Great expectations: what`s next for Latin American private equity?

Great expectations: what’s
next for Latin American
private equity?
How do private equity investors create value?
A study of Latin American exits
Contents
Key findings
6
• The exits
• Value creation in action
• Selling and performance
Executive summary
3
Outlook
16
About the study
18
Contacts
19
Executive
summary
In contrast to last year’s study,
which was set at a time of more
promising economic conditions, this
year’s research into Latin American
private equity (PE) exits has a more
challenging backdrop. The year
saw GDP growth forecasts revised
downward for many of the region’s
most significant economies, and
uncertainty prevailed in the public
markets following the US Federal
Reserve’s announcement of a
tapering of quantitative easing.
Meanwhile, in some countries, such
as Brazil, stubbornly high inflation
remained an issue.
Nevertheless, the region’s longer-term fundamentals of
continuing economic growth, swelling middle class numbers
and rising disposable incomes ensure that Latin America
remains an attractive destination for PE investment. While
PE invested and raised lower amounts in 2013 than the
previous year, they still remain solidly above 2009 levels
and significantly higher than a decade ago, attesting to the
continued development of the industry across the region.
Yet the results of our study demonstrate that, while PE funds
have spotted the opportunity to invest in Latin America’s
long-term growth story, the industry is far from a straight
macro play. PE continued to outperform comparable public
markets — by a significant margin of two and a half times.
The region’s firms have achieved this through programmatic
and sustainable value creation initiatives. Organic revenue
growth is the most significant driver of EBITDA growth,
accounting for nearly 70%. Market selection is playing a part
How do private equity investors create value? A study of Latin American exits
3
in this as PE is choosing the right sectors in which
to invest — particularly those driven by growing
consumer markets. However, the primary driver
of organic revenue growth in the Latin American
portfolio is geographic expansion on both a
domestic and international level.
The extent to which portfolio company growth
is domestic or international varies according
to the size of individual markets by deal
size. This, along with a number of our other
findings, such as a difference in deal sources by
entry enterprise value (EV) size and the slow
but steady emergence of a secondary buyout
market, reinforces the theme we explored in last
year’s report: the emergence of a multi-stage
PE model which is beginning to develop in Latin
America. The region’s smaller funds are honing
their value creation techniques around creating
stable and professional platforms to position local
entrepreneurial businesses for organic growth,
often through domestic or regional geographic
expansion. Meanwhile many of the larger and
global players, some of whom are relatively new
to the market, are focusing attention on taking
companies to the next level by creating strong
regional and international businesses.
However, new themes emerged in 2013. One
is the strength of the IPO market as an exit
route. Last year was the strongest yet for
PE-backed IPOs. Even despite volatile public
market conditions, investors welcomed portfolio
companies into the public market, and it looks as
though they will continue to do so if the robust
aftermarket performance of these deals persists.
PE-backed IPOs in the region outperformed
the broader public markets and other IPOs
by a significant margin. This is good news for
private equity, as our research shows that exits
via IPO yielded better returns than the other key
exit route in Latin America: sale to corporates.
4
Great expectations: What’s next for Latin American private equity?
In addition, while IPO has historically been an
option mainly for larger companies, we have
found evidence that smaller PE-backed companies
are now starting to reach the public markets.
This is a powerful trend that we anticipate will
pick up pace over the coming years as market
reforms and initiatives aimed at encouraging
smaller companies to list, combined with the
creation and potential expansion of a regional
exchange in the form of the MILA (Mercado
Integrado Latinoamericano), will offer PE houses
that invest at the smaller end of the deal size
spectrum a more viable and cost-effective route
to exit. This will help to further develop the exit
landscape and broaden the opportunity for exits
beyond the trade sale route that has historically
predominated.
There are clearly good reasons to have great
expectations for Latin American PE. The gradual
emergence of exits beyond Brazil is a highly
encouraging development that indicates the
spread of PE investment and validates the model
on a pan-regional basis. However, the industry is
still in its early days in the region: much of PE’s
story in Latin America has yet to be told. There
is a significant amount of capital still locked into
deals that were completed in 2008–10, and while
hold periods remain shorter on average than in
more developed markets, they have lengthened
considerably over the last two years.
Only when a greater proportion of the
investments made over the past six years really
start coming through will Latin American PE truly
be able to prove to LPs that it doesn’t just make
good investments and drive growth in portfolio
companies but also exits well enough to generate
the returns they seek. And only at that point will
we understand how future fund-raising patterns
will develop.
The Latin American PE story has got off to an
exciting start; the next few years will see how the
plot develops.
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Key findings
6
Great expectations: What’s next for Latin American private equity?
The exits
Now in its third year, our study of exits in Latin America comprises
a richer set of data, which we drew from a population of 107
exits that were completed between 2007 and 2013. The sample
represents a good spread by geography, deal type, strategy and
exit type, sourced from private companies, corporates, PE and
others and including exits from the key markets of Brazil, Mexico,
Argentina, Peru, Colombia, Chile and Uruguay. This provides
comfort that the results of our study are indicative of the way in
which the Latin American PE market is developing and of how
the region’s PE firms are refining their value creation strategies.
Nevertheless, the difficulty of obtaining precise information on
exits in the region means that we do not claim the study is fully
representative of the market as a whole.
Figure 1. Exit route by year
Figure 2. Number of PE-backed IPOs by year
80
25
25
70
60
20
50
14
10
14
13
14
40
30
9
7
6
5
0
In Latin America, as with many other regions of the world, the big
story for 2013 was the strength of IPO markets and the ability
to exit through public listings. This trend was evident with the
rapid rise of exits via IPO in the population of our study, from
three in 2012 to six in 2013. Additionally, in 2013, 38% of IPOs
in the region were PE-backed, the highest level ever recorded
and significantly higher than 2012’s figure of 20%. This is
consistent with global trends: in 2013, PE-backed IPOs worldwide
had their strongest year on record, with nearly double the number
of PE-backed IPOs pricing in 2013 versus 2012. They also raised
more than twice the amount recorded in 2012.
90
30
15
PE-backed IPOs gain traction in
Latin America
20
10
3
0
2007–2009
2011
2010
IPO
2012
2013
2004
2005
2006
2007
All IPOs
M&A
Given the size of Brazil’s economy and PE industry compared
with other countries in the region, it is unsurprising that Brazilian
exits make up over half of our sample. However, the fact that our
sample includes exits from many of Latin America’s more nascent
PE markets suggests the industry is developing well throughout
the region as PE value creation strategies are now starting to be
crystallized. We would expect our sample to broaden further over
the coming years — and for exits to increase markedly — as the
investments made over the last few years beyond Brazil in newer
markets such as Colombia, Chile, Peru and Mexico reach maturity
and PE firms prove their worth.
2008
2009
2010
2011
2012
2013
PE-backed IPOs
Source: Dealogic
This is a trend that, absent any major shocks, looks poised to
continue through 2014. PE-backed IPOs in Latin America
significantly outperformed the overall performance of the region’s
stock markets. During the course of 2013, the Ibovespa and MSCI
Latin America were down 15.5% and 13.8%, respectively, whereas
the average PE-backed IPOs that took place in the year were up 2%,
while the average non-PE-backed IPOs were down 5%.
Figure 3. Performance relative to Ibovespa
Actual
Relative to Ibovespa
2%
9%
-5%
7%
PE-backed
Non-PE-backed
How do private equity investors create value? A study of Latin American exits
7
IPOs still the preserve of larger
deals …
… but exit routes are broadening for
smaller deals
For the time being, at least, IPO remains by far the most common
route to realization for Latin America’s larger PE portfolio
companies. For deals with an entry EV of over US$100m, 82%
exited via IPO; the rest were sold to trade buyers. The reverse is
true in the sub-US$100m entry EV category, with 72% going to
trade, just 20% exiting via a public listing and 8% going to other
PE houses.
However, with some of the barriers to going public declining, the
IPO is becoming a more viable exit route for smaller PE-backed
companies, and this trend is already starting to show through in
our data. In 2013, PE-backed IPOs represented 28% of the size of
non-PE-backed IPOs. This is in contrast to previous years, when
they were 9%–25% larger than the non-PE backed IPOs.
The difficulty and cost of gaining a public listing in Brazil and the
smaller scale of local stock markets elsewhere have been significant
historical barriers for exiting smaller companies via IPO. This has
meant that for many smaller PE-backed companies, a trade sale has
generally been the most pragmatic realization option.
80%
72%
10%
0
40%
7%
7%
8%
3%
18%
0%
PE
IPO
Sub-US$100m
US$100m
Great expectations: What’s next for Latin American private equity?
3%
Value
Source: Dealogic
8%
Trade
3%
10%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Volume
20%
10%
8
18%
5%
50%
0%
22%
15%
82%
60%
20%
33%
30%
20%
70%
30%
40%
35%
25%
Figure 3. Deals by exit type, 2007–13
90%
Figure 4. Value and volume of PE-backed IPOs as % of total
PE houses in the region are clearly taking advantage of some
key developments in the markets to broaden their range of exit
routes. In Brazil, efforts to attract companies to the Bovespa
MAIS include allowing companies to list without making an initial
offering for up to seven years following the listing, reducing the
time and cost necessary for smaller-company IPO preparation and
instituting an education campaign among investors to demonstrate
the benefits of investing in smaller companies. All these initiatives
should help to make an IPO a more cost-effective route to exit for
smaller PE-backed companies.
Beyond Brazil, the regional integration of exchanges is an exciting
development and is encouraging further exits via IPO. Operating
since 2011, the MILA currently unites the Colombian, Chilean and
Peruvian exchanges. However, Mexico is reportedly considering
joining the union, and if that were to happen, the MILA would soon
surpass Brazil’s BM&F Bovespa in size, creating the largest public
market in Latin America with a market capitalization that would
breach the US$3 trillion mark.
Combined, these developments mean that IPOs will present an
increasingly viable and highly attractive exit route for PE-backed
companies across a range of deal sizes and countries in the region.
This should help create some competitive tension at exit between
trade buyers and the public markets, as is the case currently in
more developed markets, enabling Latin American PE houses to
improve returns further.
Figure 5. PE-backed IPOs by country since 2004
25
9000
23
8000
20
7000
5000
4000
10
3000
6
5
0
Brazil
Mexico
2
2
2
Argentina
Chile
Peru
Volume
Source: Dealogic
Value (US$m)
2000
1000
0
US$m
6000
15
Secondary buyouts will emerge over
the long term
Sales to PE via secondary buyouts have thus far been relatively
rare. The market had not, until recently, developed the depth
required in terms of a pool of PE firms with different strategies and
fund sizes to allow for a more vibrant secondary buyout market.
In our report last year, we pointed to the emergence of a two-tier
PE market as the industry’s ecosystem was beginning to mature.
As we’ll explore later in the report, this deepening of the market is
continuing apace as value creation strategies now vary according to
deal size and company life cycle stage.
Nearly a tenth of deals exited from the sub-US$100m size category
were sold to other PE houses. As the PE market develops further,
we’d expect this proportion to increase as smaller houses work
with portfolio companies to professionalize systems and work on
primarily domestic expansion, creating an opportunity for larger,
pan-regional or global firms to acquire these companies and take
them to the next level. This is a development we have started to
see in other regions, including Africa, where secondary buyouts
made up over a fifth of exits in our 2013 sample, up from a six-year
average of 14%.
Nevertheless, there remain some structural issues that could
impede the development of a secondary exit market outside
Brazil. While the sources of capital for Brazil’s funds have been
relatively diverse, those in other markets, such as Peru, Colombia
and Chile, have historically flowed mainly from local pension
funds, many of which are making their first forays into PE as a
result of regulatory change and the build-up of reserves over time.
Many of these pension funds remain wary of secondary buyouts,
viewing them as “pass the parcel” deals — when one fund sells to
another, the pension funds often have exposure to both the funds.
While this may occur to a degree in more developed markets,
the Latin American PE market is not yet mature enough to have
a track record of creating value through periods of successive
PE ownership.
As the market develops and deepens further with more regional
and global funds targeting investments beyond Brazil and as
additional sources of capital become available, this should become
less of an issue, but we’d expect this to happen over the longer
rather than the shorter term.
How do private equity investors create value? A study of Latin American exits
9
Many exits still to come
Figure 7. Average holding period (years)
It is encouraging that exit routes for Latin American portfolio
companies are developing well. This is demonstrated by the
fact that close to two-thirds of portfolio companies are exited within
PE’s usual time frame of two to six years, ensuring returns as
measured by internal rate of return (IRR) are not subject to the drag
effect of time.
However, the region’s PE firms still have much to prove to
LPs, particularly given many investors’ experience in the late
1990s when large swaths of the industry disappeared following
the Latin American crises. Our study shows that over a quarter of
portfolio companies have remained in the portfolio for more than
six years and that holding periods have lengthened considerably
since 2011. The high proportion of deals that have been in
the portfolio for over six years may partly be explained by PE’s
increased focus on adding value to portfolio companies over recent
years and the time it takes for geographic expansion to bear fruit.
Nevertheless, the lengthening of holding periods is a cause for
concern. After a peak in 2011, fund-raising totals in the region have
fallen. Many firms are now reaching the point where they will need
to raise fresh capital, and they will need to intensify their focus on
exits to successfully do so. They must demonstrate their ability to
exit before LPs will commit to new funds, particularly as many firms
in the region, especially beyond Brazil, are relatively young and
have yet to build up a track record.
Figure 6. Average holding period of study sample
35%
30%
30%
32%
27%
25%
20%
15%
11%
10%
5%
0%
10
Less than 2 years
2–4 years
4–6 years
More than 6 years
Great expectations: What’s next for Latin American private equity?
6
5.5
5
4.5
4
3.5
3
2009
2010
2011
2012
2013
The coming years will be a crucial time for Latin American PE. From
modest levels in the early 2000s, LPs and GPs invested a significant
amount of capital in the region during 2008–10. Some of these
investments are starting to be exited, but the vast majority still have
to be realized. While the results of our studies so far have shown
many encouraging developments in the Latin American PE markets,
this is only the opening chapter of the story. The next period will be
the true test of the Latin American PE market as more exits start
to come through and the full performance picture starts to emerge.
These results will determine future fund-raising success for the
region’s firms and ultimately shape the industry’s path to maturity.
Two-tier market in evidence at the
buying stage
Consumer-led sectors remain popular
for PE investment
Consistent with the idea that Latin America’s PE market is
starting to develop a multi-stage model, our study also shows
variation by source of deal according to the size of the initial
deal. The vast majority of sub-US$100m entry EV deals were
acquired from private sellers. This reflects the preponderance
of small and medium-sized businesses that are owned and run
by founders in the region. A few in this bracket were acquired
from public markets/corporates or other PE houses as firms’
strategy at this end of the market centers on professionalizing the
management and systems in small and often family-run enterprises
to build a platform for further growth.
The exits in our sample cover a wide range of sectors, attesting
to the broadening of the economic landscape in the region as
markets such as Brazil move away from their heavy reliance on
sectors such as resources. However, our study shows that private
equity investment is targeting certain sectors. The most significant
of these is consumer goods and services, accounting for nearly
a third of realizations. This is to be expected in Latin America,
where favorable demographics in the form of a rising middle class
with increasing disposable incomes have attracted high levels
of investment from the region’s PE houses. This is followed by
financial services and technology, both of which capitalize on
growing consumer demand as well as economic development in the
region.
By contrast, there is a broader spread of deal source in the
over-US$100m entry EV size bracket, with 53% coming
from private sellers, a further 40% from corporates and
the public markets and 7% from other PE houses. This reflects the
make-up of the business landscape in this deal size and attests to
a PE value creation model at the larger end of the market taking
companies that have already institutionalized their processes to
some degree and supporting them on the path to regional and
international expansion.
As we have outlined above, we anticipate the last category — deals
sourced through secondary buyouts — to increase over the longer
term as the market matures and an increasing number of larger
firms seek out deal opportunities in other PE houses’ portfolios,
although this type of deal may continue to be most prevalent
in the larger and deeper Brazilian market for some time yet.
PE is clearly spotting opportunities in a diverse range of sectors in
the region and is taking advantage of good investment prospects,
particularly in rapidly growing industries.
Figure 9. Latin American PE investment by sector
Consumer goods
and services
32%
Financials
23%
Technology
18%
Industrials
11%
Figure 8. Deals by provenance
Sub-US$100m
Deal type
Over-US$100m
88%
Private
53%
4%
Corporate/listed
40%
8%
Private equity
7%
Health care
9%
Utilities
5%
Oil and gas
2%
How do private equity investors create value? A study of Latin American exits
11
Value creation in action
Geographic expansion drives growth
Revenue increases driven by
organic growth
When we drill down further into the sources of organic revenue
growth, we find strong evidence of PE’s value creation strategies,
and the ways that PE firms take a hands-on approach in working
with companies to help them launch new product lines, improve
their sales processes, and most importantly, provide the capital and
support needed for portfolio companies to expand geographically.
Indeed, geographic expansion is the primary driver, of organic
revenue growth accounting for nearly 50% of growth. This is far
more significant than growth in the overall market, which accounts
for around 20% of organic revenue growth. The region’s PE firms
are clearly buying well by selecting businesses in growing sectors.
However, they are focusing on driving growth through successful
geographic expansion. This is complemented in some cases by
supporting the development of new products, which accounted for
15.2% of organic revenue growth, and improved selling techniques,
which made up 13.2%. Price increases and change of offering are,
so far, less important strategies for PE to grow revenues.
As with our findings in other regions of the world, our
Latin American study shows that organic revenue growth is by far
the largest component of revenue growth for PE-backed companies,
regardless of deal size. However, this is even more pronounced in
Latin America than in more mature markets, a reflection of the
stage of development of the region’s economies. Across our exit
sample, 68.2% of EBITDA growth was driven by organic revenue
growth, less than 30% came from acquisitions and just 3.1%
was achieved through cost reduction. This is consistent with our
findings in previous years, where the proportions were similar. In
addition, there was little variation by deal size, suggesting that the
value creation lever of expanding portfolio companies organically
remains much more important in Latin American markets, where
there are plenty of growth opportunities than through the kind of
buy-and-build/roll-up or efficiency improvement strategies that
might feature more heavily in more mature markets.
68.2%
70%
35%
30%
25%
20%
15%
40%
0%
68.0%
35.7%
28.9%
17.0%
5.2%
5.0%
10%
3.1%
0%
–10%
–4.4%
US$25m and less
US$25m–US$50m US$50m–US$100m
Organic revenue growth
12
13.2%
5%
59.1%
37.4%
20%
15.2%
New
Growth
Geographic
expansion (shrinking) in products
market demand
Improved
selling
All deals
66.8%
30%
22.1%
10%
78.0%
60%
50%
47.0%
40%
Figure 10. EBITDA attribution by entry EV
80%
50%
45%
Percentage of EBITDA growth
driven by organic revenue growth
90%
Figure 11. Breakdown of organic revenue growth — all deals
Acquisitions
Over US$100m
Cost reduction
Great expectations: What’s next for Latin American private equity?
1.7%
0.8%
Change of
offering
Price
increases
The region’s PE investment thesis is largely centered on domestic
expansion — this is a much larger element of the growth story
currently than international or regional expansion. There is clearly
a lot of growth capacity in Latin American domestic markets.
However, consistent with the thesis of an emerging two-tier market,
investors in larger deal sizes are more likely to go for international
or regional expansion than those in smaller deals where companies
are less ready to grow beyond domestic borders. As local markets
continue to mature and larger firms increasingly seek deals beyond
Brazil over the coming years, we’d expect international and regional
growth to increase markedly as a driver of organic revenue growth.
Nevertheless, there is already likely to be a difference in expansion
strategy according to market. The domestic bias may well be less
pronounced outside the much larger Brazilian market. Evidence on
the ground suggests that more portfolio companies in Colombia,
Peru, Chile and even the relatively large market of Mexico are
eyeing international expansion, particularly within Latin America
and other emerging markets, than the overall, pan-regional figures
might suggest.
94%
47%
Partnerships with local CEOs prevail
Consistent with last year’s findings, this year’s study shows that PE
houses in Latin America seek to partner with existing management
teams to create value. Unlike in some other regions of the world,
where management change is more of a feature, in Latin America,
CEOs were changed in fewer than half of the cases. This reflects
the fact that many CEOs in PE-backed businesses are founders that
have the deep understanding of the business, specialist technical
knowledge, and the local and regional relationships necessary
for the business to grow. PE appears to take the view that it’s
far riskier to replace CEOs in Latin America than in more mature
markets because of the need for strong and developed networks
in the region. These CEOs also often still have significant stakes in
the business: in our sample, only just over half of PE investments
resulted in a majority stake in the business, another key difference
from more developed PE markets.
Figure 12. Frequency of management team changes by type
and percentage
Larger deal sizes are more likely to go for geographic expansion
Kept
21%
Changed
Kept
49%
51%
Changed
79%
Domestic expansion
CEO
CFO
However, PE’s value creation through professionalizing the systems
of its portfolio companies is apparent in the rate of change in
finance personnel. CFOs are changed in nearly 80% of PE-backed
businesses in Latin America — PE investors clearly place great
emphasis on overhauling the finance operations to bring in the
right mix of skills that will enable the business to expand.
International/regional
expansion
How do private equity investors create value? A study of Latin American exits
13
Selling and performance
Exiting at the right time
A large part of PE’s expertise lies in knowing when to sell. In
Latin America, the key trigger is strong business performance,
accounting for nearly 50% of exits. This is followed by a favorable
market in just over a third of exits. Other factors, such as
unsolicited offers or fund-raising concerns, are less important.
Overall, this suggests that PE owners in the region have an eye
on the exit and are preparing their businesses well for sale to take
advantage of good performance numbers and ensuring a sale can
be completed at the right time.
Figure 13. Exit timing triggers
60%
50%
40%
49%
35%
30%
20%
10%
0%
8%
6%
Related to Buyer came to
Strong business Favorable
fund-raising the table
performance market
unexpectedly
circumstances
and made a
good offer
2%
Other
Exit via IPO outperforms trade
This preparation for sale pays off, with exits to both trade and IPO
showing strong multiple returns. However, IPOs in Latin America
have the edge as a means of exit over selling to trade in the region:
multiples are 9.8% higher for IPOs than trade sales.
9.8%
Higher cash multiple from
IPOs when compared with
exits to trade buyers
14
Great expectations: What’s next for Latin American private equity?
Latin American PE continues to
outperform
This mix of value creation levers — choosing companies for
investment in the right sectors; partnering with entrepreneurs
to provide support for geographic expansion, develop new
products and improve selling techniques; and then selling at the
right time via the most appropriate exit channel — clearly works
for Latin American PE firms.
This is the case even in the more challenging economic
environment that prevailed during 2013 as growth moderated
in many of the region’s markets. The region’s PE firms are
outperforming in both good and more difficult conditions. While
there are still many more exits to come through from the peak
years of 2008–10, our findings so far on the investments that
have been realized are a highly encouraging sign for the further
development of PE in the region.
In Latin America as in the other regions of the world, our study
demonstrates that PE’s actions to improve and expand the
businesses it backs leads to outperformance against comparable
public benchmarks. Our analysis shows that PE deals have returned
2.6 times the public market return over matched periods. This
outperformance is consistent with findings from our studies in
other regions, clearly demonstrating the value creation capability of
the PE model at a global level.
Figure 14. PE return relative to the market
Market return (Ibovespa index)
1.0
PE strategic and operational improvement
1.6
PE return
2.6
How do private equity investors create value? A study of Latin American exits
15
Outlook
16
Great expectations: What’s next for Latin American private equity?
Our study shows that PE in Latin America is creating value in the
companies it backs through partnering with the right management
teams, driving organic growth through geographic expansion and
taking advantage of new exit routes as they emerge, with IPOs in
particular set to show strong growth over the coming years.
The market is steadily maturing with more exits beginning to come
from newer markets such as Colombia, Chile, Mexico and Peru. A
multi-stage model is also emerging, with observable differences in
value creation strategy depending on the size and, to some extent,
the geographic location of the portfolio company.
This is a solid foundation from which this evolving industry can
build upon a track record and erase the longer-term memories of
the difficult period following the Latin American crises of the late
1990s. The further development of skills and experience in the
region’s PE firms will stand it in good stead to continue to generate
outperformance even while economic growth in many Latin
American countries looks set to moderate over the short term.
Nevertheless, some challenges lie ahead. The large number
of deals completed in 2008–10 will need to be exited over the
coming years. To increase the pace of realizations, firms will need
to focus more heavily on developing a wider range of exit options
for their portfolio. While improvements in the IPO markets will
help in this regard, the choice of exit route in the market remains
largely binary: public markets or trade buyers. Other routes, such
as secondary buyouts, will need to become more commonplace,
although this can happen only when local LPs in markets outside
Brazil are more comfortable that further value can be added
following a sale to another PE house. The industry will need to
manage this development carefully.
Progress on exiting portfolio companies will ultimately determine
the success of future fund-raisings. Anecdotally, we are already
aware of many firms that have delayed raising their next fund
until they can show LPs demonstrable returns. This is a particular
problem for the region’s many first-time funds: LPs will need to see
proof of concept before committing to a new fund. In addition, we
are also aware that some funds may well be affected by currency
devaluations in markets such as Brazil, where the value of portfolio
companies may have been affected. Nevertheless, this development
could also provide opportunities for exit: international trade buyers
may well seize the opportunity to acquire at a time when the
exchange rate is more favorable.
Overall, our study points to highly positive progress in the
development of the region’s PE industry, which continues to
outperform public markets by driving through strategic and
operational improvements. This is encouraging for the region’s
entrepreneurs and growing businesses as they seek capital and
hands-on expertise to grow their businesses to their full potential.
We look forward to charting the region’s progress in all of these
areas in the coming years as the Latin American PE story unfolds.
How do private equity investors create value? A study of Latin American exits
17
About the study
The 2014 Africa study examined the results and
methods
PE exits
and value
2013creation
Now in itsofthird
year,between
our Latin2007
America
using similar
methodology
the
US, Europe,
study
examines
the results to
and
methods
of companies
Latin
America
and
Australasia
studies.
Data
owned by PE firms that were exited betweenwas
2007
drawn
from various sources,
AVCA and
and
2013.
Latin America’s PEincluding
firms continue
to
EMPEA,
and
confidential,
detailed
interviews
with
rapidly evolve their value creation strategies, and
former
owners
of the exitedwith
businesses.
Initial
throughPE
robust
conversations
many of the
most
research
was performed into
207
transactions
active firms in the region, we present a series of best
across
thecurrently
continent,
with in-depth
information
practices
employed
by firms
across an array
obtained
on 129 exits.
The exits had a minimum
of
industries
and deal types.
entry enterprise value of US$1m and included
From
an initialpartial)
population
only full (not
exits.of more than 107 exits
identified between the years 2007 and 2013, the
Our
analysis
entailed
anfrom
examination
the decision
study
presents
insights
a sampleoftailored
to be
to
invest,
value
creation
during
ownership,
the
representative of the deals and exits most common
exit
strategy
and key lessons
We obtained
within
Latin America.
Becauselearned.
transparency
remains
good
coverage
of
data
in
our
sample
relative
an issue in many emerging markets, includingto the
population
across
numberused
of metrics,
such does
as exit
Latin America,
theasample
in our study
year.aim
However,
as our exitofpopulation
notregion,
complete
not
to be exhaustive
all exits inisthe
but
for
the
period
2007–13,
our
findings
may
not
be
fully
rather a demonstrative subset pulled from publicly
available databases and supplemented with insights
from interviews with former PE owners. In the coming
years, we look forward to continuing to build upon our
dataset and documenting the varied and evolving
ways that PE firms in Latin America create and
preserve value.
The Latin America study joins similar studies
that we have conducted in more developed
PE markets — namely, North America, Europe and
Australia. In addition, as part of our commitment to
document the value creation strategies of emerging
markets managers, for the last two years we have
released a companion study on Africa’s rapidlygrowing market, with the African Private Equity and
Venture Capital Association (AVCA). We hope you will
find the insights herein useful, and we look forward
to continuing to deliver hard data on value creation
modalities in both the emerging and developed markets
as these markets evolve and the PE industry continues
to mature.
18
Great expectations: What’s next for Latin American private equity?
representative. In particular, we highlight the relatively
small sample in Central Africa.
Given the limitations of the data, our aim in this
inaugural study was to produce an important but not
necessarily statistically significant sample of deals,
analysis of which would enhance the understanding of
exit modalities and strategies in these markets and the
underlying drivers of value creation.
The size of the sample is a function of the availability
of data on exits in these markets — our primary
motivation for embarking on this research — and the
extent of participation from the PE community. We
are tremendously grateful for the generosity of those
participating in this study and appreciate both their
time and input.
We look forward to continuing to bring you insights into
private equity value creation in both developed and
emerging economies in the coming months and years.
Contacts
Jeff Bunder
Global Private Equity Leader
jeffrey.bunder@ey.com
Special thanks to:
Flavia Araujo
Private Equity Analyst
Michael Rogers
Global Deputy Private Equity Leader
michael.rogers@ey.com
Peter Witte
Senior Private Equity Analyst
Carlos Asciutti
Private Equity Leader, Brazil
carlos.asciutti@br.ey.com
Andres Gavenda
Private Equity Leader, Colombia
andres.gavenda@co.ey.com
Olivier Hache
Transaction Advisory Services Leader,
Mexico and Central America.
olivier.hache@mx.ey.com
Daniel Serventi
Transaction Advisory Services Leader,
South America
daniel.serventi@ar.ey.com
Roberto Cuarón
Private Equity Leader, Mexico.
roberto.cuaron@mx.ey.com
How do private equity investors create value? A study of Latin American exits
19
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