Latin America private equity interest seen gaining
By Herbert Lash
Investment in the first six months of this year was $1.54 billion in Latin America, more than the $1.02 billion invested all of last year and $609 million in 2004, according to Emerging Markets Private Equity Association (EMPEA). Returns also have picked up after years of decline, and the best-managed funds are posting one-year returns of about 50 percent, said Sarah Alexander, executive director of EMPEA.
Several initial public offerings in Brazil this year, in tandem with Google Inc.´s acquisition last year from Brazilian venture firm Fir Capital of Akwan Information Technologies Inc., should be snapping investors out of their apathy toward Latin America, observers say. "This is going to be a wake-up call for people who had forgotten about the region," said Umberto Pisoni, senior investment officer in charge of private equity investing in Latin America for the International Finance Corp.
Many private equity funds were unable to recoup their investments as initial public offerings were put on hold after the technology bubble burst and slammed equity markets. The internal rates of return for funds that had invested in electricity distributor Equatorial Energia SA and business software provider Totvs SA topped 200 percent, Pisoni said in an interview last week. The two Brazilian companies went public this year.
Some of the best-managed private equity firms have internal rates of return of about 40 percent, although the average for Latin America has been in single digits or mid-teens, he said. Fund raising for emerging market private equity more than tripled in 2005 to $22.1 billion from $5.8 billion the previous year, but the bulk, about $15.5 billion, went to Asia, less Japan, Australia and New Zealand, Alexander said. She spoke during a presentation in New York on Monday of the Brazilian Association of Venture Capital and Private Equity.
Latin America attracted $1.3 billion last year, or less than half the funds raised for Central Europe and Russia at about $2.7 billion each, the Washington-based association said. The outlook for Latin America is clearly changing, she said. The return of the IPO market and the strengthening of investor rights has helped reignite investor interest in Latin America, Julio Lastres, senior managing director, Americas, at Darby Overseas Investments Ltd., a unit of Franklin Resources Inc., said in an interview on Friday. Corporate governance has improved in Latin America, while in Brazil the Novo Mercado stock market eliminated non-voting shares, bolstering investor rights.
Economic stability in Brazil and Mexico after currency crises in those two countries put a crunch on investment returns in dollars, and the increased sophistication of local bond markets for mid-tier companies, along with lower interest rates, has also helped, Lastres said. The change in investor interest marks a contrast with the dry years after the economic downturn following the attacks of Sept. 11, 2001 and the bursting of the technology bubble. "We were pretty much not raising a lot of money when you saw a pick-up in 2004, then greater pick-up in 2005. This year will show a considerable pick-up as well," Lastres said. "Some of the risk that was embedded in financing companies back in the 1990s, in foreign currencies, is no longer there," he said.
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