2016 a group of laws that comprises the legal framework that will make effective the public strategies and policies for fighting corruption and impunity, were published in Mexico. The objective of this legal reform is to achieve full coordination of the efforts of the Federation, the States of the Federation, municipalities and the government of Mexico City, to prevent, investigate and punish administrative violations and corruption by public officers and by private parties involved.

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Impact Case Study: Koba International Group S.A. 

The Abraaj Group was selected as a finalist in the EMPEA Institute’s 2016 Sustainability & Operational Excellence Challenge for its active management of Koba, a hard discount retailer in Colombia. Koba, the first hard discount retailer in Colombia, offers high quality food and basic staples at prices that can be up to 50% cheaper than those offered by traditional retailers. Considering that low- and middle-income families typically spend a large portion of their money on such goods, these savings have had a material impact on their daily lives. With over 500 stores in operation to date—up from around 20 at the time of investment—Koba now serves over 10 million clients (tickets) per month.

Download the Koba International case study here.

Colombia: Ten Years of the Development of the Private Equity Industry

Colombia’s PE industry has reached its first decade (2006-2016). Incorporation of local funds has been successful for an emerging economy, placing Colombia in the spotlight of foreign and domestic GPs willing to incorporate local PE vehicles or to raise capital from local investors, specifically in the real estate and infrastructure sectors. Simultaneously, local investors such as pension funds and insurance companies are increasingly seeking attractive PE opportunities offered by international managers abroad.

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New Brazilian Regulations Promote Important Changes for Private Equity Funds (FIPs) in Brazil

On August 30 this year the Brazilian Securities Commission (“Comissão de Valores Mobiliários” or “CVM”) enacted Instruction CVM No. 578 (“Instruction 578”) to govern the formation, operation and management of private equity funds in Brazil. Instruction 578 revoked and replaced Instruction CVM No. 391, as amended, as well as several other regulations on the matter and is now the main regulation concerning private equity funds formed in Brazil.

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