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Private equity roundup Latin America

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Page 1: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

Private equity roundup Latin America

Page 2: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

1 | Private equity roundup Latin America

Contents04 Introduction

05 Economic overview

07 Fundraising

09 Transactions and exits

13 Conclusion

Page 3: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

2Private equity roundup Latin America |

About the private equity roundupIncreasing macroeconomic stability in the developed markets, coupled with declining growth and geopolitical change, is leading to challenging times across many emerging markets. Despite the volatility, private equity (PE) investors have remained committed, seeing opportunity in the long-term secular trends that have emerged over the last decade — namely a rising middle class, favorable demographics, low PE penetration and a lack of traditional financing infrastructure. These macro trends will continue to play out over the next decade and will continue to provide PE firms with a wide range of compelling opportunities.

EY’s Private equity roundup series delves into the drivers of fundraising, investment activity and exits across a range of developing economies, including Africa, China, India and Latin America. Our quarterly, semiannual and annual reports deliver fresh insight into the forces shaping activity, including macroeconomic trends, regulatory developments and capital markets activity.

Page 4: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

Private equity roundup — Latin America is part of an EY series focusing on private equity activity in the emerging markets.

3 | Private equity roundup Latin America

Page 5: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

Introduction2015 represented another challenging year for the economies of Latin America. Falling commodities prices, decreasing exports to China, increasing inflation and declining currencies precipitated one of the most difficult macro environments of recent times. Led by Brazil, the region saw negative GDP growth for the first time since 2009, leading many investors, both foreign and domestic, to take an increasingly cautious stance as the year progressed.

Overall, LatAm M&A activity fell 30% in 2015, to US$84.7b in announced deals, the lowest since 2009. While this was partly the result of substantial currency depreciation, potential acquirers were also discouraged by diminishing growth projections and a persistently wide seller expectations gap. The year saw many PE investors hesitate out of similar concerns. While overall deal value was up, the market suffered from a lack of breadth as firms struggled to put assets to work amid the challenging environment.

Nonetheless, the evidence is strong that PE investors remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys of limited partners (LPs) invested in the emerging markets cite LatAm (exclusive of Brazil) as the single most attractive destination for investment capital. Indeed, the year saw a range of deals focused on the consumer-related spaces, as PE firms sought to put assets to work in alignment with the region’s long-term secular trends, while forgoing cyclically challenged sectors — energy in particular.

While the macro outlook for 2016 remains mixed, the opportunity set for PE investors is perhaps becoming increasingly interesting. Although fundraising moderated in 2015, PE firms presently have ample supplies of dry powder to put to work in LatAm. The extent to which they are able to increase their activity will be dependent on the depth of the downturn and the ultimate shape of the eventual recovery.

4Private equity roundup Latin America |

Page 6: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

Continued signs of recovery in the US in 2015 led to investors’ anticipation of rising interest rates throughout the year, culminating in the Federal Reserve’s interest rate hike in December, and drove significant US dollar appreciation against developing countries’ currencies. Moreover, China continued to show strong signs of deceleration, especially across its industrial sectors, significantly affecting its trade partners and driving investor concern in markets across the world.

As a result, Latin America, with the exception of Mexico, suffered increased economic tensions in the form of commodities depreciation, rising inflation rates and, in some countries, rising dissatisfaction with incumbent political regimes, compounding economic instability. GDP growth across many countries slowed: in Brazil, GDP growth is expected to close the year lower than -3%; in Colombia, growth slowed from over 4.5% in 2014 to an expected 2.5% in 2015.

Figure 4: Latin American fundraising, 2010–2015

-1%0%1%2%3%4%5%6%7%8%

Advanced economies Euro area Emerging anddeveloping Asia

Latin America and theCaribbean

GDP Growth

2014

Source: International Monetary Fund, World Economic Outlook Database, October 2015

2014 2015E 2016E

1 Economic overview

5 | Private equity roundup Latin America

Page 7: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

Gross domestic product of region GDP growth

-13%

-8%

-3%

2%

7%

12%

Argentina Brazil Chile Colombia Mexico Paraguay Peru Venezuela

GDP Growth

2014 2015E 2016E 2017E2010

6%

4.8%

3.1% 2.9%

1.3%

2011 2012 2013 2014 2015-0.2%-1%

0%1%2%3%4%5%6%7%

While 2015 brought rough economic changes, observers are cautiously optimistic that the region could see improvement in 2016 as both currencies and inflation stabilize. For some countries, the key issues are as much political as they are economic — the evolution of the fiscal/political crisis in Brazil, a new government in Argentina, presidential elections in Peru, and hope for a final peace deal between the Colombian government and FARC.

Mexico, in particular, has directly benefited from the ongoing US recovery. The country has stable inflation and exchange rates, as well as good momentum in private consumption. Implementation of new energy reforms, which have opened oil and natural gas reserves to foreign investors and companies, have led to increased investment and contributed to growth.

In Argentina, new president Mauricio Macri will face significant challenges, but the administration’s market-friendly position is expected to facilitate policy changes, especially related to exchange rate issues. Over the short term, however, the country will face transition costs on its path toward market alignment; with low reserves, the peso could devalue further, and fiscal policy may tighten to control inflation.

Latin America’s largest economy, Brazil, could see improvement across some indicators in 2016, but real economic recovery will ultimately be dependent on congressional approval of additional steps needed to stave off further economic deterioration, something that a lack of support for the Rousseff government could make challenging. Already, the unstable political situation in the country has led to a downgrade in Brazilian bonds to junk by both S&P and Fitch ratings services.

Figure 2: Latin American GDP growth, 2010–2015

Figure 3: Actual and expected GDP growth by country, 2014–2017

6Private equity roundup Latin America |

Page 8: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

With the economic outlook deteriorating as the year wore on, PE fundraising for Latin America was challenged. PE firms raised US$5.6b for funds focused on the region, a 48% decline relative to 2014, when US$10.7b in new funds closed. In contrast to 2014, the year saw fewer large vehicles raised. Just one fund broached US$1b in 2015, compared with three — from Advent International, Gavea Investimentos and Pátria Investments — that exceeded that amount in 2014. Many other funds have also raised significant amounts of capital in recent years and had limited need to return to the market in 2015.

The largest fund to close in 2015 was P2Brasil III, a joint venture by Pátria and Promon, which raised US$1.8b to invest across a range of infrastructure projects, primarily in Brazil. The year also saw a number of significant closes from buyout funds. In May, Linzor Capital Partners closed its third buyout fund with US$621m in commitments after just six months in the market; in October, Axxon closed Axxon Brazil Private Equity Fund III, with US$440m in investor commitments. Both funds were oversubscribed and pulled investors from across Latin America, the US and Europe.

Figure 4: Latin American fundraising, 2010–2015

Amounts are in $US mm

$7.9

$17.8

$8.1

$3.8

$10.7

$5.6

2010 2011 2012 2013 2014 2015

Fund Type Close size ($US mm)

Industry targets

P2Brasil III Infrastructure 1,674 InfrastructureBTG Pactual Brazil Timberland Fund I

Timber 860 Timber

Linzor Capital Partners Fund III

Buyout 621 Consumer products, industrial, retail

Pátria Brazil Real Estate Fund III

Real estate 512 Property

Axxon Brazil Private Equity Fund III

Buyout 400 Health care, consumer products, retail, diversified, education/training

Fondo de Fondos Mexico II

Fund of funds 349 Diversified

2 Fundraising

7 | Private equity roundup Latin America

Page 9: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

Fund Type Close size ($US mm)

Industry targets

Americas Energy Fund II

Infrastructure 241 Oil and gas, energy, infrastructure

Carlyle Brazil Fund II

Buyout 235 Consumer products, consumer services, diversified, infrastructure

Jive Distressed Real Estate Fund

Real estate 159 Property

Partners Group Mexican Energy Infrastructure

Infrastructure 150 Infrastructure

While fundraising figures have declined from last year, there is evidence that many global firms intend to increase their investment activity in LatAm from their primary global vehicles, potentially understating the amount of capital targeting the region. Among the most compelling is the continued drive among the large global funds to open new offices across Latin America. In June, General Atlantic opened its first office in Mexico City to better access opportunities it sees in the health care, energy, financial services and technology spaces. The firm has invested more than US$2b in Latin America

over the last 15 years, representing roughly 10%–15% of its US$1.5b–US$2b annual investment. General Atlantic was joined by Actis, which also opened an office in Mexico during the year and is heavily invested in the energy space across the region. In Brazil, CVC Capital Partners announced plans to open its first office in Latin America. Slated to open in early 2016, the São Paulo office represents the firm’s 24th global location.

While many observers expect continued economic pain in 2016, a dynamic that is almost certain to affect fundraising efforts in the region, there is also evidence that investors remain committed to the long-term opportunities in Latin America and the emerging markets as a whole. According to the annual survey by the Emerging Markets Private Equity Association (EMPEA), 33% of LPs expect to increase their percentage allocations to EMs over the next 12 months, and another 47% expect to increase their overall dollar commitments to the EMs. Among specific regions, Latin America (exclusive of Brazil) was cited by LPs as the top spot for additional capital allocations.

8Private equity roundup Latin America |

Page 10: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

Acquisitions2015 was a record year for M&A activity, with more than US$4.7t in deals announced across the globe, a 35% increase over 2014. Latin America, however, saw less M&A activity as diminishing growth saw many potential acquirers step back from the market. Overall, LatAm M&A activity fell 30% in 2015, to US$84.5b in announced deals; this represented the lowest M&A value in the region since 2009 in US dollar terms. Given the significant decline of the real and other LatAm currencies, however, activity as measured in local currency was less dramatic.

$8.9

$2.1

$4.5

$2.9

$4.3

$7.5

2010 2011 2012 2013 2014 2015

Figure 6: Latin American PE investment, 2010–2015

PE activity across Latin America increased in 2015, with firms announcing US$7.5b in new investments, a marked increase relative to 2014. However, a significant percentage of the year’s value came from just one deal — the US$4b offer for an undisclosed stake in Brazilian telecom Oi Sa, by Russia’s LetterOne Holdings. If completed, the deal would account for 53% of 2015’s total value.

Another significant deal was Linzor’s US$1.1b acquisition of General Electric’s equipment lending and leasing business in Mexico. The deal represented the firm’s third investment in Mexico and the second Mexican company the firm has acquired from GE.

Deals predicated on the growth in consumer spending remained popular during 2015. Among the largest of these was Carlyle’s US$593m investment in Rede D’Or Sao Luiz Sa, Brazil’s largest private hospital operator. According to Carlyle, over the last eight years, the number of private health care beneficiaries grew from 37 million to 53 million, while the number of hospital beds available remained unchanged. Carlyle’s investment will allow the company to pursue an aggressive expansion plan that will expand existing facilities and grow the company’s domestic footprint. Other consumer-oriented deals included Advent’s US$344m investment in LifeMiles, the loyalty business owned by Colombia’s Avianca airlines, and Carlyle and Vinci’s investment in Uniasselvi, which serves more than 100,000 students across a range of undergraduate and graduate programs. The sector has been an active space for PE in Brazil in recent years as rising incomes have led to greater investment in education.

3 Transactions and exits

9 | Private equity roundup Latin America

Page 11: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

Announcement date

Target Target country

Target general industry group (GIG)

Financial sponsor Deal value ($US mm)

26 Oct 15 Oi SA (Stake%) Brazil Telecommunications LetterOne Holdings SA

US$4

4 Dec 15 General Electric Co (Equipment lending and leasing business in Mexico)

Mexico Machinery Linzor Capital Partners LP

US$1.1

27 Apr 15 Rede D'Or Sao Luiz SA (8.3%) Brazil Health care Carlyle Group LP US$592.9

13 Jul 15 LifeMiles BV (30%) Colombia Professional services Advent International Corp

US$343.7

10 Apr 15 GE Capital Real Estate (Performing first mortgage loans in Mexico and Australia)

Mexico Finance Blackstone Group LP US$336

26 Oct 15 Sociedade Educacional Leonardo da Vinci SS Ltda; Sociedade Educacional do Vale do Itapocu SS Ltda; Instituto Educacional do Alto Vale do Itajai Ltda; Sociedade Educacional do Vale do Itajai Mirim Ltda — ASSEVIM; Sociedade Educacional do Planalto Serrano Ltda

Brazil Professional services Carlyle Group LP US$284

13 Aug 15 Tempo Participacoes SA Brazil Professional services Carlyle Group LP US$175.5

31 Dec 15 Recovery do Brasil Consultoria SA (81.94%)

Brazil Finance Lone Star Global Acquisitions Ltd

US$165.7

21 Dec 15 Empreendimentos Pague Menos SA (17%)

Brazil Retail General Atlantic LLC US$151.5

7 Jan 16 Property Portfolio Brazil Real estate/property BV Empreendimentos e Participacoes SA

US$114.5

15 Sep 15 Fleury SA (13%) Brazil Health care Advent International Corp

US$86.1

Figure 7: Top PE deals announced in Latin America, 2015

10Private equity roundup Latin America |

Page 12: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

While the energy space represented some of 2014’s largest PE deals, the sector saw relatively little activity in 2015 as declining oil prices led to a significant seller expectations gap.

Observers are cautiously optimistic about the outlook for 2016. While valuations have yet to decline commensurate with the deteriorating macro situation, assets are off their highs. Moreover, companies continue to become cheaper in US dollar terms, which should spur additional foreign investment. The marketing of state-owned assets in Brazil should lead to additional opportunities for PE firms.

ExitsWhile 2015 saw a sharp pullback in the number of energy acquisitions announced by PE firms, the sector was active in terms of exits, with a number of deals announced in the space. The largest of these was in the renewables space, when SunEdison acquired Globeleq Mesoamerica Energy from Actis LLP and Mesoamerica. The company is among the largest renewable energy providers in Latin America, operating a number of wind and solar power-generation facilities in Central America. The sale was one of several in the renewables space; in December, Actis also sold Energuate, a Guatemala-based energy distribution company that provides electricity for approximately 1.6 million homes.

11 | Private equity roundup Latin America

Page 13: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

Figure 8: Top PE exits announced in Latin America, 2015

Firm Investors Exit date Exit type Exit value ($US mm)

Globaleq Mesoamerica Energy Actis LLP 12 Jun 15 Trade sale US$721.3

Energuate Actis LLP 30 Dec 15 Trade sale US$299.5

Equatorial Energia S.A. Vinci Capital Partners 21 May 15 Private placement US$231.8

Tempo Assist GP Investments 17 Aug 15 Sale to GP US$205.6

Banco Daycoval SA (25.2732%) Cartesian Capital Group LLC 24 Jun 15 Trade sale US$194.4

Figure 9: LatAm PE exits by type, 2015

Overall, PE firms exited 20 companies during the year, with a total value of US$1.9b. Consistent with global trends, which saw a significant uptick in sales to corporate acquirers, trade sales dominated as an exit

route for LatAm deals during the year, representing 55% of PE exits. The year also saw a sharp drop-off in the number of PE-backed IPOs: the region saw no exits via initial public offerings during the year.

55%

25%20%

Trade sale Secondary Other (including puts andprivate placements)

12Private equity roundup Latin America |

Page 14: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

Clearly, the macro challenges facing Latin America are not unique to the region. The slowdown in China, falling commodities prices and rising rates in the US are having a marked impact on most developing economies. With Brazil and Russia both now in recession and declining confidence that China can engineer a soft landing, PE investors across the emerging markets are grappling with a radically different environment than just 18 months ago. Indeed, while emerging markets as a whole are still growing faster than developed countries, the differential between the two is now the smallest in 15 years.

Nonetheless, the last decade has seen Latin America’s private equity industry develop the structural maturity required to navigate the current volatility. Recent years have seen LatAm PE make great strides in developing a robust PE ecosystem: greater global relationships with general partners (GPs) and LPs, expanded geographic footprints and success in helping family owners and entrepreneurs understand PE’s value proposition. PE has become an increasingly important part of Latin America’s economy and is well-suited to help it weather the downturn.

Most importantly, the opportunities for PE remain robust. Over the last decade, the economies of Latin America have seen more than 70 million people enter the ranks of the middle class, increasing their spending on education, consumer goods, health care, leisure, and other products and services. There remain 130 million more that hope to one day join their ranks. Valuations, a limiting factor when the macro environment was red-hot, have moderated across many industries and in many geographies, providing greater opportunities to invest in the sectors serving them. Currencies have seen sharp depreciations, making acquisition candidates more attractive in US dollar terms, and traditional sources of lending have become more expensive across much of Latin America, making PE an increasingly attractive option to business owners looking for financing.

Despite the downturn, investors who ignore Latin America do so at their peril. While significant risks remain, and may even rise in the coming months, the long-term secular trends that have put a spotlight on the region remain intact. As a consequence, the present environment has the potential to be among the most interesting on record for investors.

4 Conclusion

13 | Private equity roundup Latin America

Page 15: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

14Private equity roundup Latin America |

Contact informationJeffrey Bunder Global Private Equity Leader [email protected]

Michael Rogers Global Deputy Private Equity Leader [email protected]

Daniel Serventi South American Transaction Advisory Services Leader [email protected]

Carlos Asciutti Brazil Private Equity Leader [email protected]

Peter Witte Global Private Equity Research Leader [email protected]

Olivier Hache Mexico Transaction Advisory Services Leader [email protected]

Page 16: Private equity roundup Latin America - EY · remain committed to Latin America. Global firms continue to open new offices in the region, with a particular focus on Mexico, and surveys

EY | Assurance | Tax | Transactions | AdvisoryAbout EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

© 2016 Ernst & Young LLP. All Rights Reserved.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

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