THE LATIN AMERICA SPECIAL 2014 - Invierta en Colombia · 2016 Summer Olympics in Rio de Janeiro. And while some GPs are expecting less deal activity in Brazil this year, fundrais-ing

March 2014 privateequityinternational.com

A PEI supplement

Brazil takes on the world How to expand in LatAm Unlocking public pensions Colombia’s first fund of funds

...and more

Sponsor:Actis

THE LATIN AMERICA SPECIAL 2014

65 year heritage

10 offices

$6bn funds under

management

160 investments

made

100 exits

1march 2014 the latin america special 2014

The world awaits

This is a big year for Latin America – and in particular for its largest and most significant economy, Brazil.

From a macro point of view, the most sig-nificant event may turn out to be a downsizing of the US Federal Reserve’s asset purchasing scheme, the mere hint of which hammered the Brazilian real last year.

But the highest-profile test will come in the summer, when this football-mad country hosts the World Cup for the first time in 64 years. This is the biggest sporting jamboree on the planet (more than 3.2 billion people tuned into the last one at some stage), so it’s fair to say that the eyes of the world will be on Brazil – just as they will be in 2016, when Rio de Janeiro hosts the Olympics.

On the face of it, a football tournament might seem to have little relevance to the health of the region’s private equity market. But the government’s spending on infrastruc-ture upgrades ahead of these events (not before time, as we discuss on p. 18) creates various investment opportunities in and of itself. And then there’s the intriguing question of whether the popular unrest arising from some of this spending – as evidenced by a number (largely peaceful) protests about issues like jobs, health-care and public transport costs – will affect the country’s attractiveness as an investment destination (p. 6).

President Dilma Rousseff will want to keep a lid on that while Brazil is in the shop window,

not least because she has an election to win later in the year.

Of course, the private equity story in Latin America isn’t just about Brazil, and it isn’t just about this year. One of the big themes to emerge from these pages is how the growth of economies like Colombia and Mexico and Chile and Peru – and the concomitant rise of the middle class – will create opportuni-ties for savvy investors (p. 4). People are also saving more, which means pension schemes are expanding; and they’re steadily putting more money into alternatives (p. 15). That’s good news for domestic GPs – especially since the last couple of years have seen a major dip on the fundraising front, albeit after a bumper 2011 – and it’s good news for foreign GPs in search of fresh pools of capital.

One last thought: the short-term senti-ment boost if Brazil were to actually win the World Cup in the famous Maracanã stadium on 13 July (which is perfectly plausible; they’ve already done so five times, more than anyone else) would be worth its weight in gold. So private equity players in the region should be crossing their fingers that Seleção stars like Neymar, Hulk, Thiago Silva et al are in-form and injury-free come the summer.

Enjoy the supplement,

James Taylor

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JAmEs tAylorEDitor's lEttEr

2 private equity international march 2014

1 Editor’sletter

4 Overview:Findingthemiddleground

Private equity is making a comeback in Latin America’s more established markets, but the industry still has a way to go in many parts of the region

6 Brazil:Theworldiswatching Tensions are high in Brazil as the

country prepares to host a World Cup, but after a couple of difficult years, there are signs that its private equity industry is on the up

9 Realestate:Firstmover Being first helped HSI pull off the

biggest real estate exit in Brazil’s history. Now it’s informing the firm’s response to the slowdown

10 Keynoteinterview:Actis Investing in education is the ideal way

to tap into Brazil’s young and growing middle class, says Patrick Ledoux and Beatriz Amary

13 Publicpensions:Wait-and-see-mode

Pension funds have been allowed to commit more money to private equity in some parts of the region – but until they see more proof of concept, getting more capital from them may be hard

16 ExpandingintoLatAm:Plantingaflag

A number of private equity firms have been looking to open local offices in Latin America to improve their access to deal flow – but timing the market is a challenge

18 Infrastructure:Thegreatlogisticspush

The Brazilian government outlined a whopping $121bn infrastructure programme in 2012 to address a 30-year logistics deficit. But it hasn’t all gone to plan

20 OntheRecord:MargaritaCoronadoGomez

Bancóldex’s director of private equity on building Colombia’s first fund of funds programme

COnTEnTs

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4 6 16

9

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Finding the middle groundPrivate equity is making a comeback in Latin America’s more established markets — but the industry still has a way to go in many parts of the region, writes Chelsea Stevenson

oVErViEW

managing director and co-head of Latin America private equity at emerging markets-focused investment manager Gramercy.

BuilDinG in BrAZil

From 2000 to 2010, Brazil’s economy grew at a steady rate, with middle-class con-sumers doing particularly well. But since then, the country’s gross domestic prod-uct growth has slowed substantially, falling from 7.5 percent in 2010 to 0.9 percent in 2012, according to the World Bank.

Large capital inflows from previous years caused the Brazilian real to appreci-ate, which hurt the country’s manufactur-ing industries and slowed industrial output. The government intervened by raising taxes on foreign capital; this inevitably affected investment appetite, which in turn crippled the country’s economy.

Private equity felt the impact. In 2012, there were 80 private equity investments in Brazil with a total value of $4.58 billion; in 2013, that fell to 55 deals with a total value of $2.78 billion, according to EMPEA.

Although the consumer and retail sectors seem to have become less attractive, oppor-tunities still exist in infrastructure, accord-ing to Patrice Etlin, a managing partner in Advent International’s São Paulo office.

“Brazil is launching a pretty ambitious investment plan focused on airports and highways,” he says. “We may see an increase in private equity investment in these sectors, or at least privatisation across some sectors.”

There are also a number of infrastruc-ture developments associated with the 2014 World Cup, which is being held in

It’s not easy to paint a clear picture of the Latin American private equity market as a whole. Each country in the region has its own unique characteristics, offering differ-ent levels of opportunity for private equity fund managers.

In 2013, local and international general partners raised 16 funds targeting the region, closing on a total of $3.12 billion, according to Private Equity International’s Research and Analytics division. This rep-resents a 45 percent year-on-year decline in the number of funds raised and a 57 per-cent decline in the amount of capital raised.

Deal activity in Latin America also slipped. Firms completed 77 deals in 2013 compared to 125 in 2012, while volumes totaled $3.76 billion, down from $5.24 billion in 2012, according to data from the Emerging Mar-kets Private Equity Association.

“While the region’s macro-economic trend generally moves economies in tandem, each country’s challenges and opportunities are unique, and are dependent on demo-graphics, government policies and rela-tive natural advantages,” says David Britts,

Salgar: seeing interest in Colombia and Peru

Brazil for the first time since 1950, and the 2016 Summer Olympics in Rio de Janeiro.

And while some GPs are expecting less deal activity in Brazil this year, fundrais-ing may well be up on 2013’s paltry total, when five private equity funds raised $783.5 million (by comparison, in 2012, 15 funds raised $5 billion, according to PEI data).

GPs like Brazil-based Gávea Investimen-tos, Patria Investimentos (an affiliate of The Blackstone Group), BTG Pactual and The Carlyle Group are all expected to launch Brazil-focused funds this year, meaning the country could see between $4 billion and $5 billion of capital raised in 2014 and 2015.

Most of the firms investing in Brazil are also looking further afield, however. Gramercy, for example, says it doesn’t want to be “Brazil-centric”, as Britts puts it, but create a regional portfolio across the five biggest economies: Argentina, Brazil, Colombia, Mexico and Peru.

AnDEAn ADVAncEs

The Andean region, which consists of Colombia, Venezuela, Ecuador, Peru and Bolivia, is experiencing economic growth comparable to Brazil, despite the market being much younger. Investment opportu-nities lie primarily in the natural resources, coal and mining sectors.


oVErViEW

On the exit front, the Mercado Inte-grado Latinamericano (MILA), which inte-grates the stock markets of Colombia, Peru and Chile, is helping investment activity by making initial public offerings more viable.

“A more robust liquid market amongst these countries will ultimately benefit pri-vate equity companies wanting to access public capital,” says Steven Costabile, global head of the private funds group at PineBridge Investments, which engages in Latin American investment activity from an office in Mexico City and a support office in Santiago, Chile.

Activity in the Andean region is still well behind Brazilian levels. But deal volumes and ticket prices are on the rise.

“We see a number of private equity [-backed] businesses in Peru and Colom-bia and we also see local business owners and companies interested in having conver-sations about transactions; so we see the potential,” says Mauricio Salgar, a managing director in Advent’s Bogotá office.

Despite perceived corruption and stubbornly high unemployment, Colom-bia’s economy has undergone one of the more significant transformations in Latin America in the last five years.

Its private equity industry only really began in 2005, with a few fund launches.

Now, GPs are seeking companies in the transportation services, food processing, and clothing and footwear industries.

Mexico remains the most industrialised country in Latin America – though it also has investment opportunities in sectors such as financial services and retail, while deregulation should drive future deal activ-ity in the telecom, media and energy sectors.

“The government’s urgency in advancing entrepreneurship, shaking up monopolies and uncompetitive industries, and unlock-ing value through efficiency in the labour market bodes well for the private equity industry,” Gramercy’s Britts says.

Mexico’s robust growth and stable infla-tion should help: in 2012, Mexico’s GDP grew 3.8 percent, which is down from 4 percent and 5.1 percent in 2011 and 2010 respectively, but a lot better than the 2009 figure of -4.7 percent.

southErn sloWDoWn

In countries such as Argentina, Chile, Para-guay and Uruguay, opportunities for private equity are limited primarily to GPs with a specific sector focus.

“Paraguay faces challenges as a newer developing market, but may offer interest-ing add-on opportunities,” says Sebastian Popik, a managing partner at Aqua Capital, which specialises in food logistics and services companies.

As for Argentina, many GPs feel that political instability and judicial changes make the risk of investing in the country

too great. “Argentina? No, thank you,” as one industry source puts it.

Chile and Uruguay are steadier in terms of economic predictability and their econo-mies are more competitive, but that has led to higher deal prices for the asset class.

“It’s not like we’re going to ignore Chile, but that market has been more developed and consequently we think opportuni-ties there are usually priced up and less attractive from a valuation standpoint,” says Gramercy’s Britts.

GPs don’t expect the Chilean market to change any time soon.

“Opportunities in Chile and Uruguay are less structural and are more on a case-by-case basis. If there are deals we find inter-esting, we move very quickly,” Popik says.

“We don’t expect much to change there.”

miDDlE GrounD

Despite their many differences, there is one theme common to the majority of Latin American economies: the rise of the middle class.

“The consumption capacity of the middle class is expanding,” says Advent’s Salgar.

“Demand has been opening up in consumer and retail, and affordability has reached a better level.”

As the middle class grows, typically demand in healthcare and pharmaceutical products, education companies and finan-cial services increases.

“At the same time [that] consumption per capita and disposable income grows, people save money, which increases the need for asset managers. Access to mort-gage and insurance products generate higher demand,” says Salgar.

It’s the rise of the middle class that is likely to foster the development of private equity in some of these nascent markets. At the moment, the regional picture may be relatively fragmented – but over time, a more consistent picture should emerge

– and that should benefit the established regional players. n

Bogotá: the peak of private equity in the Andes While the region’s macro-economic

trend generally moves economies in tandem, each country’s challenges and opportunities are uniqueDavid Britts


The world is watchingTensions are high in Brazil as the country prepares to host a World Cup. But after a couple of difficult years, there are signs that its private equity industry is on the up, writes Simon Meads

BrAZil

players, not to mention millions of fans from around the globe. Elections in Octo-ber will put pressure on president Rousseff to convince Brazil’s massive population of 200 million that she can clean up the coun-try’s grubby reputation for backhanders, while also improving public services and ultimately lifting many more out of poverty.

Meanwhile, the world is watching closely to see whether Latin America’s larg-est economy – GDP was $2.4 trillion last year – can re-invigorate flagging economic growth and get a grip on spiralling inflation. Also under scrutiny is the likely response of the country’s weakening currency when massive US fiscal stimulus – which has ben-efitted many emerging markets with cheap money – is withdrawn.

This year could also signal a turning tide for the private equity industry in Latin America’s largest investment market. Brazil lost its sheen for investors three years ago, after a wave of capital ploughed into large buyout funds, creating fierce competition and pushing up prices. Many would-be pri-vate equity buyers branched out into other countries in the region like Colombia, Chile, Mexico and Peru, looking for cheaper deals.

But with choppy financial waters now buffeting Brazil, high asset prices are reced-ing, as sellers rein in their eye-watering expectations – so despite all the volatil-ity and uncertainty, buyout firms and their investors are looking at Brazil once more.

“With the negative move against the dollar, currency problems, and growth

Riots from São Paulo to capital Brasilia over bus and train fare rises last year alerted the world to simmering tensions in Brazil. Mas-sive spending on stadia for this summer’s football World Cup, and for the Olympic Games in Rio de Janeiro in 2016, angered millions of Brazilians forced to spend hours in traffic jams in major cities because of overstretched infrastructure.

Public fury was then directed at corrupt politicians, and poor healthcare and educa-tion. President Dilma Rousseff offered a $25 billion investment into public transport to appease the protestors. But anger remains, and frequently bubbles up.

2014 is a pivotal year for Brazil. In July, it will welcome the world’s best soccer

prospects that are lower, it is a great time to look at acquisitions,” says Patrice Etlin, managing partner at Advent International, who leads the firm’s investments in Latin America. “We are actually very bullish on acquisitions in Brazil at the moment.”

The hope is that this renewed interest will result in a more balanced investment picture for the region – in which all the markets of Latin America share the lime-light and continue to motor ahead.

multiPlE ProBlEms

Brazil has seen its GDP growth drop signifi-cantly over the last three years, putting it at the back of the pack of the so-called BRIC economies. From expansion of around 7.5 percent in 2010, the IMF was predicting growth of 2.5 percent in 2013, and the same again in 2014. The global financial body has recommended more decisive action to raise productivity and spur pri-vate investment, along with tighter mon-etary controls to curb inflation.

Such reforms may cause short term pain; but they’ll benefit the economy and facilitate more private equity investment

in DEclinE

Source: Dealogic

2007 2008 2009 2010 2011 2012 2013

$m

Total private equity deal value in Brazil last year was barely 10 percent of its 2010 high


BrAZil

in the long run. If re-elected, Rousseff has promised decisive action – and while it’s easy to be sceptical about promises made by politicians just before an election campaign, the president appears serious about taking the message to the international commu-nity too. After spurning past invites, she attended the annual economic forum in Davos this year, where she told delegates the country would not be weak on manag-ing inflation and the public finances.

Brazil raced up private equity investors’ agenda in the early part of the decade, with large funds from big players flood-ing the market. In 2010, Latin America fundraising more than doubled to $9 billion, followed by another rise in 2011 to $11.2 billion, according to PEI’s own data. That appetite led to record-breaking funds from the likes of Advent, as well as regional players Southern Cross Group, Gávea Investimentos and investment bank BTG Pactual. Global funds also started to tune into the country for the first time.

Armed with plenty of capital, those buyers ploughed into Brazil, where sellers were waiting with high expectations. Many

deals were concluded, such as Apax’s deal for Tivit – the firm’s first in the country –which valued the IT services company at about $1 billion. Overall, private equity invested $5.6 billion in Brazil in 2010, according to figures from data group Dealogic.

But interest quickly cooled, as potential buyers baulked at the high prices which rou-tinely stretched beyond ten times company earnings before interest, tax, depreciation and amortisation. As a result, it was a better time to sell than buy. Deal volume plum-meted to $419 million in 2011 in Brazil, while sponsors disposed of assets worth $3.3 billion, Dealogic data shows.

Faced with high prices in Brazil and large pools of capital to invest, the pan-regional and global firms moved out into other rapidly-expanding countries, where the economies were smaller but competi-tion was less fierce and businesses cost less.

When Dubai-headquartered private equity firm The Abraaj Group (through emerging markets group Aureos, which it acquired in 2012) set up operations in Latin America in 2007, it decided to focus its efforts on Colombia, Peru and Mexico, which together with Chile now form the Pacific Alliance trade group.

Regular trips around the region from the firm’s hub in Mexico City reinforced this strategy by highlighting the gulf between Brazil and its neighbours. “You could see higher multiples – we were buying at most at 6 times, on average 5.5 times, where[as] in Brazil you were looking at pricing that

was 8 or 10 times,” said Miguel Olea, head of Abraaj’s activities in Latin America.

Colombia, seen as one of the power-houses of the Pacific coast of South America, with solid economic growth in the 4 to 4.5 percent range, garnered much attention as Brazil’s draw weakened. Advent had its busi-est year in Colombia in 2013: it made three investments, including a $1.1 billion deal to buy a 22 percent stake in Ocensa, the country’s largest oil pipeline. Competition and prices are increasing, but private equity penetration remains low and investors still have room to move. It’s a similar story in Peru, which is growing between 5 percent and 6 percent a year, and Mexico, where annual growth is a little more modest at around 3.5 percent to 4 percent.

“Our markets are more attractive now; we see a lot of international players coming around looking for opportunities,” said Hector Martinez, a managing director at Abraaj with responsibility for business in Peru. However, he doesn’t see these global buyers as a threat to Abraaj, which has typically invested about $10 million in its deals. “These big players are looking at our companies as potential targets. So there is a broad market for us, which is secondary sales to other private equity players.” Having assembled a portfolio of 13 portfolio companies since 2007, the group is preparing to move into exit phase.

PlAyinG thE lonG GAmE

But having lost some of its appeal to its Pacific-facing neighbours, Brazil is now coming back into focus among private equity houses and investors alike. The sheer scale of the market, with its burgeoning middle class, is hard to resist.

The private equity capital that con-tributed to a bubble in asset prices is now largely deployed, while there has also been a sharp fall in the public stock market – the BOVESPA index of Brazil’s most liquid stocks has fallen 22 percent in the last

Demo: thousands of Brazilians took to the streets to protest against transport fare hikes

If you are going to invest in Latin America, not

just Brazil, you are sure to have volatility. You need to have the stomach to go through thatPatrice Etlin

››


BRAZIL

year. Coupled with a more sombre mood and macroeconomic pressures, this has brought sellers back down to earth. Prices are routinely down below the critical 10 times EBITDA level in many industries. For those looking beyond the short-term volatility at the longer-term opportunity, it’s arguably a good time to invest.

“Given what has happened globally, valua-tions have come down significantly in Brazil,” says Jaime Londono, head of Latin American investments at funds group Pantheon. “And many of these funds that raised capital in 2010 and 2011 are coming back to market this year and next. So we are expecting to see an increase in our commits to Brazil.”

Among the funds coming back, BTG Pactual is looking to raise $1.5 billion, according to reports, just shy of the $1.6 billion it raised in 2011. Gávea is also expected back with a $1.5 billion fund.

It’s too late for some private equity houses. London-listed 3i Group set up in São Paulo in 2011, and some early prom-ise – including deals in cable operator Blue Interactive and eyewear group Oticas Carol

–saved the outpost from the chop a year later when Simon Borrows took over as CEO, tasked with reviving the group’s flagging fortunes. There was even talk of a $500 million Brazil-focused mid-market fund. However, in January this year, 3i said it was pulling back from the country.

“Following changes in the macro-eco-nomic conditions in Brazil, 3i has decided not to make any new investment in the region, or to proceed with the raising of a Brazilian fund,” it said in a quarterly update.

“The focus will be on the management of the two existing investments in Brazil, which were valued at £34 million ($56 million; €41 million) at 31 December 2013. Con-sequently we will be reducing the cost and resources applied to the region.”

However, those with long histories in Latin America are used to the ups and

downs, and are sanguine about the cur-rent conditions. “If you are going to invest in Latin America, not just Brazil, you are sure to have volatility,” said Advent’s Etlin.

“You need to have the stomach to go through that volatility, and to play the appropriate opportunities depending on the cycle.”

For some, that means betting on long-term consumer growth and rising domestic demand, as well as overseas opportunities. In 2012, Abraaj invested in Peruvian res-taurant group Acurio – founded by chef Gaston Acurio – and hopes to take its casual dining and fine dining brands across the region, as well as into Europe and the US.

It also means looking at investments in Brazil and its neighbours that are flow-ing from ongoing market reform, such as privatisations. The sale of Rio de Janeiro’s airport attracted huge attention; it was eventually sold to Singapore’s Changi Airport Group and Oderbrecht for $8.3 billion, a price that far exceeded expecta-tions. Large infrastructure assets, including shipping ports, attract traditional buyout firms because they can generate private equity-style returns when the right opera-tional changes and capital expenditure are applied.

Risks remain high. Brazil is more exposed than the rest of Latin America to the end of quantitative easing, due to its higher balance of payments deficit.

However, private equity buyers are confident that their new and existing investments can weather conditions in the country and its neighbours. And crucially, limited partners seem to have an appetite to back them. “Brazil has some big funds out next year, and they will have a tougher time than in the past,” said Mounir Guen, CEO of placement agent MVision, which has helped private equity firms including Abraaj and Advent raise money. “But inves-tors know they need to have Latin America and Brazil in a balanced portfolio.” n

Given what has happened globally,

valuations have come down significantly in BrazilJaime Londono

Londono: bullish on Brazil


rEAl EstAtE

First mover Being first helped HSI pull off the biggest real estate exit in Brazil’s history. Now it’s informing the firm’s response to the slowdown, writes Evelyn Lee

rEAl EstAtE

largest-ever real estate exit in the Latin American nation.

The massive trade marked the Singa-pore-based logistics provider’s entry into Brazilian industrial real estate, as well as HSI’s exit from the sector. “If you’re an early mover and you create a certain size within a key market, you’ll be taken out,” says Lima.

Now, HSI is once again getting ahead of the pack. In 2011, Lima anticipated both a slowdown in the Brazilian economy and a substantial amount of real estate supply coming to market – the combination of which would lead to prices and leasing rates dropping dramatically. “We started looking outside the box,” Lima says. “We started asking ourselves: ‘What can we do that is different from what everyone else is doing and that essentially can deal with this slower economic cycle while still making money?’”

Máximo Lima likes arriving early. For the founding partner of São Paulo-based pri-vate equity real estate firm HSI, formerly known as Hémisferio Sul Investimentos, being one of the first to invest in a real estate sector in Brazil pays dividends down the road.

“We try to be where no one else is,” says Lima. “The theory is that, if we get to these unexplored markets and start making money, it draws attention to them and then everybody else comes.”

Lima has proven this theory before, most notably with the firm’s early entrance into Brazil’s industrial market. After developing the largest logistics portfolio in the country between 2008 and 2011, the fund man-ager sold all of those assets – encompassing some 22 million square feet of space – to Global Logistic Properties in 2012, the

Parauapebas: site of HSI’s first hotel

The answer was hospitality and self-storage assets, two property sectors where few other private equity real estate firms in Brazil have ventured. Indeed, roughly half of the $650 million in HSI’s latest real estate fund, Hémisferio Sul Investimentos Fund IV, is being deployed in these new strategies – even though they were not part of the vehicle’s original investment thesis, which had targeted retail, residential and office real estate.

Last March, HSI launched a new hotel platform, Zii, to cater to domestic busi-ness travelers in the secondary and tertiary cities in northern and northeastern Brazil. Its first hotel, for example, is being built in the town of Parauapebas, which is located close to the world’s largest iron ore mine.

HSI is also expanding into the self-storage market, with plans to invest more than $100 million to build 20 properties in the city of São Paulo. Even in Brazil’s largest city, self-storage still is a relatively untapped market, with few organised players, Lima says.

While some of the demand for self-storage space is coming from the growing middle class in Brazil, about 70 percent of users in São Paulo are small business owners, according to Lima. “Because of the way the city is set up, you can’t bring large trucks in. You’re better off storing your stuff inside the city, and the only place you can do that is in self-storage units.”

Eventually, HSI plans to exit its hotel investments through a property or portfo-lio sale to a hotel REIT or owner-operator in Brazil, or an individual sale of each hotel room to retail investors. As for self-storage, Lima doesn’t anticipate that the market will remain an open playing field for long. “The key is to be able to get some scale in a major market like São Paulo. The global players already have started to look.” n


Latin lessonsBrazil was one of the big economic success stories of the decade prior to the financial crisis; its spectacular GDP growth brought a higher standard of living to both the poor and the middle class. A country long seen as a potential economic superpower appeared to finally be taking its place at the top table, after years of underperformance.

However, in recent years the country’s economy has stalled: the growth rate is currently languishing around 2 percent, and is expected to stay there for the next couple of years. The current account defi-cit is growing; the exchange-rate has been volatile; and inflation remains a worry. In addition, the recent protests against World Cup spending have led to questions about whether the country’s rapid growth has cre-ated a degree of social instability.

Nonetheless, Brazil is far from being a busted flush.

thE risE oF thE miDDlE clAss

“From a macro point of view, we are not doing too well,” says Patrick Ledoux, co-head of Actis’s Latin America business, who has lived in Brazil for 27 years. “But if you look at the correlation between successful private equity investment and GDP growth you will see that it is almost zero – in some cases negative.”

The fundamentals that made Brazil so suc-cessful in the decade to 2008 are still in place, he argues. There’s its demographic advantage, thanks to its population of 200 million; its abundance of natural resources; its political stability; and its openness to investment. “In Brazil you see a respect for the game of capi-talism, by which I mean that you can invest your money and take it out,” says Ledoux.

“That should make investors comfortable about Brazil. Sometimes you see interesting emerging markets [where] it is not possible to invest. Brazil is not like that.”

Actis clearly believes that Brazil still offers great opportunities: it has invested

more than $400 million in the country since 2010. “When people are saying bad things about Brazil, that’s the time to invest,” says Ledoux.

As a long-term investor, even the most visible signs of tension have not had any impact on Actis’s interest in Brazil. Although the recent highly-publicised demonstrations against the World Cup and income inequality might suggest a degree of instability, Ledoux is sanguine about it all. He points out that Brazil only reinstated democracy in 1985; the fact that young people feel they can go onto the streets and demonstrate shows that they are politically involved, and are confident that they can do so without reprisals. It’s a sign of the coun-try’s maturity, he says. “We can’t compare what is happening here to the Arab Spring. There is not going to be a revolution.”

The protests can also be seen as a func-tion of the very thing that makes Brazil so appealing to investors: the growth of a young middle class. At the heart of the protests was a feeling that the fruits of the country’s boom years have gone to the wealthy, and not to the 20 million people who have been pulled out of poverty and

Investing in education is the ideal way to tap into Brazil’s young and growing middle class, say Patrick Ledoux and Beatriz Amary of Actis

inVEstinG in EDucAtion

KEynotE intErViEW: Actis

Amary: students focused on quality, not price

Ledoux: now is the time to invest


KEynotE intErViEW: Actis

into the middle class in the last two decades. Tapping into the aspirations of this group represents a huge opportunity – and in many cases, that means education.

BAcK to schools

The private education sector in Brazil is already healthy, but is set to boom. Ledoux says that Actis’s strategy is to look for sectors or sub-sectors which are underpenetrated, and where organic growth can be expected.

Education in Brazil certainly meets these criteria. The percentage of people entering post-secondary education in the country is low compared to its peers – just 28 percent, compared with 71 percent in Argentina and 59 percent in Chile. But according to Beatriz Amary, a director at Actis who spe-cialises in education, young people increas-ingly want to learn in order to improve their prospects. “There is research showing that 77 percent of 18 to 24-year-olds want to go into post-secondary education, which they see as one of their key areas of investment in their future,” she says.

Just as importantly, the regulatory framework is very friendly to private pro-viders of post-secondary education; Brazil

is in fact the world’s second-biggest market for private education, after the US. “The government have realised that it costs three times as much for them to provide this sort of education as the private sector, so they have fostered the private sector to take over the role,” adds Amary. “The regulatory framework has been changing in the past 15 years, allowing profit on post-secondary education and giving significant tax incen-tives, so schools would not pay taxes if they granted scholarships to students,” she says.

More recently, the government has started financing students, so public money is being spent with private education pro-viders. “That means students are really starting to focus less on value for money, and more on the quality of the education they are receiving,” says Amary.

These changes have seen an explosion in the number of education providers. There are currently over 2,000 private firms offering post-secondary education in Brazil, making it a sector ripe for consolidation.

All of this explains why in 2012, Actis made a $103 million investment in the well-known University Cruzeiro do Sul Educacional. Since its investment, Actis has made several acquisitions that have more than doubled the number of students being taught at the university to 80,000. It has also looked to improve governance.

EnGlish Focus

Another sub-sector that met Actis’ crite-ria for investment was English language

teaching, another severely underpenetrated market. Only 2 to 3 percent of the popula-tion speaks English, says Amary, a figure that is way below that in comparable countries [5 percent in Mexico and 24 percent in Chile]. “Most of the multinationals now have a presence in the country and Eng-lish speakers can earn a salary of 30 to 50 percent more than non-English speakers. So there is demand to learn,” says Amary.

To capitalise on this opportunity, Actis bought CNA, an English school founded in 1970, for $68 million in 2012. Since the acquisition, Actis has increased the number of CNA outlets from 500 to 600, and 60 of the best schools have opened a second branch. Further expansion is planned. “The core of CNA will continue to be the open-ing of new schools at a very aggressive pace; that is where our focus is,” says Amary.

So far growth has taken place mainly in the São Paulo and Rio de Janeiro areas, but there are plans to move much more quickly in the underpenetrated north-east, where the firm believes there is massive scope for growth. In terms of exits, there would be appetite for either a trade sale or a flota-tion; publicly-traded education firms have continued to perform well, despite a weak stock-market in Brazil.

Education is a hugely significant theme for Actis. In addition to its two sector investments in Brazil, it also has three in China – taking its total spending on edu-cation-focused businesses to $360 million. And it’s always on the look-out for more.

“There are some interesting deals on the global pipeline; there are some countries with similar conditions to Brazil, with regulatory frameworks that are friendly to private investors, and also with good growth rates.” says Amary.

In Brazil and elsewhere, educational investments are only going to become more attractive. n

When people are saying bad things about

Brazil, that’s the time to investPatrick ledoux

Private education: the government is actively encouraging private providers to get involved


company profile: acTiS

Actis invests exclusively in the emerging markets with a growing portfolio of invest-ments in Asia, Africa and Latin America; it currently has US$6 billion funds under management.

Combining the expertise of over 100 invest-ment professionals in nine countries, Actis identifies investment opportunities in three areas: private equity, energy and real estate.

The firm, which was founded in 2004, build-ing on a 60-year heritage, is a signatory to the United Nations Principles for Respon-sible Investment (UNPRI) – an investor initiative developed by the UNEP FI and the UN Global Compact.

Actis backs quality businesses, bringing financial and social benefits to investors, consumers and communities. It calls this the positive power of capital.

Actis has recently been awarded ‘Firm of the Year in Africa’ for the sixth time as well as ‘Firm of the Year in MENA’ by Private Equity International, ‘African infrastructure fund manager of the year’ by Infrastructure Investor and ‘Africa and Middle East Firm of the Year’ by PERE.

recenT inveSTmenT highlighTS

include:

AutoXpress: East Africa’s leading tyre dis-tributor (February 2014)

Symbiotec Pharmalab Limited: a lea-ding specialist producer of steroid-hormone active pharmaceutical ingredients (APIs) ($48m, October 2013)

Atlantic Energias Renovaveis S/A: a Brazilian renewable energy company ($169m, September 2013)

Paycorp: a leading payments business in South Africa ($95m, August 2013)

Edita Food Industries: a leading snack food business in Egypt ($102m, July 2013)

Aela Energía: a renewable energy develop-ment set to become Chile’s largest wind and solar energy provider ($290m, June 2013)

Nanjing Micro-Tech: the largest local player in the Chinese endoscopy consumable sector (January 2013)

Globeleq Africa: 238MW of wind and solar projects in South Africa (November 2012)

Asiri Group: a 604-bed private hospital group in Sri Lanka ($32m, October 2012)

Bellagio: one of China’s most popular casual dining chains (September 2012)

CNA: English language training in Brazil ($68m, September 2012)

AGS Transact Technologies Ltd: India’s leading ATM outsourcing and payments company ($40m, August 2012)

Garden City: The largest retail mall in East Africa ($36m, July 2012)

University Cruzeiro do Sul Educacio-nal: Brazilian secondary education platform ($103m, January 2012)

You can learn more about Actis at www.act.is

65+ years of on-the-ground experience

$6bn funds under management

216limited partners

100investment professionals

10offices

70portfolio companies

30countries

104,170employees of Actis portfolio companies

160investments made

100 exits

Actis: A unique firm with a distinctive heritage


FunDrAisinG

Wait-and-see modeLatin American pension funds have been allowed to commit more money to private equity in some parts of the region—but until they see more proof of concept, getting more capital out of them may be challenging, Chelsea Stevenson writes

FunDrAisinG

Latin American fundraising peaked about two years ago but has steadily declined since, as the region’s economies have slowed and pensions have cut back their commitments.

In 2013, 16 private equity funds raised $3.12 billion in Latin America, according to Private Equity International’s Research and Analytics division. The previous year, 29 funds raised nearly twice as much capital, hitting about $7.25 billion; while in 2011, 36 private equity funds raised $11.22 billion.

In 2011, regulations changed for some of the region’s largest pensions, allowing them to raise their private equity allocations to double digit-levels. Brazilian pensions, which began allocating part of their funds to alternatives in 2002, are now allowed to invest up to 20 percent of their assets in domestic private equity funds approved by the National Monetary Council.

But now, these pensions (both in Brazil and in places like Colombia) are pulling back or looking at other asset classes as they wait to see what private equity returns will be, forcing general partners to raise more money abroad.

For example, São Paulo-based asset manager Rio Bravo Investimentos has been

talking to more foreign institutions in the last two years, because local pensions seem more comfortable investing in Brazilian bonds.

“They are used to investing in more liquid assets,” explains Paulo Camargo, Rio Bravo international business development manager.

Rio Bravo raises both private equity and venture capital funds; it’s currently in the market with its Rio Bravo Nordeste Fund III, which will follow the same strategy of the firm’s previous funds and invest in the north-east states of Brazil. In the past, Rio Bravo’s limited partners have historically been Brazilian pension funds, development banks and more sophisticated family offices.

comPlicADo colomBiA

Colombian pensions entered the private equity market in 2005 with less flexibility, including smaller allocation permissions. The country’s four largest pensions – Pro-teccion, AFP Skandia, Porvenir and Col-fondos – are allowed to allocate 5 percent of their funds to international GPs and 5 percent to local fund managers with more than $1 billion under management.

Colombian pensions are expected to grow their own assets steadily to about $550 billion by the end of 2014 and more than $600 billion in 2015, according to 2011 predictions by asset management research firm Cerulli Associates.

Proteccion, which began by investing in private equity via fund of funds, is in the process of transitioning to making more direct investments, according to the ››

Mexican pensions are a part of large financial

institutions with a large presence in private equityroberto terrazas

Medellín-based pension fund. Proteccion made its first international fund commit-ment in 2007 and its first secondary com-mitment in 2008.

However, because Colombian pensions have not been investing in private equity for an entire investment cycle, some are halting further commitments until they have a better picture of the private equity programme in 2014 and 2015, according to Maria Claudia Correa Ordoñez, head of investments at Skandia.

As a result, the number of funds raised in Colombia has slowed recently. In 2013, three funds raised $475.8 million, accord-ing to PEI data. That compares to zero funds in 2012 and five in 2011, which collected $280 million.

In the history of Colombia, 30 pri-vate equity funds have raised $3.1 billion, according to data from Colombian develop-ment bank Bancóldex.

There are currently about 14 private equity and venture capital funds in market in Colombia, according to Bancóldex.

Afore Banamex: the largest LP in the new Nexxus fund


FunDrAisinG

Carmago: talking to LPs abroad

Current funds include Madrid and Bogotá-based Diana Capital which is target-ing $150 million for its first Latin America fund and Efromovich-Silva Partners, which is targeting $500 million for investments in Colombia, Peru, Brazil, Spain and Portugal, the bank says.

These funds are likely to receive commit-ments from family offices in Colombia that have been active in the asset class already, but local foundations are still hesitant about the risks of private equity. As a result, most of the capital will be raised from international investors, local fund managers suggest.

Some Colombia-based GPs, such as Latin America Enterprise Fund Manag-ers and Altra Investments, seek to invest in companies with operations in Peru as well. That said, the number of Peru-specific funds is increasing. In 2013, four funds (two raised by local managers and two raised by international GPs) raised a total of $1.3 billion. In 2011, there was just one fund closed, according to PEI data: Nexus Group, which raised $320 million.

mEXicAn stAnD-oFF

The Mexican private equity market is slightly more mature than that of Colombia and Peru. One of the more veteran fund man-agers, Nexxus Capital, has raised six funds in the past 16 years. Most recently, Nexxus Capital Private Equity Fund VI closed on $550 million, surpassing its $400 million target, in November 2013. Nexxus launched Fund VI in November 2012 and held a first close in June 2013, according to Roberto Terrazas, a managing director at the firm.

Fund VI was nearly double the size of Nexxus’ prior vehicle, which closed on $300 million. Unlike Rio Bravo’s fundraising in Brazil, about 55 percent of LPs in Nexxus’ latest fund were local Mexican investors – mostly pensions, family offices and one fund of funds. The fund’s largest investor was Afore Banamex, a Citi affiliate that is the largest bank in Mexico, Terrazas says.

“Mexican pensions are a part of large financial institutions with a large presence in private equity,” he says.

Between 2009 and 2013, Mexican pen-sions invested more than $4 billion in alter-natives, the bulk of which went to real estate and infrastructure funds, followed by fund of funds and mezzanine vehicles, according to a report from Bain & Company.

Buyout funds like Nexxus Fund VI only accounted for a small portion of the pensions’ capital commitments. The Mexican govern-ment revised the regulatory framework in 2009, allowing pensions to invest more freely in private equity, the Bain report suggested. As in Brazil, Mexican pensions are allowed to invest up to 20 percent of their assets in Mexican companies and infrastructure projects through investment vehicles called Certificados de Capital de Desarrollo.

Nexxus’ Fund VI also received one com-mitment from Colombian institutional investor CAF. This was the first time any of the Nexxus funds had received com-mitments from a Latin American investor outside of Mexico.

“We’ve had unsolicited calls with some Latin American investors that weren’t on our radar, but the pensions have restric-tions [on investing in alternatives] outside of [their home] country,” Terrazas says.

With the number of Latin American LPs committing to local private equity funds not likely to rise anytime soon, fund manag-ers are looking further afield. Nexxus, for example, plans to target more investors in the US Hispanic market and an increasing number of funds of funds and sovereign wealth funds.

“People are coming into our office almost every week to understand the market and our investment thesis,” he adds. “What’s keeping them away is the fact that there aren’t very many GPs with a solid track record.”

Terrazas estimates that there are about 45 alternatives funds in Mexico, based on

››$600bn Predicted AUM of Colombian pensions by 2015

20%Percentage of assets Brazilian and Mexican pensions can now invest in PE

$4bnAmount Mexican pensions invested in alternatives between 2009 and 2013


Cunningham: eyeing Mexico

data from the Mexican Private Equity Asso-ciation. But only five or six funds actively invest in private equity in the same way that Nexxus does.

“GPs [in Mexico] with a solid track record are very scarce. This is changing – but not as quickly as in other countries,” Terrazas says.

PErtinEnt PlAcEmEnt

One notable aspect of Nexxus’ latest fund-raise was that the firm engaged a placement agent for the first time.

While only a small number of place-ment agents are marketing funds in Mexico, interest in Mexican funds is on the rise, according to Timothy Cunningham, presi-dent of placement agent Touchstone Group.

“Mexico is exciting and bears watch-ing,” says Cunningham. “Central America has some high quality stuff going on. But it’s really small.”

Touchstone has only served as a place-ment agent for GPs that are fundraising in Brazil and seeking capital from foreign investors typically in North America and Europe. According to Cunningham, some foreign LPs are currently increasing their target allocations to private equity in Latin America.

That chimes with a survey by Coller Capital and the Latin America Private Equity and Venture Capital Association last year, in which 35 percent of LPs said they expected to increase their commitments to Latin America in 2014. About 53 percent of the LPs expected to maintain their current commitment levels.

However, convincing LPs without an allocation to emerging markets to invest in Latin America can be challenging. Many LPs have already made decisions about the kind of emerging markets exposure they’re willing to consider for a given investment period.

“If an LP is interested in [Latin America], they’re going to have several decisions to make; if they are learning about the region, they’re generally open to discussion; and if they are experienced, they have various opinions,” Cunningham says.

LP concerns in Latin America tend to include volatility, the unpredictability of exchange rates and vulnerability to gov-ernment regulations. The need for strong environmental, social and governance prac-tices is also important to LPs, particularly European LPs, Cunningham adds.

Aside from Mexico, Touchstone is also targeting placement agent work in the Andean region and in Chile. The latter’s fundraising market is one of the smallest in the region, however, not least because local pensions are limited to investing 2.5 percent of their total assets in private equity. Chile’s pensions are also the small-est by assets under management, relative to Peru, Colombia and Mexico. The country’s total assets are expected to hover just above the $200 billion mark this year and in 2015, according to data from Cerulli.

So far, placement agent work hasn’t been too common in Colombia, or the rest of the Andean region – but a few fund managers are exploring the idea for their succes-sor funds as they seek more international investors.

For example, Bogotá-based Altra Investments raised its debut fund with commitments from local investors, but engaged US placement agent Stanwich Advisors to raise its second vehicle. Fund II was oversubscribed and closed on $356 million in 2013, exceeding its $350 mil-lion target.

That’s an exceptional case in Colom-bia, where most funds are still too small to require placement agent work. “The mid-size managers have found it difficult to find global placement agents willing to take a look at them for their small fund sizes and their limited full-cycle track records,” says Robert Linton, an investor relations officer at the Brazilian Private Equity & Venture Capital Association.

However, there’s no doubt that demand for placement agent work throughout Latin America more broadly is increasing.

“We have not gotten all the assignments we have wanted, [so] there is clearly com-petition,” says Cunningham. “But we have several prospective GP clients we’ve been working with for a while, and we expect they’ll be in the market soon.”

The future growth of private equity fundraising in Latin America is dependent on the development of local LPs, primarily pension funds, committing more capital to the asset class – although a more prominent role for placement agents could also help develop the market.

With a number of big Latin America-focused GPs set to come to market in 2014 and 2015, the hope must be that progress happens sooner rather than later. n

FunDrAisinG

The mid-size managers have found it difficult to find global

placement agents willing to take a look at themrobert linton


Planting a flagA number of private equity firms have been looking to open local offices in Latin America to improve their access to deal flow — but timing the market is a challenge, writes Graham Winfrey

EXPAnsion

In all emerging markets, establishing an on-the-ground presence is crucial for originating good deals and managing local operations.

During the past few years, general part-ners seeking to capitalise on Latin American investment opportunities have raced to open offices in the region. Brazil has naturally been the most popular choice, with the likes of 3i Group, Apax Partners, The Carlyle Group, Kohlberg, Kravis Roberts, and TPG all estab-lishing offices in the country.

The most recent example was the Canada Pension Plan Investment Board, which opened an office in São Paulo in February that will be operational in April. The office is staffed with three investment professionals, two of whom have relocated from Toronto, though CPPIB aims to grow the office to

companies that are not based in São Paulo will do a lot of business in São Paulo.”

Piacsek joined Apax in 2012 to lead the firm’s efforts in South America. Though Apax has had a local presence in Brazil for only three months, the firm made its first investment in the country in 2010, acquiring Brazilian IT and business proc-ess outsourcing firm TIVIT for $1 billion. The deal marked the largest private equity transaction in the country at the time and was Brazil’s first ever take-private.

But regardless of whether a firm has experience investing in Latin America, all fund managers establishing a first office in the region are subject to the same risks that come with expanding into any new territory.

runninG thE risK

“One of the main challenges for an invest-ment firm is to successfully transplant the firm’s culture, values and standards into the new office,” says Alejandro Rodriguez, a director at PineBridge Investments in Mexico City. “In addition, there are the structuring challenges of legal and tax efficiencies for conducting business locally. [But] risks associated with operating in an emerging market [like] Latin America can be mitigated by taking the global standards of the firm and applying them locally.”

And even if firms get all this right, they may succumb to macroeconomic pressures that threaten long-term returns.

For instance, in 2011, 3i opened a São Paulo office, its first in Latin America, staffed with a four-person team hired from Standard Bank Private Equity. 3i planned to make investments of between $30 million and $100 million per transaction, targeting Brazilian businesses with enterprise values of up to $200 million.

about a dozen individuals within the next year, according to a spokesperson. From São Paulo, CPPIB will focus primarily on five markets: Brazil, Chile, Colombia, Mexico and Peru. Prior to opening the office, CPPIB had invested about C$5 billion (€3.3 billion; $4.5 billion) in Latin America across private equity, real estate, infrastructure and public equity investments.

As any Latin American GP will tell you, São Paulo is the most logical city for a pri-vate equity firm to establish a first office in the region.

“Unless you are a more niche player, it makes little sense to have your first office in Latin America be in one of the smaller countries,” says Walter Piacsek, a partner at Apax Partners, which opened a São Paulo office last November. “Even Brazilian

Brazil: normally the first port of call for a GP expanding into Latin America


One of the main challenges for an investment firm is to

successfully transplant the firm’s culture, values and standards into the new officeAlejandro rodriguez

In January, however, 3i finance director Julia Wilson said on a conference call that after making two investments in Brazil – sunglasses maker Oticas Carol and cable and broadband provider Blue Interactive – 3i’s now eight-person team would not be making any new investments in the coun-try. The firm also scrapped plans to raise a Brazil-focused fund.

“Brazil remains a really interesting market, but conditions have changed over the last 12 months,” she said. “There’s much greater market and political uncertainty, and that’s also been reflected in currency volatility.”

Nonetheless, private equity interest in Brazil and other Latin American economies remains strong.

“There will be people who come into the region and stay for a while, and if they don’t get the returns maybe move on, but I don’t think it’s a fad,” says José Antonio Contreras, a managing partner at Mexico Coty-based WAMEX Private Equity. “I think there’s enough substance in terms of the size of the economies, and the number of companies that lack capital.”

FrEsh colomBiAn intErEst

While Brazil continues to attract the most interest, appetite for its neighbouring econ-omies is on the rise.

“Over the last few years, Peru and Colombia have shown a number of struc-tural changes in their economies, so that there’s been fresh interest in those coun-tries also,” Contreras says. “The other key market is of course Mexico, which is close enough to the US that for many years larger private equity managers have glanced over the border – and now their interest has significantly grown due to unprecedented reforms. Those would be the more substan-tive markets in [terms of] their popula-tion and GDP, and also because they share common themes – younger demographics and a growing middle class.”

US GPs are not the only fund managers looking at Mexico, either. “In a few cases we have had South American players look into Mexico and even open an office, with various degrees of success,” Contreras says.

Though interest in Colombia and Peru has grown considerably in recent years, Camilo Villaveces, president and chief executive officer of Andean private equity investment manager Ashmore Colombia,

says he doesn’t expect a significant amount of new private equity firms to open offices in Bogotá and Lima. “I think the people who were going to come to Bogotá and Peru are basically here, and Mexico is now the place to expect openings of new offices,” he says.

If anything, he suggests, some firms will start scaling back their Latin American activities in the near future. “Managers that are not really emerging market managers, but who came opportunistically because of the problems of the rich countries will begin to go back to their comfort areas.”

That said, investors who stay the course should be able to benefit from a growing market.

“The opportunity set in Latin America has grown significantly over the last five years, but it’s still on average one of the most underpenetrated private equity mar-kets in the world, [as]measured by private equity investments as a percentage of GDP,” says PineBridge’s Rodriguez. “More and more institutional quality managers are emerging, companies and entrepreneurs are experiencing the value of partnering up with private capital providers, and local institutional investors continue to grow their mandates locally and internationally – all signs of a healthy ecosystem developing for anyone looking to expand into a region.”

But fund managers be warned: if you expand into Latin America, you run the risk of jumping in too late.

“You have to be very nimble in hitting the right cycles,” says Contreras. “Even though the economies in the region have a lot of fundamental reasons to keep growing, there’s always the political side of presidents coming and going; maybe not the shocks that you used to have in the past, but there’s always changes and reforms. It’s a moving target.” n

Rodriguez: LatAm remains underpenetrated

EXPAnsion


The great logistics pushThe Brazilian government outlined a whopping $121bn infrastructure programme in 2012 to address a 30-year logistics deficit. But it hasn’t all gone to plan, writes Bruno Alves

inFrAstructurE

It’s not often that infrastructure draws an emotional response from people. Sure, pro-fessionals in the asset class might experi-ence a range of emotions when bidding for deals – anything from elation, if you’re the lucky winner, to bitterness or disappoint-ment, if you’re on the losing side. But to see millions of people emotionally engage with the asset class? Rare indeed.

That’s precisely what happened in Brazil, though, when a local protest over bus fare increases mushroomed into nationwide opposition to the cost of host-ing the 2014 World Cup and the 2016 Olympics, bringing millions of Brazilians

spending. But regardless of the imminent sporting events, there’s no doubt that Bra-zil’s logistics network is desperately in need of a revamp.

loGistics DEFicit

As it stands, Brazil has a widely acknowl-edged 30-year logistics deficit, which, according to some estimates, costs the country up to 15 percent of annual gross domestic product, versus some 5 percent for most other countries. “Soy beans, for example, now cost more to ship than to produce,” Endo pointed out in his note.

In an effort to counter this shortfall deci-sively, in 2012 the government announced a $121 billion logistics programme, leaving no stone unturned in its quest to modernise the country’s roads, rail, ports and airports.

The so-called ‘Programme for Invest-ments in Logistics’ is set to span 30 years, but a significant chunk of the required investment is to be deployed over the first five years. For example, more than half of the government’s announced $21 billion roads programme is to be done in that time period, with $28 billion of the $46 billion railways programme envisaged to be completed during the same period.

Rio de Janeiro’s Galeão and Minas Gerais’ Confins airports, expected to net the government more than $4 billion, will have been awarded to the private sector by then, with the ports sector also in line for a substantial amount of investment.

As well as putting all of these projects ‘out there’, the government is also “building a supportive environment”, to use Endo’s words. “To encourage foreign investment into the sector, for example, the govern-ment created targeted tax breaks on infra-structure bonds for both domestic and for-eign investors,” he wrote.

onto the streets. Eventually, it transcended infrastructure altogether, focusing on eve-rything from corruption to the cost of the Pope’s recent visit.

It was a bitter development for Presi-dent Dilma Roussef, whose government in late 2012 “made it crystal clear that [it] sees infrastructure development as the surest way of lifting millions out of pov-erty and re-energising economic growth”, as Mauricio Endo, a partner with KPMG Brazil, wrote in the aftermath of the gov-ernment’s announced infrastructure push.

Many Brazilians appear to disagree with at least some of that infrastructure

Looking grim: President Roussef’s infrastructure efforts have not gone down well


inFrAstructurE

In a bid to further woo foreign pensions, Bernardo Figueiredo, the man tasked with implementing the logistics programme, said in 2013 that the government is consider-ing creating a new investment vehicle to facilitate foreign pension investments into Brazilian infrastructure.

unhAPPy rEturns

But in spite of the bounty of opportunity, the picture is still not uniformly rosy.

For starters, allowed rates of return for Brazilian infrastructure projects are not exactly high – even, arguably, after a recent increase.

“I’d say the challenge for new invest-ments in Brazil at the moment is that the government in its privatisation efforts – which have been underway for the last six months or so – has been trying to push the envelope down on allowed rates of return, and so they’ve had a few false starts in the privatisation process,” Sam Pollock, chief executive of Brookfield Infrastructure Partners, said on the fund’s Q2 earnings call last year.

The government, having realised this, began to make amends in 2013, sweetening allowed rates of return for highway conces-sions from 5.5 percent to 7.2 percent, with

returns in the rail sector upped to between 7 percent and 7.5 percent from the previ-ous 6.3 percent.

“We’ve been encouraged with the direction that they’re heading, in as far as providing an opportunity to earn a better rate of return, [but] we’ll still have to wait and see how that all works out,” Pollock said.

Another red flag for investors is Brazil’s patchy procurement history, which often leads to delays and cost overruns.

For a recent high-profile example, look no further than the projected 420-kilo-metre high-speed rail line linking Rio de Janeiro and São Paulo, which last summer was yet again pushed back by at least a year.

Brazil’s transport minister, Cesar Borges, said the government was delaying the project in order to get more bidders to participate. Prior to the postponement, only a French-led consortium had pro-claimed itself able to meet the late August auction date.

However, this is not the first time the multi-billion dollar project has been pushed back – in fact, it’s the third. A previous tender in 2011 was cancelled due to an absence of bids, forcing the government to restructure the project so it would be more palatable to investors.

A hEAVy toll

And then, of course, there are more imme-diate concerns, following the recent pro-tests. In late June, the São Paulo government told toll road concessionaires that it was freezing tolls for a year until summer 2014, a decision that will affect some 19 road concessions throughout the state.

So far, investors have put on a brave face. Mark Ramsey, head of Latin American advi-sory and a senior managing director for

Macquarie Capital, attempted to put the protests in a long-term context at an event last year on Latin America:

“Political movements could be viewed as troublesome, but in the long-term we don’t think they are. You have to put it into perspective. Infrastructure is rarely affected by these kinds of events.”

Pollock, whose firm teamed up with Abertis last year to acquire thousands of kilometres of roads across Brazil, includ-ing in São Paulo, was equally upbeat: “With respect to some of the announcements in São Paulo, regarding putting a cap or a short-term freeze on some of the inflation-ary increases to the tariffs, there still hasn’t been any formal announcement of what the regulator intends. However, the regulator has indicated that all the concessionaires will be kept whole.”

“This is something that they’re really doing for their own population, in response to some of the tensions going on in the country,” he added. “But as far as perform-ance of roads and the concessionary frame-work, everything is as expected. Brazil has a long history of compensating concession holders when they make changes to the tolling regime.”

But there’s something else Brazil has always done, at least as far as investors are concerned: fail to deliver on its promise. As the old saying goes: “Brazil is the country of the future – and always will be”.

It would be a shame, given all its mani-fest demographic advantages plus the added bonus of World Cup and Olympic limelight, if Brazil is not finally able to persuade inves-tors of its attractiveness in the here and now. n

A version of this article previously appeared in our sister title Infrastructure Investor

The government has been trying to push the envelope

down on allowed rates of return, so they’ve had a few false starts in the privatisation processsam Pollock


PEI: Bancóldex has invested in seven

private equity funds since 2009.

What do you look for in managers?

MCG: We have to invest in funds with a special interest in Colombia. The funds are allowed to be pan-regional and invest in other countries and they can be based in other countries, but we must concentrate our efforts in Colombia. The seven funds we’ve committed to are completely aligned with this policy. Our commitments are relatively small – about $5 million each – and to date we’ve committed a total of $50 million. Right now we’re trying to reach our goal of com-mitting $100 million of our own resources.

What private equity strategies look

the most attractive today?

Bancóldex is a development finance insti-tution promoting Colombia’s industries, trade and tourism, so we invest in funds that benefit the retail, services, biotechnol-ogy, renewable energy, information technol-ogy, manufacturing, and trade and tourism industries. We don’t invest in agriculture, oil and gas because the country has other institutions in that space. Since 2009 we have analysed more than 35 funds and have furthered our due diligence process on 19 funds, but we are very strict in trying to understand each fund’s objective, team mem-bers and key persons, history of exits, ways of generating value and overall track record. Our investment committee, which consists of two Bancóldex board members and three external experts in private equity and ven-ture capital, approve each commitment.

What are some of the challenges that

come with being a relatively new LP?

Our challenge is to continue investing and improving our investment process so we can build up Colombia’s first fund of funds. The country needs this kind of tool so that limited partners can offer bigger

commitments to general partners. We could not start by building the fund of funds in the beginning, but the idea is to improve year-by-year and now we’re the most active government LP. It is difficult to say, but the fund of funds project could be finished in one or two years. Right now, our commit-ments help to attract new investors to the industry and to provide the market with support. We hope other local LPs comple-ment our fund commitments and make larger fund investments of their own. We have to be very careful with our investments though, since we are trying to promote best practices.

How does the regulatory environment

impact your investing programme?

There are a number of regulatory, economic and financial issues. We need to clearly define the legal structure of a fund of funds vehicle and we need to consider who the possible investors might be. We want other govern-ment-owned investors and international agencies to be invested in the fund of funds. We don’t have any relationships with sec-ondaries funds but we probably will when we define our fund of funds structure. In general, there have not been enough exits in Colombia’s private equity market right now, because the economy is small and the private equity and venture capital markets are not very well known among local entrepreneurs and other industries.

What prospects do you have for

the private equity market in 2014?

This year we expect to commit to four private equity funds; historically we’ve com-mitted to two funds per year. We are also expecting some important exits before the end of the year, especially from our 2009 vintage funds. Our portfolio will need to wait another year or two to see significant returns though.

Blazing a trailMARGARITA CORONADO GOMEZ, BANCÓLDEX

Colombian development finance institution Bancóldex is looking to build Colombia’s first private equity fund of funds programme, says Margarita Coronado Gomez, the bank’s director of private equity

ON ThE RECORD

We are expecting some important exits before the end of the year, especially from

our 2009 vintage funds

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THE LATIN AMERICA SPECIAL 2014 - Invierta en Colombia · 2016 Summer Olympics in Rio de Janeiro. And while some GPs are expecting less deal activity in Brazil this year, fundrais-ing