Is Private Equity Out of Control in Latin America

8/3/2019 Is Private Equity Out of Control in Latin America

1/10

I s P r iv a t e E q u i t y O u t of C o n t r o li n L a t i n A m e r i c a ?T h e Imp act o f S truc tures on Pr ivate Eq ui tyTran sact ions in Lat in A m erica 198 8-2007R O B E R T O C H A R V E L

R O B E R T O C H A R VE Lis a vice president arEndeavor's Cente r forHigh Impact Entrepre-neursh ip ill New York,N [email protected]

T ere are many reasons why someregions have underdeveloped pri-vate equity markets. The earlyliterature on this topic focusedon variables such as GDP gr owt h , GDPper capita, and the depth of the local stockexchanges in order to explain the perfor-mance of the private equity markets.' In therecent past, most of the research on privatetransactions in general and private equity inpart icular has focused on the way privatetransactions are structured as a reaction tothe exist ing legal inst itut ions. This art iclewill build on some of the findi ngs performedon this topic but focuses exclusively on LatinAmerica. There are several factors that shouldnot be overlooked when trying to under-stand the performance of private equity inthe region.

For example, in Latin America thereare particular aspects related to the industrialorganization of each cou ntry that may inhibitprivate equity investments (from the existenceof monopolies to the cont inued s t rengthsof family-controlled business groups). Thisshould be addressed in future articles.

As referred to above, animportant bodyof literature on private equity has focusedon the development of f inancial marketsand thtfir impact on the private equity cycle.Some authors have even proved the impact oan active stock market on the venture capitalcycle.- However, little attention has been paid

to specific effects of the actual state of tstock markets in emerging markets. Insteof focusing only on the access to IPOs, somresearch should be performed regarding thimpact of having fewer publicly traded companies on the exit of private equity portfocompanies. Inother words, does having fewpublicly traded companies limit the exits fthe private equity funds? This could be reevant in understanding the private equienvironment in Latin America.There are other aspects that may impathe private equity cycle and that could bunderstood as cultural aspects. These proably have a twofold impact. First, anentreprneur may perceive the equity of a companin Latin America as an extension of hisher family, which would generate barriers fpossible external sources of equity. Seconentrepreneurial f inancing probably relimore strongly on family and friends thandoes inother regions. Entrepreneurs may femore comfortable relying onpersonal agre

ments than on legal contracts.* This couhave an impact on the performance of privaequity firms.As previously explained, this art icfocuses on the impact of the legal instituti onframework on the private equ ity cycle. Inordto do so, it would be wise to review somethe literature on this topic. In the late 199La Porta et al. [1997, 1998] described how tlegal origin of a country has an impact on

8 0 Is P!).ivArn E Q U I T Y OUT or C O N T R O L IN L A TI N A M E R I C A ? W I N T E R 20


2/10

financial markets. Their findings focused partly on thepoo r mino rity shareholder protections in French civil lawcountries compared to those of common law countries.Djankov et al. |2()()3j found that common law countriesare able to enforce contracts better than countries withother legal origins. Lerneret al. [2O5[ found that in low-enforcement and French civil law nations, private equitygroups rely on majority ownership rather than contractualprovisions to protect their interests.

Most ofthe literature compares the performance oftransactions am ong groups of countries that do not havethe same legal origin. However, little research has focusedon the impact of different structures used in private trans -actions among countries with the same legal origins.Is there an indication that private transactions per-form better by relying on con tracts or on majority p osi-

tions in countries with a French civil law origin? Dothe different ways of structuring private equity dealsin countries with similar legal infrastructure have animpact on their performance? This article specificallytbcuses on information on private equity transactionsfor the thr ee leading econ omies in Latin Am erica, all ofwhich have a French civil law orig in: A rgentina, B razil,and Mexico. The article also provides information for22 other countries in the region. Not all of them havethe same legal origin,'' but it is likely that the findingsfor the three largest economies in Latin America applyto the region's other countries as well.There are several variables that determine tbestrategy and structure of a transaction. This articlefocuses on the following three variables: equity owner-ship acquired by the private equity firm, post-moneyequity valuation ot the company receiving the privateequity investment, and the amount invested by the pri-vate equity firm per transaction. Each variable will holda specific hypothesis.

lased on the underdeveloped legal structures inLatin America (including not only problems with therule of law, but also the enforcement of laws and con-tracts as well as execution in the courthouses^), it wouldseem rational to target controlling stakes in order toprotect the investments. If contracts could be enforcedefficiently, minority ownership would be a reasonableinvestment strategy for a firm, as it could still protect itsinvestors' interests. Even more important, the minorityinvestor could still have control over certain decisionsif it's agreed in a contract with the other owners. Thishypothesis is in line with Lerner et al. [2005J findings on

majority ownership from private investors in emergingmarkets. Some initial find ings of this article seem to con-tradict Lerner's finding: Brazil's private equity invest-ments do not have majority controlling stakes in theportfolio compan ies. This would be m aterial, as Brazil isa leading m arket for private equ ity investments in LatinAmerica. However, an additional analysis for Brazil andLatin America seems to confirm a tendency of privateequity investments to obtain controlling ownership.

Investments in Latin America have a higher riskprofile than investments in developed markets. Thesecond hypothesis is that due to the additional risk asso-ciated with investing in emerging markets, the majorityof private equity investments are focused on late-stageinvestments that reduce such additional risk, as early-stage investments would require an additional expectedreturn. Post-money equity valuations should produceevidence regarding the late-stage focus of private e quityinvestments in Latin America.

The third hypothesis is that the equ ity investmentshave to be big enough to support a thorough due dili-gence process. This process should include but not belimited to legal, fiscal, and financial topics. It is likelythat due to the underdeveloped legal structures and thedifficulty of enforcing contracts in Latin America, thedepth and sophistication of the due diligence processis more important than it is in developed economies,where representations and warranties can be signed.The depth ot the due diligence process may accountfor higher transaction costs per investment, which mayinhibit investments or negatively impact the performanceofthe investments. In other words, smaller transactionsare less likely because either the due diligence processaccounts for a big percentage ofthe equity investedcreating a negative impact on the performance of th einvestmentor private equity firms making smallerinvestments are not able to perform through due dili-gence analyses, which could have a negative impact onthe performance ofthe transaction.Du e to the lack of information about return s (cashon cash or internal rate of return) in Latin America,the analyses of this article are based on an importantassumption: If a country has a larger amount of privateequity inflows over time, it is a sign of positive perfor-man ce for private equity inv estments. T he idea is basedon the following reasoning: if a fund is successful in itsinves tmen ts, it will be able to raise an additional fund.In the aggregate, a country in which the initial intlow

W I N T E R 2009 T H E J O U R N A L O F P R I V A TE E Q U I T Y 8 1


3/10

of private equity performs positively is more likely toattract additional investments from private equity funds,as a positive track record is created for that market.''

Tbe leading receptors ot private equity transactionsin Latin America are Argentina and Brazil, while Mexicoseems to be an underacbiever. These results were mea-sured in three different ways by Charvel [2007]: first, totalamount invested; second, by comparing the percentageof private equity going into a country as a percentage oftotal private equity investments in Latin America with thespecit^ic country's CDP as a percentage of Latin America'stotal GDP; and third, calculating private equity inflowsas a percentage of GDP of tbe country where the privateequity transactions were performed and comparing thosenumbers witb tbose of the country's peers.

This article compares data to prove or disprovetbe three hypotheses among Argentina, Brazil, andMexico and determine what variables can explain dif-ferences in tbe performance of eacb country-specificindustry. If the leading countries-such as Argentinaand Brazilhave a different way of structuring transac-tions tban underperformers like Mexico, it may suggesttbat certain structures have a positive impact on theperformance of private equity investments. Tbe posi-tive performance would eventually lead to the raisingof new funds, increasing the amount of private equityin a specific country.

DATA DESCRIPTION

Two databases were used for the analyses of thisarticle. One is from Venture Equity Latin America(VELA), which was acquired recently by Thomson Reu-ters. This database is not public, but it is available tbrougha subscription. Up to now, VELA has the best and mostcomprehensive database for private equity transactionsfor Latin America. Its information goes back to 1988and covers 25 countries: Argentina, Bahamas, Barbados,Belize. Bolivia, Costa Rica, Brazil, Chile, Colombia,Dominican Republic, Ecuador, Guatemala, Honduras,Jamaica, Mexico, Nicaragua, Panama, Peru, PuertoRico, El Salvador, Santa Lucia, Suriname, Trinidad andTobago, Uruguay, and Venezuela. The VELA databaseincludes 1,403 transactions from 1988 to 2007.

The second database, called Charvel in this article,has been built by tbe author during tbe last seven years.Tbe Charvel database is exclusively for Mexican trans-actions and was built tbrougb direct interviews with

fund managers, entrepreneurs, and institutional invetors. Additionally, exhaustive news runs were peformed in different search engines, newspapers {ReforEl Econom ista, El Financiero and El Universal) and m azines {Expansion, America Economia, and Poder y NegocWhen possible, the information was cross-referencwitb VELA, LAVCA, Pablo Rion & Asociados newletter, and Thomson Financial.^ Charvel has 359 transations from 1990 to 2007.

The main difference between tbese databases is thCharvel has significantly more informationmore transations aswell as greater depth of informationfor MexicFor example, Charvel has ownership stakes for transactiodating back to 1990, while VELA goes back only to 200(except tor two transactions tor Mexico in 1995). AlsCbarvel has information not only about tbe equity investbut also about the debt component of the deals.

The principal variables tracked by both databasare: portfolio company, industry, amount invested (US$), extent of control, country, and date of invement (year), among otbers. Both databases have incomplete information for many variables. For purposes this article, the most relevant variables relate to equiinvested: ownership acquired and tbe post-money equivaluation of the firm receiving the private equity infloBoth databases have incomplete information tor tbevariables. This means tbat both sources may have intomation about a transaction, but not necessarily about tequity invested; or they may show the equity investebut not the percentage of shares acquired. Exhibitshows the total number of transactions per variable wicomplete information. However, tbrougb combinitbese sources, there is enough information available explore tbis article's hypothesis.

Wben tbe information from VELA's Mexican dais compared to Charvel (which follows information on

E X H I B I T 1Data Description

VELA CharvelNumber of countries 25 1Total numb er of transactions 1,403 359Transactions with information on:Equity invested 906 341Extent of control or ownership 201 271Equity valuation of the firm 124 268

8 2 Is PRIVATE EQUITY OU T OF CON TRO L IN LATIN AMEH.K:A? W I N T E R 20


4/10

about Mexico), the latter seems to be a more robustsource of informa tion for the analyses. Th is could beexplnined by the sources used to gather information.Charve l is a more reliable database as the informa tion isgathered directly from institutional investors and fundmanagers rather than mainly relying on news runs."As stated in Ch arvel [2007 ], which uses the sametwo databases, if the information on Mexico in VELAis incomplete, it is very likely that the informationfor other countries in the database is incomplete aswell, so information on Argentina and Brazil could be

misrepresented. However, for purposes of this article,the author believes that while incomplete, both data-bases provide sufficient evidence of clear tendenciesthat explain strategies, structures, and performanceamong countries.WHAT REALLY GOES ON IN THE PRIVATEEQUITY INDUSTRY IN LATIN AMERICA?

As per Exhibit 2, Argentina, Brazil, and Mexicoare the three countries in the region that have attractedE X H I B I T 2Latin America Benchm ark A nalys is 1988-2007

Argent ina1. Total number of transactions2. Investment analysesAm ount invested {$1Mill investmentMax inveiitmentAverage investmentModeMedianTransactions with completeinformation3 . Ownership analysesMin ownershipMax ownershipAverage ownershipWeighted average of ownership &investmentModeMedianCorrelationinvestment and %Transactions with completeinformation4 . Company equi t j ' value analysesMin CO's equity value ($)Max co's equity valueAverage co's equity valueWeighted average of co's equityvalue & Inv.ModeMedianCorrelation^co's equity value andinvestmentCorrelationco's equity value and %Transactions with complete infonnation

2141 7,1570.03740.0049.3610,0015.60

145

7.0%100.0%56.5%43 .7%100,0%50,5%(0.20)

304,00892.86184.11

335.24400,0094.500.75(0,59)22

Brazil41 9($) 13,3810.15

1.000,0054.8410.0018.45244

4,0%100.0%46.0%66.9%100.0%34,2%0.40

73

(S) 0.671.000,00194.52

505.70317,86142,860,78(0,02)37

Chile82($) 1,3730.20320.0021.1210.009.00

65

11,0%100.0%47.8%54,4%30.0%40,0%0.07

19($) 2.221,066.67161.82

510,83na40,670.86(0.34)16

VELAColombia37(S) 7280.38160.0021.4025.0015.00

3 4

10.0%50,0%33,0%11,7%na36.0%(0.94)

4($) 1.161.600.00550,961.463.11na51.72

1.00(0,92)3

Mexico198(S) 3.3530.22317.0022.8120.0015,00

147

8.0%100,0%64,5%58,3%100,0%65.0%(0.64)

47

($) 4.00821.4375.2883.7310.0029.42

0.84(0,64)30

Regional"'27 6

(S) 5,6950,251,400.0039.8215.0015.00

143

7.0%100.0%47.7%69,7%100.0%37.5%0,37

12($) 2.002,333.33435.801,633.80na111.11

0,970.219

Other**177($) 2,1160,20200.0016.5310.007.70

128

15.0%100.0%48.1%51.7%100,0%39.8%0.34

16

($) 1.17281.6773.43231.161.1726.36

0,960.177

AU1.403(S) 33.8030.03

1,400.0037.3110.0013.0090 6

4,0%100,0%52,1%60.4%100.0%49.0%0.13

201(S) 0,672,333.33185.66

822.60421.0568.750.81(0,20)124

CharvelMexico35 9

(S) 5,9460.01228.0014.6320,005,5034 1

1,0%100.0%38.9%45.7%100,0%29.4%0,12

271

($) 0.05837.5061.25201.19102.5017.35

0.68(0.26)26 8Notes: ^Regional investments include inrestmcnts in thcfolhwnig regions or set of countries: Argcntiwi-Bra zil; Argentin-i-Brazi! an d Chile; Argentina-B ra::il''rui Colomb ia; Brazil-Bolivia; Bra zil-Mexico: Central America; Central Ann-rica-Do miniuin Re puhhc and Mexk'o-U.S .;**T^^^information of ihv ollowing 20 countries: Baham as. Barb ados. Belize, B olivia, Costa Rica, Dominican R epublic, Ecua dor, Guatem ala, H onduras Jamaica,Nicaragua. Panama, Peru, Puerto Rico. El Salvador, Santa Lucia, Suriname. Trinidad and Tobago. Urugay and Venezuela.

WINTER 2009 or PR VATE EQUITY 8 3


5/10

the most private equity investment, with an aggre-gate 70.6% of the total invested in Latin Am erica from1988 to 2007 (VELA). Among the biggest countriesin the region, Colombia and especially Chile seem tobe under-represented in VELA. Those two countriesrepresent only 119 transactions of the 1.403 in VELA,and just 19 have complete inform ation. Apart from thethree major recipients of private equity in Latin America,Regional transactions seem to be a fairly commonstrategy, acc oun ting for 16.8% of all private equityinvested in Latin America. In this article, "Regionaltransactions" means private equity investments per-formed in more than one country in Latin America.Usually these transactions include Argentina, Brazil, orboth. B razil, Argentina, M exico, and R egional transac-tions combined account for 87.5% of all equity investedin the Latin America.Among the 906 transactions in VELA with infor-mation about the equity invested, there is a big range ofinvestment sizes, from USS30,000 to US$1.40 billion.However, the average and median numbers describea different story. The transaction size seems to be sig-nificantly smaller than similar investments in developedeconomies. The average equity investment is US$37.31million and the median transaction is only USS 13.00million (see Exhibit 2).Th ere also seems to be a big difference amo ng theownership percentages targeted by the funds, varyingfrom as low as 4% all the way up to 100% for the 201transactions with complete information from VELA. Itis noteworthy that VELA's information on private equityinvestments shows that on average funds have a majorityownership60.4%when investing in Latin Americanfirins. The median ownership may even show a relativemajority (49.0%) vis a vis the other investors or even theentrepreneurs (see Exhibit 2).Finally, after describing the amount invested pertransaction and ownership structures, the last vari-able that this analysis focuses on is the post-moneyequity valuations of the companies receiving privateequity investments. Similar to the variable trackingthe amount invested, post-money equity valuationsvary significantly, from US$0.67K to USS2.33B.However, on average the companies' equity valuationsare US$185.66MM, and the median is US$68.75MMfor the 124 transactions with complete inform ation fromVELA (see Exhibit 2).

WHAT ARE THE WIN NING PRIVATE EQUITYINVESTM ENT STRATEGIES IN LATINAMERICA?

In the first part of this article three hypotheswere formulated. The first one assumed that due to welegal systems and infrastructure and the difficulty enforcing private contracts, private equity firms shoutarget controlling stakes in their investments. The secohypothesis was that private equity firms investing Latin America should target later-stage investments dto the additional premium associated with earlier-stainvestments in a region already perceived as risky. Tthird hypothesis, which is linked to the previous twwas that investments had to be larger rather than smalto proportionally reduce the transaction cost basis the investment. For purposes of this section, and explained in the data description. VELA informatiwill be used to describe patterns in Argentina, Brazand Latin Am erica as a region, and Cha rvel w ill be usfor information on M exico. From Exhibit 2 informatican be extracted to understand strategies followed by tprivate equity firms.

As per the first hypothesis and based on the anysis in Exhibit 2, funds investing in both Brazil aMexico are not obtaining a controlling stake in tcompanies they invest in. In a way this could say thhaving a contro lling stake does not determ ine the sucess and amount of private equity invested in a coutry."* Th is find ing wo uld also go again st the L ernet al. 12005] finding regarding how private equifirms protect their interest when investing in countrwith a French civil law origin by obtaining majorownership.

However, there is a simple test that could be pformed on the data to prove otherwise. Even when boBrazil and M exico have smaller owne rship stakes in tprivate equity investments th an the rest of the countrin the region, it would be important to review changin strategy over time. If there is a shift to h igher ow nship shares, this could signal the growing importanof having a relative or absolute controlling stake whinvesting in Latin America.It can be seen in Exhibit 3 that investments hafocused on increasing their extent of control throug h region over time. This is also the case for both Braand M exico independen tly. It could signal an adaptatiprocess for the funds when structuring transactions

8 4 I s P R I VA I E E Q U I T Y O U T OF C O N T R O L I N L A T IN A M E R I C A ? W I N T E R 2


6/10

E X H I B I T 3Evolution of the Extent ofControl in Private Equity Transactions in Latin America

BrazilI T * -

2000Source: VELA.

2001 2U02 2003 2004 2005 2006 2007

Mexico1

O

t

1

0 . 9 -

0 .8 -

0 .7 -

0.6^ 0.5 - -

0 . 4 -

0.3 -F0.2O.I H ; -, .Tt~TTTi-Ti-r-

1990 1992Source: Charvel.

1994 1996 1998 2000 2002 2004 2006

W IN TER 2009 THEjUUkNAL Ol- PklVATE EQUITY 85


7/10

E X H I B I T 3 (continued)I

0.90.80.70. 6 0.50.4 H0.30.2 -|O.I

02000

Source: VELA.

Latin America

J L .%

i:2001 2002 2003 2004 2005 2006 2007

the region. Therefore, the findings could confirm theimportance of having majority control when investingin Latin America.The second hypothesis of this article focuses ondifferences in equity valuations for companies receivingthe private equity inflow among Argentina, Brazil, andMexico. When using information both from VELAand Charvel, Mexican transactions seem to target sig-nificantly smaller average and m edian equity valuationswhen compared with transactions in Argentina andBrazil (see Exhibit 2).'" It is likely that Argentine andBrazilian investors are targeting later-stage companies,and in Mexico investors are funding smaller transactions.This could confirm the idea that private equity invest-

ments in emerging markets should focus on larger andmore stable companies in order to minimize risks andobtain financial gains.The third hypothesis is based on possible differ-ences in the amount of equity invested per transactionamong Argentina, Brazil, and Mexico. It seems that theaverage and median equity investment in Argentina andBrazil are significantly larger than Mexican investmentusing either VELA or Charvel information for Mexico(see Exhibit 2)." Again, this suggests that investment

strategies in M exico are lagg ing beh ind those of its LatAmerican peers.The median investment in Argentina and Braz

seems to be two to three times larger than the mediatransaction in M exico (when using Charvel's data). This likely to have a direct impact on the performanot the investment. Smaller transactions cannot suppolengthy, deep, and expensive due diligence processand structu ring activities. If the du e diligence and strutur ing of a deal costs U SS lOOK, this represents 0.54% the median deal in Brazil and 1.82% in Mexico (usinCharvel's data). Mexican investments either have wave some of the relevant cost associated with peforming the investment and mitigating risks, or assuma cost situation that may directly and negatively impathe financial outcome.C O N C L U D I N G R E M A R K S

After describing three variables (ownership stakcompany's equity valuation, and equity invested) am onArgentina, Brazil, and Mexico, there are several takaways regarding possible dominant strategies for priva

86 Is l'KivA! F. EQ UITY O UT O F CO NT RO L IN LAT IN AMERICA? WIN T E R 20


8/10

equity investments in the emerging markets of this

1. Based on the lack of development in legal insti-tutions in the region (from poor rule of law toinefticient courthouses'-), having an absolutecontrolling stake would seem to be the winningstrategy. While in legally advanced regions con-tracts such as shareholders' agreements are easierto enforce, doing this in Latin America couldprove ditficult and expensive to monitor andimplement.'-^

2 . Private equity investments in Latin America seemto do better when focusing on later-stage invest-ments in medium to large companies.3. Relatively larger investments seem to be a domi-

nant strategy wben performing private equityinvestments in Latin America.4. Future research should focus on the combination ofsome of these findings. For example, it seems thatlarger Argentine firms are willing to sell absolutecontrol, wliile smaller Mexican companies are onlyinterested in selling minority positions. Exhibit 2may also provide information about diterences ofbusiness cultures and entrepreneurship in LatinAmerica and shed light on which attitudes mayprovide better results for investors.5. Tbe most important thing to be learned from thisarticle may be that, apart from poten tial differencesin tbe performance of private equity investmentsdue to macroeconomic, entrepreneurial, cultural,or managerial variables, tbe way a transaction isstructured in Latin American countries is a keydeterminant of the success of the investments.

FUTURE RESEARCHThis article singles out tbe legal institutional frame-

work as a possible variable that could help explain theperformance of private eq uity transactions. As stated inthe be ginn ing of the article, there are several other va ri-ables that need to be studied in order to understand theperformance of private equity investments in emergingmarkets (i.e., specifics on industrial organization intbe markets, underdevelopment of financial markets,and cultural aspects tbat impact entrepreneursbip andprincipal investment). Future research in addressingthese variables needs to be performed in order to have

a better understanding of emerging-markets venturefinancing.ENDNOTES

The author thanks Alfredo Castellanos, Geort^inaEnthoven, and Fernando Fabre for their valuable comments.All errors or omissions are the author's own.'See Gompers and Lerner | l '^98j . Black and Gilson[1999], Jcng and Wells (2000] and Balboa and Marti [2U01]for external variables to the private equity cycle.-See Black and Gilson [1999] for external variables tothe private equity cycle.^Allen and Qian [2005] analyze some of these aspectsfor Chinese entrepreneurs.""For example Venezuela, Belize, and Trinidad andTobago do not have a civil law origin.=Sec La Porta et al. |1998]."See Charvel [2007].'For a detailed description, see Exhibit 3 in Charvel[2007].''Based on the possible issues with VELA's data, theinformation in Exhibit 2 may create some confusion. Forexample, if the median transaction in Latin America (usingVELA) is USS13.0()MM and the median ownership stakeacquired by the private equity fund is 49.0% , the post-mo neyvaluation of the private equ ity tirms receiving the investmentshould be USS26.53MM and not USS68.75MM as stated inthe exhibit. This issue can be explained by the number of

variables with com plete information. VELA has 1.403 tran s-actions of which 906 have the amo unt invested per deal. Forthe ownership variable there are only 201 transactions andjust 124 for post-money equity valuation. The same analysiscould be performed for Charvel with similar results based onthe different number of observations per variable. However,in Charvel numbers seem to be relatively more consistentamong the three variables.''Investments in Argentina and Brazil seem to acquirelarger ownership percentages than the ones performed inMexico. This is apparent only when using the informationfor Mexico from Charvel. VELA's information is significantly

different. It states that both Arg entina and Mex ico have largerowne rship stakes per transaction than Brazil, a situation thatwould not be conclusive about the impact of ownershipand control when performing private equity investments inLatin America. Mexico information in VELA includes only47 transactions with complete information. Charvel has 271.Using Charvel, it seems likely that transactions performedin Argentina and Brazil are securing larger ownership per-centages than investments performed in Mexico. In VELA,Mexican transactions have on average 58 .3% of own ership

W I N l E i i . 2(109 THEJDURNAI OF PRIVATE EQUITY 8 7


9/10

and a median of 65.0%. Charvel's database suggests a dif-ferent story: Mexican transactions seem to h;ive an ownershipaverage of 45.7% and a median of 29.4%, in b oth cases belowLatin America's numbers.'"The two databases seem to have differences for theMexico numbers, but are not as drastic as the results in own-ership participation. VELA has an average post-money equityvaluation of US$83,73MM and a median of USS29.42MM.Charvel 's database has US$61.25MM and US$17.35MM,respectively."There seems to be a big variation between the VELAand Charvel databases. In VELA the average and medianinvestments are US$22.81 and US$15.0()MM, while forCharvel the numbers are US$14.63 and US$5,50, respec-tively. VELA has 147 transactions and Charvel 341 for thesame time period.'-See La Porta et al. [1997, 1998].''See Djankov et al. [2003].

REEERENCESAllen, F.. and M. Q ian. "Law, Finance and Economic G rowthin China." fournal of Financial Economics, Vol, 77. N o. 1 (July2005), pp, 57-116.Balboa, M., andJ. Marti. "Determinants of Private EquityFundraising in Western Europe." Unpublisl ied WorkingPaper, 2001 .Black, B., and R.J. Gilson, "Does Venture Capital Requirean Active Stock M arket? "Jn/mi/ of Applied Corporate Finance,Winter 1999, pp. 36 -48 .Charvel. R. "A Comprehensive Look at the Private EquityIndustry in Mexico {\990-2006)." Journal of Private Equity,Fall 200 7.Charvel, R., andJ.C. de Yeregui. "Private Equity in LatinAmerica: The Mexican Cstse."Journal of Private Equity, Winter2002.

Gompers, P.A. "Ownership and Control in EntrepreneuriFirms: An Examination of Convertible Securities in Venture Capital Investments." National Bureau of EconomiResearch, September 1997.

Gom pers, P.A., and J, Lerner. "W ha t Drives Venture C apitFundraising?" Working Paper No. 6906, National Bureau oEconomic Research, January 1999.Jeng, L.A., and P,C. Welts. "The Determinants of VenturCapital Fundraising: Evidence Across Countries."/oHmti/Corporate Finance, 6 (2U00). pp. 241-289.Kaplan, S.N., and P. Stromberg, "Financial ContractinTheory Meets the Real World: An Empirical Analysis oVenture Capital Contracts." National Bureau of EconomResearch, April 2000.La Porta, R., F. Lopez-d e-Silanes, A. Shleifer, and R . Vishn"Legal D eterminants of External Vinaucc." Journal of Finan52 (1997), pp. 1131-1150.

. "La-w and Finance." Journal of Political Economy, Vol. 1N o . 6 (1998).

. "Investor Protect ion and Corporate GovernanceJournal of Finanical Economics, 57 (2000), pp. 1147-1170.Lerner, J., and A. Schoar, "Transactions Structures in thDeveloping World: Evidence from Private Equity." MISloan Working Paper 446H-04, MIT Sloan School of Management, February 2004.

, "Does Legal Enforcement Affect Financial Transations? The Contractual Channel in Private Equity." ThQuarterly Journal of Economics, February 2005, pp. 223-2Sahlman, W. "The St ruc ture and Governance of Venture Capital Organizations." JawrHi/ of Financial Econom27 (1990), pp. 473-524.

Cha rvel, R., L.F. Gon zalez, and D. Olivas. "T he UnfulfilledNeed of Venture Capital in Mexico." InternationalJournal ofEntrepreneurship an d Innovation Management, Vol. 6, Nos. 4/5(2006), pp. 303-32 5.Djankov, S., R. La Porta, F. Lopez-de-Silanes. and A. Shle-ifer. "Courts." Quarterly Journal of Economics, 118 (2003),pp. 453-517.

71) order reprints of this article, please contact Dewey Paat [email protected] or 212-224-3675.

8 8 Is PRIVATE EQUITY OU T OF CONTR OL IN LATIN AMERICA? WINTER 200


10/10

Euromoney Institutional Investor PLC. This material must be used for the customer's internal business use

only and a maximum of ten (10) hard copy print-outs may be made. No further copying or transmission of this

material is allowed without the express permission of Euromoney Institutional Investor PLC. Source: Journal of

Private Equity and http://www.iijournals.com/JPE/Default.asp

Documents

Is Private Equity Out of Control in Latin America