Latin America has had a decade (2002-2012) of solid growth and social improvements. We believe there were two main factors behind this success: the steep rise in commodity prices and the significant improvements and stability in the politic and economic institutions after 20 years of democracy.
Source: World Bank and IMF
The result was a boom focused in the industries connected to commodities (energy, agriculture, metals) and the industries with high leverage and low risk that benefit from falling bond rates (infrastructure, real estate, transportation, utilities); with spillovers to domestic-demand industries via income growth.
Source: IMF (2005 base=100)
Source: Multiple sources via http://www.quandl.com/economics/spread-over-us-treasuries-all-countries
The Private Equity Industry had a very good decade as it rode the growth in revenues and multiples of their companies:
- It went from USD 0.5B raised in 2003 to USD 10B in 2011 according to private sources
- It had Return Multiples of 2.4x Market Returns (Bovespa)
Ernst & Young assumes these extra returns come from PE Strategic and Operational Improvements, but that is a rushed conclusion since PE Investments are usually highly leveraged and have a higher beta. However, 2.4 times market returns are great returns and probably well in excess of its risk premiums. PE in Latam was a great investment.
It is interesting to understand the main drivers of EBITDA growth. PE is usually associated with cost reductions and hard social outcomes as it lays off workers. However, as we can appreciate from the data, PE benefited mainly from Organic Revenue Growth, specially when investing in companies under USD 100MM. Geographic expansion and demand growth, both deeply connected to macroeconomic growth, were the key growth sources. Upon exit, high multiples via lower risk-premia and high growth rounded up the great returns.
This decade also saw the rise of Brazil as a new economic power and a part of the BRICS. Brazil is half of the South American Economy, but it received way more attention from the investment world than the other half. According to private data, Brazil represented 80% of the total Fund Raising of 2011 and 60% of the Investments.
The Venture Capital Industry took part in this wave by investing mainly in Copy Cat Ventures that expanded and replicated companies across the Latin American Market. The focus was mainly in Internet where replication is more often not protected by patents, the technical threshold is low and the market is regional. The main strategic focus when investing in a Region for such ventures is the Size of the Market and its growth. Therefore, its incentives and timing are closely aligned to those in standard PE.
VC Investmet Distribution in Latam
Source: Axia Ventures´ Proprtietary Analysis
Since most investments in VC were made over the past 2-3 years, the jury is still out on its performance. However, early signs suggest good returns for the bigger funds in the Region.
This decade things are starting to change. Growth has slowed down a bit, the investors are paying more attention to the Pacific Alliance countries, R&D Investment is growing quickly, Exchange Rates are changing directions, Bonds have almost no default-risk upside, the Political Map is mutating...
How will the next 5-10 years look like? Should one invest in Latin America? How? Where?
A new article soon to come.
This decade things are starting to change. Growth has slowed down a bit, the investors are paying more attention to the Pacific Alliance countries, R&D Investment is growing quickly, Exchange Rates are changing directions, Bonds have almost no default-risk upside, the Political Map is mutating...
How will the next 5-10 years look like? Should one invest in Latin America? How? Where?
A new article soon to come.
