Latin America Private Equity Funds Are Trying to Ride Out the Storms

If it’s tough for private equity players to do leveraged deals on the home front these days, investing in the U.S. is almost a picnic compared with doing business in troubled-riddled Latin America. Yet, says Rob Coble of KPMG, LBO firms with funds dedicated to investments in Central and South America remain interested in putting money into good transactions there, with Mexico and Brazil getting preference in the near term. Investments in countries to the south of the U.S. clearly are not for the faint of heart, says Coble, a Miami-based leader of KPMG’s Latin American Transaction Services team. But good deals may be available for the hardy, patient fund managers who take the time to probe for the right properties, perform in-depth due diligence, create appropriate structures, and craft a viable exit strategy. Nobody is saying that’s easy in an area roiled by an Argentina economy in shreds, war raging in Colombia, economic and political turmoil in Venezuela, and problems of varying magnitudes elsewhere. The drags on the private equity market are intense, Coble says. “There is trouble getting credit from both North American and Latin American banks,” he says. “You have September 11 issues. You have volatile markets and government issues in Latin America. There are a lot of hurdles to go over and a lot of risks involved because of those hurdles.” Even Mexico and Brazil, the two largest economies in the region, are “somewhat volatile” but draw the most attention from private equity players because they are considered relatively stable in comparison with the other countries. Those two countries emerged as the most favored investment locales in a poll of 140 managers conducted by KPMG at the Latin American Private Equity Conference in Miami in early February. More than 80% said they will be focusing on Mexico and Brazil over the next two years. And almost two-thirds are aiming to increase their investments in Latin America as a whole by more than 25% between 2003 and 2005. What keeps their appetites whetted while fund managers wait out the current storms? Opportunities, says Coble, that go to those willing to both weather and manage intense risks. “We see expansion in Latin America. The infrastructures there are not as built out as those in Europe and the U.S. That’s why these funds are there – because the infrastructure is underdeveoped. That’s where they see the expansion.” That calls for a significant variation on the U.S. or European private-equity model in committing money. Most funds, says Coble, are hybrids – a cross between pure LBO acquisitions and venture capital – and do a lot of work on roll-ups. “There aren’t a lot of large companies to buy,” notes Coble. “There is a lot of consolidation to be done and in order to play in that market, there are a lot of little transactions that you need to make. So from that point of view, it’s a venture type of approach. The key is finding the right opportunity and determining if that’s where you want to play.” Although that approach suggests a higher tolerance for risk than the orthodox North American leveraged investor, Coble says it increases the pressure on the Latin America player to do huge amounts of up-front investigation to ” make sure you are doing the deal right,” even in the calmest times. “They need better financial, legal, IT, and investigative due diligence,” he says. “It means spending more time to make sure that the structure is right and that the transfer of information is correct.” “There are a ton of risks: interest rate risks, devaluation of currency risk, government intervention risk, information risk, and disclosure risk. The information is not passed on as a easily as it is in the U.S. Ask a U.S. company and you’ll get the information in a couple of days. Ask a Latin American company and you’ll get it in a few weeks.” If not repelled by the current problems, even the most committed investors aren’t rushing in, Coble says. “Everybody is waiting out the storm to see what happens. Everybody is hoping there will be some turnaround.”