| Low-income housing backed by private equity in Mexico. |
"You'd love to dream about IPOs," says Dirk Donath, managing director of emerging markets private equity at hotshot hedge fund Eton Park. "But you don't want to rely on them as a viable exit alternative in general."
Local listings are often impractical, especially in the smaller economies of the region, adds Erik Peterson, a managing partner at Aureos Capital, a fund looking to invest $50 million in Central America. "Local stock markets [in Central America] do not have liquidity or a track record," Peterson told investors at LatinFinance's Dominican Republic-Central America conference in March.
Ira Chaplik, COO of Equity International, which is controlled by US real estate magnate Sam Zell, notes that his real estate-oriented $300 million Equity International Fund II focuses on the larger economies of Mexico and Brazil. "Why not invest in Costa Rica, for example?" he asks rhetorically. His answer: "There's no scale, you can't attract other equity [to invest alongside], and you need liquidity at exit."
When funds are able to bring an investment to market, it's usually in the most liquid equity markets in the region. These days, that means Brazil and Mexico, where IPOs are making a comeback (see Escape From New York, p. 20).
In early December, the $1 billion Washington, DC-based EMP Global Latin America Infrastructure Fund launched Mexican phone company Axtel in a $320 million-equivalent public offering on the Mexican Stock Exchange. The fund, which sees its 10-year mandate expire in November, is in divestment mode, returning money to its investors. As the fund winds down, managing director Everett Santos says he has two more Latin American IPOs planned before November. Donath at Eton Park says he's also planning an IPO in the region this year for what he describes as a "real assets company."
Chaplik, of Equity International, names the $370 million IPO of Mexican home builder Desarrolladora Homex in June 2004 as one of his fund's key successes. Homex is a star in the burgeoning Mexican housing market. Equity International has cut its stake in Homex from 22% prior to the IPO, down to 13%. Since the IPO, Homex shares have steadily doubled in price to reach $36.15 on the NYSE as of mid-April.
"Because of Equity International, we went public with an ADR," says Carlos Moctezuma, Homex's director of investor relations. "They shared their experience of having public companies in the US, and helped us in the selection of advisors for the IPO." The De Nicolás family's majority stake in Homex shrunk to 46% after the launch of shares.
Absent an IPO, private equity managers with investments in Latin America and the Caribbean target companies from more evolved markets. In January 2005, Darby Overseas, a Washington, DC-based private equity fund headed by former US Treasury Secretary Nicholas Brady, sold a controlling stake of Brazilian packaging manufacturer Dixie Togas to Minnesota-based Bemis Co. for $250 million.
Homegrown Buyers
Now private equity investors have also set their sights on regional power players like Mexican multi-billionaire Carlos Slim, whose assets cover the gamut of sectors from technology to infrastructure. In late February, Advent International, a US-based private equity and buyout firm, sold Fada Pharma, an Argentine generic pharmaceutical manufacturer, to a group of Latin American investors and Polygon Labs, which is owned by the wealthy Said and Weinstein families. The terms of the deal were not disclosed.
Chaplik notes that a key investor in his fund, the Washington State Investment Board, ended up buying out his position in a Monterrey, Mexico-based housing company called Corporate Properties of the Americas. "They had capital participation in it along with us and loved it, so they bought the company from us," he says. According to public figures, Washington's manager of pension funds and state trusts had $8.5 billion invested in private equity at the end of February.
For many funds, total return is the metric by which they measure success, and it has a high bar. "The returns from private equity have to be above 20% to attract significant attention," says Santos. "At one point they had to be above 30%."
With double-digit returns coming out of private equity investments, the segment is likely to attract more hedge funds, like Eton Park, that are out hunting for yield that they can't get these days from debt and equity markets. And with the hedge funds come wealthy US investors, who are also seeking out more exotic, or riskier vehicles to grow their cash. "As the US population ages, their appetite changes," says Chaplik. "There's a greater desire for yield."
Meanwhile, management teams at firms in various stages of development are looking to private equity groups to give them the flexibility and knowledge they need to grow.
In December, Hispanic Teleservices Corp., a Monterrey, Mexico-based call center, took on the Carlyle Group as a majority investor for an undisclosed sum. And it wasn't the first time Hispanic Teleservices worked with private equity investors. The call centers – which handle customer service issues for Spanish-speaking clients of multinational companies – kicked off with seed money from Citigroup and JPMorgan. With the entry of Carlyle last year, the investment banks vacated Hispanic Teleservices.
Alejandro Jaime, COO of Hispanic Teleservices, says the company – which has grown from a dozen employees to a staff of over 800 in less than a decade – considered several firms and global players before going with Carlyle. "We went with a private equity group because we felt it would lead to better growth for the other partners," he says. Those growth prospects and the certainty of financing made Hispanic Teleservices more comfortable with continuing with a private equity group. "The pricing was fair, and financing was a done deal," says Jaime.
Then again, Hispanic Teleservices is a young and agile company, hatched by two MBA classmates from Georgetown, so the company was a natural candidate for cash from private equity funds. In general, though, Latin American management teams aren't terribly comfortable with private equity. "Management teams and family-owned businesses are still warming up to familiarity with investment funds – both hedge funds and private equity funds," says Donath, from Eton Park. "That's why when we partner with local teams, we spend a lot of time explaining that we can be a partner."
On the plus side, Donath says that management talent that was leaving the region or simply not returning from jaunts or studies abroad at the beginning of this century, is now flocking back. There's a reverse of the brain drain of Latin America's best and brightest.
