Cate Ambrose, president of LAVCA (Latin American Private Equity & Venture Capital Association) speaks with Michael Washburn about trends in Latin American private equity and why energy and infrastructure are attracting interest
Can we begin by talking about LAVCA’s origins and its early work with investors interested in Latin America?
LAVCA was founded in late 2002 with support from the Multilateral Investment Fund (MIF) of the Inter-American Development Bank, the National Venture Capital Association (NVCA), and Development Capital Networks (DCN). There was not much PE [private equity] and VC [venture capital] activity in the region at the time. There had been a first generation of private equity investing in the 1990s that ended its cycle around 2001, but there wasn’t an uptick again until about 2007. I joined LAVCA in late 2007, establishing the New York office in response to a demand from PE investors for more in-depth programmes and research related to Latin American investment trends.
Our board and our members are Latin American and global firms located in the region and around the world. We play a critical role connecting global and LatAm investment firms with global and LatAm institutional investors, introducing them to potential partners, making contacts and relationships, and helping them think about an investment strategy for Latin America. Our core markets include Brazil, Colombia, Mexico, Peru, and Chile, but we have members from across the region. Notably, this includes increased interest in Argentina following the introduction of a new pro-business political party which is on track to revive the private investment community in the coming years.
Our membership has grown from 25 firms in 2007 to more than 180 today (largely PE and VC firms, as well as some institutional investors and service providers). We collect proprietary data on fundraising, investments and exits, which is a critical tool for understanding and communicating the opportunities for the international investment community. We also play an active role on industry related regulation, meeting with local regulators and policymakers, and have targeted programs for areas like professional development and ESG (environmental, social and governance).
We’re a non-profit group, much like the Private Equity Council or the NVCA, and our membership runs the full scope, from global investment funds like KKR, Carlyle, Advent International or Warburg Pincus, all the way through to small venture firms on the ground in Argentina and Chile.
What do you think accounts for the decline in interest in the region from around 2001 to 2007?
Emerging market private equity didn’t really develop as an area of focus for institutional investors until the mid-2000s. The first generation of LatAm PE/VC investing, in the 1990s, took place ahead of activity in most other regions – it is my understanding that there wasn’t much private equity investment in India or Africa, for example, at that time. The end of the first generation of deals was the result of multiple factors: the bursting of the tech bubble in the US, which impacted VC in Latin America; Brazil’s devaluation crisis in 1998-1999; and, the Argentine crisis where Argentina defaulted on its debt in 2001).
The first generation of investing was a reflection of global firms going into Latin America without a clear understanding of the market, putting money into economies and stakes into companies. There weren’t a lot of firms that had thought through their strategy at that time. There are a handful of investment firms that survived that downturn and remain active today, but there wasn’t much activity from 2001 to 2006.
How would you characterise the current level of interest in the region, and where is it coming from?
There are a number of important macroeconomic trends bringing investment into Latin America, involving both global and local PE firms. For example, Brazil is home to a highly developed domestic asset management industry, including a community of private equity managers that have raised billion-dollar-plus funds for investing locally. In Mexico, Peru, Colombia, the domestic industry is smaller in scale, but you also have local fund managers in addition to international fund managers that have gone into the region.
Latin America is rich in natural resources; energy, mining and agribusiness, continue to see a significant share of investment dollars. Equally important, the middle class has expanded dramatically over the last decade, representing millions of new consumers.
Education, healthcare services, consumer goods and retailing, financial services have all been areas of focus for investors. And then infrastructure has been important as well, both through traditional PE funds and through dedicated infrastructure funds.
Another driver has been the positive support from governments in countries like Mexico, Colombia, Brazil, Peru and Chile that have sought to develop local PE/VC industries and to court international firms to enter their markets. At the same time, pension funds in these markets have growing AUM and have become active investors in private equity domestically. In the Andean countries,-Peru, Chile and Colombia - these local institutional investors are also investing internationally, which has attracted the attention of global firms. And in all these markets infrastructure has been an area of focus as well, often backed by local pension funds.
Why is infrastructure in the region perceived as having so much potential? Is this a recent development?
Like in other emerging markets, there is a large infrastructure deficit in Latin America. This extends across transportation, energy and telecommunications, and of course infrastructure is critical to realising the potential of growth in both exports and domestic consumption. If goods and resources are going to be sent to China, the necessary infrastructure needs to be in place. Agriculture is another important sector in Latin America and if you want to get agricultural products to market, you need ports and roads.
The trick becomes the role of government and how well the government is able to facilitate the participation of private investment in infrastructure projects. A big part of the issue is around governments getting regulation right, finding ways for private investors to get involved with local partners. In the case of pension funds, it’s actually a political mandate, you have the retirement accounts of the population invested in local pension funds trying to find a way of delivering returns to retirees and at the same time investing. The political mandate is an opportunity for the pension funds to invest in domestic infrastructure projects.
According to LAVCA data, over the last two years, about 20% of the total amount of capital raised for private equity was actually raised for infrastructure specifically. The percentage of investments dedicated to infrastructure related projects was around half.
What criteria do investors typically use when considering infrastructure prospects in the region?
Private equity investors have a different set of criteria compared to traditional infrastructure investors. They are looking for a shorter time horizon and higher investment returns. They are not likely to invest in toll roads, for example, or to compete for a public tender where they see significant regulatory risk.
PE firms typically focus on services and logistics related to infrastructure and energy. Advent International did a major gas pipeline in Colombia in 2013, with the Colombian pension funds as partners in the deal. Advent also did a port deal in Brazil, and has invested in duty-free stores at airports. In these instances, they are taking on services contracts and the logistics around them. That’s where we tend to see private equity firms playing.
What are some further examples?
Another recent story, overall, is the energy side of infrastructure, and subsectors within energy. In Mexico this has been driven by the opening up of the energy sector to private investment for the first time under an important reform passed in December 2013. As a result, we are seeing global sector-focused energy private equity funds moving into the country.
Riverstone, First Reserve, and EnCap, are all international funds that exclusively do energy investment and have recently been active in Mexico. KKR is raising a fund in Mexico that’s going to be energy focused. Partners Group, which is a global private equity investor, did a significant oil and gas deal and raised a fund specific to that asset class.
BlackRock is yet another player that has targeted Mexico and the region more broadly with a focus on energy and infrastructure. Last year BlackRock acquired a Mexican infrastructure investment firm for a $1 billion in order to ramp up in the country. We’ve also seen First Reserve enter into a joint deal around the PEMEX privatization.
How popular are investments in alternative energy?
There is quite a bit going on in the realm of alternative energy investments in areas like hydroelectric, wind and other sub-sectors. I think it would be an oversimplification to say that this has all happened suddenly. Clearly privatisation in Mexico created a lot of opportunity, and the boom that we saw for several years of demand for natural resources in Latin America by China is cooling down as oil has taken a hit, leading to an increased interest in alternatives.
Are there certain laws or regulations anywhere in the region that you find particularly problematic?
We track regulation very closely though the LAVCA Scorecard, which benchmarks regulation relevant to private equity specifically.
Regulators have recently been focused on changing how much pension funds can invest. In the last year, Colombia increased the amount that pension funds can invest in infrastructure specifically. This has been an ongoing issue across the region.
In Mexico, they have passed a new law to create FIBRAs, a new fund structure or investment vehicle that targets infrastructure and energy specifically. There is a similar structure for real estate, which has been very successful.
In Brazil, unfortunately today the political environment in Brazil does not allows for significant reforms that will support increased infrastructure investment.
Does Latin America compare favorably to other regions in investors’ eyes?
Quite honestly, I think when you look around the world, you have got to compare apples to apples. There are a number of reasons why Latin America is attractive for investors compared to markets like India, China, or Russia which all have their own challenges around regulation, bureaucracy and political risk. I think comparatively Latin America is an attractive market in the context of global emerging market economies.
Let’s talk about your relationship with the legal industry. How heavily do you rely on external counsel?
The number of international law firms that have expanded in the region, and in Brazil specifically, over the last seven to eight years has been impressive. We also see international firms partnering with local firms. In most cases, they have both international counsel and local counsel.
LAVCA’s membership is composed of investment firms and service providers, including law firms. A lot of law firms in our membership are local Latin American firms. Every country, whether its Colombia, Peru, or Mexico, has different rules around how to structure a fund. If you want to set up a local fund in these markets, you’re hiring a local law firm or working with an international firm that has a local relationship.
We have a public policy council and legal committee which both engage the legal community as well. The LAVCA Scorecard I mentioned previously reflects very detailed regulation, and is reviewed by both international and local lawyers.
What is your vision for LAVCA for the next few years?
As I mentioned, we have seen significant member growth over the last eight years. We see a range of investors and organisations interested in being active in Latin America, and that universe continues to expand. We think about the role of organisations like ours and how we are going to represent and serve that universe. Over the last year, Canadian pension funds have become more active with the association. We have Latin America family offices, and to a lesser degree international family offices, looking to invest alongside PE firms in Latin America. We have also spent more time engaging with real estate investors in the last few years.
Our vision is to represent, and to be a resource for, the full range of private investors, be they private equity funds, sovereign wealth funds, family offices, pension funds interested in becoming active in Latin America, as well as new types that are emerging in the region for infrastructure, energy, real estate, and traditional private equity going forward.
Alongside that, venture capital is an important area of focus for LAVCA, with a set of parallel activities in programs and research, supported by significant grant funding from a Silicon Valley foundation. Tech start-ups are different than traditional PE investments, and we see a lot of excitement and new activity happening. It’s relatively early days, but it’s definitely expanded significantly over the last five years. We’ll be doing more and more around venture capital in response to this growing segment.
President and executive director
LAVCA (Latin American Private Equity & Venture Capital Association)
Cate Ambrose is president and executive director of LAVCA. She speaks and writes regularly on a range of topics related to public policy and private investment in Latin America, and is a regular commentator on CNN, Bloomberg, and Fox Business and a guest lecturer at The Wharton School.
Prior to joining LAVCA, Ambrose was chief of advocacy for the Commission on Legal Empowerment of the Poor, where she directed research projects on business regulation and property rights in Mexico, Brazil, Guatemala, India, Kenya, and Tanzania.
Ambrose began her career as a journalist in Spain. She holds an MPA in international economic policy from Columbia University, and received her BA in Latin American studies from St Lawrence University and the University of Madrid.