Search
Eurekahedge - Other Products and Services
Fund Of Private Equity Fund Database Free Trial

Hedge Fund News

EH Report

Manager Interviews

‘Mizuho-Eurekahedge Index’ goes live

Asian Hedge Fund Awards

Industry Events Calendar

Fund Launches and Closures

Archive



Eurekahedge
Eurekahedge Hedge Fund Indices

Hedge Fund Monthly
 
Steady in the Storm with Regional Opportunities

Damian Hampson
Alternative Latin Investor

September 2009
 

After a decade of steady growth, Central America is weathering the global financial downturn comparatively well and continues to offer regional opportunities for private equity. Historically, this small, diversified region has suffered from armed conflict, political instability, weak institutions and a lack of legal frameworks and enforcement. However, stable democratic governments allied with disciplined fiscal policies brought an unprecedented period of growth in the past decade with steady growth rates on average above 5%. According to IMF figures from 2006, Central America with 5.5% real GDP growth was second only to Latin America and the Caribbean with 5.9%. Through interviews with some of the main players in the region, Alternative Latin Investor has found that in addition to the countries within Central America nations such as Mexico, Colombia, Peru and Ecuador are increasingly becoming of interest to private equity investors looking for more region-wide plays as opposed to focusing on a particular country. Peru and Colombia have been and are two countries that have demonstrated stability in fiscal terms for Peru and with internal security matters in Colombia.

The nature of Central America with its small countries is dictating that small or regional investments are attracting the most private equity interest. Mark Bishop from The Provident Group feels that the conditions investors have been waiting for are now becoming reality. “Initially, back in our earlier days we did a lot of work in Central America ourselves. We were early in the game there. We thought there was going to be a lot more consolidation regionally. It looks like it’s becoming a lot more interesting now.” When asked by Alternative Latin Investor if The Provident Group would now be refocusing on the region, Mark Bishop is optimistic but cautious “the problem with Central America was and remains, very fragmented economies, small markets and lack of experience with legal transparency – it makes putting capital in there just much more difficult. At the end of the day, people are going to cherry-pick – there is going to be a couple of selective opportunities but it is still a difficult market to get your arms round.”

Aureos Latin America fund is the largest private equity fund in the region with over US$200 million under management among three funds. They are primarily a provider of capital for companies that are looking to expand or fund for management buyouts. The majority of their investments are around the US$5 million mark and Erik Peterson, regional managing partner of Aureos Latin America, says they see greater regional integration as the key to their strategy. “We have a strong preference for companies that have the potential to become regional players. As you know, there is a lot of cross-border activity within the region, which is one of the reasons why we have selected this region. There are free trade agreements enacted with the US and within these regions, so you have quite a flow of capital, say between Colombia, the south-end of Peru, the north-end of Central America and Mexico going south into the Central American region.

M&As have seen heavy activity in recent years but are now in a downward cycle that will present opportunities, according to Juan Carlos Rojas from Mesoamerica. Having been established in the region for over ten years, Mesoamerica primarily deals with a group of 15 private business groups in the region. Rojas says after initially operating a general fund, they have refined their strategy for the region. “We moved towards industry specific SPV’s instead of managing a general fund. And this was mainly because we started on licensing vast opportunities in specific sectors. We launched an investment in telecommunications, raising some US$200 million in commitments from our investors and did a joint venture with Telefonica to develop telecom in Central America. We exited that deal in 2003 and created Mesoamerica Energy, which is a company that develops and operates wind power plants in Central America. Basically our strategy is that we do not manage a fund. We have no real need or pressure to be diversifying and be investing – committing funds. We are very picky about the opportunities – it has to be certain types of industries and opportunities that have certain types of scale. We are looking to invest US$50-100 million or more per deal.”

The M&A sector in Central America has seen some large-scale activity, with Citi Bank, HSBC and GE money moving into regional banking and Telefonica, Telmex and Cable & Wireless now operating in Central American telecommunications. Up to US$30 billion has been spent by multinationals on M&As in the region but with many now wanting to protect their core business in the present climate. Rojas doubts such activity will continue in the near future, thus creating distressed opportunities. “I think that in our region many multinational companies are going to be faced with, over the next one or two years, the decision to basically spin-off their Central American operations and that may make opportunity to invest in corporate orphans. Spinning-off their Central American operations creates a great opportunity for local groups to buy and then once the economy picks up again, you’ll see them coming back in.”

Venture capital and stock markets within the Central American region play little or no role in attracting private equity. According to a 2008 IMF report, “several Central American equity markets are severely under-developed. There are no equity markets in four out of the seven countries (Guatemala, Honduras, Nicaragua and the Dominican Republic), and markets are small and shrinking in the other three (El Salvador, Costa Rica and Panama). At the end of 2006, there are 88 equity issues listed in the Central American region.” Roberto Zeleya, partner at Batalla & Asociados in Costa Rica, says there are attempts to address this hole in the private equity market. “We have a vacancy in venture capital because there are no funds investing in start-ups or new projects. What we have are some efforts to try to establish an angel investor community here in Costa Rica. Those are institutional efforts which were initially funded by TAMIS, which is a multi-lateral development fund by the Inter-American Development Bank and by the Corporation Andino de Developmento (CAD). They funded the first stage of link inversions which basically put together a web of angel investors in Costa Rica trying to invest in new companies.”

Whilst the lack of significant venture capital is a real challenge for growing businesses in the region, funds focused on SMEs (small and medium enterprises) do offer a focus on smaller investments in an area that Zeleya says has seen strong activity. “SMEs that invest up to US$3 million have made a lot of investments in this past couple of years. They engage in transactions from US$500,000 to US$3 million and there are two of those funds operating in the region. One of those funds is Emerge Central America growth fund that is managed by Aureos Capital and the other one is CASEIS Corporation Two Limited, a second generation fund managed by LAFISE investment management, based in Nicaragua.” Central American pension funds have a negligible impact on private equity, though recent changes to regulations in Colombia and Peru are allowing for increased activity. Many pension funds in the region are limited in terms of where they can invest in, either not being able to invest in private equities or only being allowed to invest exclusively in their own region. However, Aureos Latin America fund reported to Alternative Latin Investor that changes to regulations are slowly opening up possibilities in Colombia and Peru. “They have recently enabled regulation that would allow them to invest outside. In the case of Colombia, it allows a Colombian fund to invest outside of the Colombia region. And in the case of Peru, they have recently authorised Peruvian pension funds to invest outside of the region as long as they are essentially qualified and registered private equity funds.”

Foreign direct investment (FDI) in Central America is dominated by US capital according to the sources Alternative Latin Investor interviewed. Rojas observes that whilst the US is providing the bulk of FDI’s, there are new trends emerging. “We are very tied to the US and I would say most FDI – 60-70% comes from the US. Nonetheless, there has been more and more FDI from Mexico coming in. It is Mexico’s backyard and now Colombian investments are coming back up. Also, the Spanish invests with Telefonica although the Spanish banks have not come in yet. So it is primarily the US, Mexico, and Colombia, as well as the Europeans, albeit to a lesser extent.” Bishop also noted some interest from the Middle East but with more  focus on Latin America as a whole. “Where we see interest is certainly not in the hydrocarbon and the farm sectors. With the issue of food security, a number of groups have targeted growth crops and cattle operations.” In focusing more on Central America, Aureos have attracted a diverse group of investors. “We have a strong mix of development financial institutions and multi-lateral institutions, so we have many of the well-known institutions that are generally seeking to provide capital and invest in emerging markets, particularly in mid-sized and the S&B segment of emerging markets. With this fund, we have also included some capital from private sector investors – US private investors – and more recently, we have raised capital from some Colombian pension funds and insurance companies.”

Regional stability and new growth countries such as Colombia and Peru look set to be the main drawing points for private equity investors to Central America in the future. Erik Peterson from Aureos sees Central America maintaining a steady, if unspectacular, course in the next ten years. “CA countries are rather small so they tend to fall in margins of places that investors are looking to invest in. Yet, at the same time they are considered relatively stable locations with some exceptions. I would expect this to be the trend going forward as well as that they are not going to be a focal point for investors, yet at the same time the region as a whole is considered a relatively stable region to invest in.” Even though groups such as Aureos and Mesoamerica currently dominate the private equity in the region, Mark Bishop thinks there is an opening for competitors. “I would say there may be more room. The things people are focused on are some oil and gas plays, and there are the housing plays and financial services plays. Aside from that, there are not many other sectors that are that interesting. There may be room for another couple of funds. I think what Aureos did, they are already moving into a more regional approach so it is basically Central America plus Colombia and Peru. And I think people are realising that - people are taking more of a regional view instead of being Central American focused.” Whilst the current crisis has not affected Central America to the degree of other regions as yet, Roberto Zeleya of Batalla & Asociados believes that if the right direction is taken they will emerge stronger, “being such small economies we depend on foreign trade for growth. The external demand for exports would be a very important factor or conditioning element in our recovery. I would say that we could navigate through this fairly unscathed if there is creativity in the business sector in the region looking for alternative markets or our own internal market. If we continue to rely on traditional markets such as the US or to some degree Europe – we are going to be pegged to them.”

 

 

This article first appeared in Alternative Latin Investor (July/August 2009 issue), http://alternativelatininvestor.com.

 

Alternative Latin Investor is currently the only digital publication to provide information on alternative investment opportunities in Latin America.
 

 

 

 

If you have any comments about or contributions to make to this newsletter, please email advisor@eurekahedge.com

[Top]

 
Industry News
 
     
  The Eurekahedge Report - September 2014  
     
  Asset Flows Update for the Month of August 2014  
     
  Hedge Fund Performance Commentary for the Month of August 2014  
     
  2014 Key Trends in UCITS Hedge Funds  
     
  Interview with Steve Knabl, Managing Partner at Swiss Asia Holdings  
     
  Alternative Investment Fund Managers Directive Implemented Into Belgian Law  
     
  FATCA for Private Fund Key Considerations  
     
  Of Activists and Activism: Why We Have Seen a Rise in Activist Funds Examining Australian Listed Entities for Opportunities  
     
     
Eurekahedge Hedge Fund Manager Travel Plans

space
Copyright © 2014 Eurekahedge Pte Ltd.
Use of this site is subject to our terms and conditions of use.