the latin private equity journal - july 2014 - digital edition

EDITOR’S NOTEChief Executive OfficerAdam Raleigh

ManagementGiseli AkabociKenneth BaucoKilby BrowneCharles FathersWilliam FrankPaloma LimaZaianna OrtizAmir OukiTim RaleighAhmad Sahar

Finance & OperationsLarissa Guimaraes

EditorialSeth Fraser Keoni HarrisonKarishna PerezAline Viana

Private Equity GroupAnna GonzalezLiana GriegBrandon Link

Real Estate GroupDaniel KimPablo OliveiraAndres OrtizMaria RodriguezRoy Salsinha

Energy & Infrastructure Projects GroupJavier GrullonCarolina Gomez-LacazetteDaniel Para MataAna Carolina RomeroVirginia SchmithalterJavier VergaraDavid Cherrez

Hedge Funds GroupAna LoboAna MelloJack SchwartenMauricio Silva

Institutional Investors GroupCarolina BarretoHugo Della MottaMarcela FonsecaCinthia SilvaBrian Rogers

Private Wealth GroupHeriberto AcevedoMaria TatisJohn ZajasVictor TolentinoGerman Chavez

INTERNATIONAL INVESTORS

It was a tough fought loss to Germany, but the US advanced to the knockout round, thus escaping the aptly named Group of Death. This doesn’t have anything to do with this month’s magazine, but I really wanted to talk about the World Cup.

Anyway, international investors…where are they finding private equity opportunities in Latin America? In this edition, it was my pleasure to sit down with many interviewees either at our office in Manhattan or at this year’s Private Equity Latin America Forum. As you’ll see in the following pages, we discussed first forays into the region, country selection and their appetite for continuing to invest in Latin America and emerging markets in the coming years.

In addition, you’ll find a company interview with Peter Macnee, CEO at Virgin Mobile Latin America on why the firm began its operations in Chile and its current plans for opening locations in Mexico and Brazil.

If you’d like to receive the August issue of LPEJ, visit our web site www.lpej.org and subscribe for free! As always, many thanks to those of you that took the time to share your views. I look forward to speaking with all of you again soon! All the best,

Seth Fraser

LPEJ.ORG / JULY 20142

The Latin Private Equity Journal (LPEJ) is a Latin Markets weekly newsletter and monthly publication featuring interviews with LPs, GPs, government officials and private equity thought leaders active in Latin America. Latin Markets is the world’s leading provider of Latin America focused investment forums, regional summits, and streamlined market intelligence. Our platform provides a comprehensive and fascinating perspective of the opportunities in this diverse and booming region.

© All LPEJ content is copywritten & owned solely by Latin Markets Brazil LLC.

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OTHER INTERVIEWS INCLUDE:

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Contents

Jaime LondoñoPrincipal and Head of Latin American Investments at Pantheon Ventures

Elvire PerrinPartner at Altius Associates

Alejo CzerwonkoEmerging Markets Professional at UBS Wealth Management

Diane MulcahySenior Fellow at the Ewing Marion Kauffman Foundation

Ram LeePresident at Seven Bridges Advisors

David SchaferAssociate Director at Munich Private Equity Partners

Carlos RangelDirector of Investments and Risk Management at WK Kellogg Foundation

LPEJ.ORG / JULY 2014 3

4 David Simpson, Investment Officer at LACERA

interview with virgin mobile Latin America CEO

Lacera to make first Latin America Fund Investment

12 Peter Macnee, CEO at Virgin Mobile Latin America

Interview with Bessemer Trust

16 Marc de Saint Phalle, Director of PE at Bessemer Trust


Partners driving terms, securing preferred economics and positioning ourselves for co-investments. In terms of geographic diversification, the LACERA private equity portfolio is predominantly North American (76 percent) followed by Western Europe/UK (20 percent) and the remaining Asia (2.5 percent), Australia (0.8 percent) and South America (0.7 percent). Our 2014 Investment Plan states that increasing our exposure to emerging markets is an explicit goal. I would expect that roughly 10 percent of the $5 billion in upcoming new commitments would target these markets. An interesting slide below shows the 10 year IRR average for the LACERA portfolio versus the venture economics upper quartile benchmark (smoothed lines). What’s clear is that staff, the board and consultants have combined to implement processes that seem to work in generating exemplary performance. As we forge into new markets, I would expect that performance to continue as the three distinct bodies attain consensus on the direction of the portfolio.

3. Which countries are you currently focused on in Latin America? Are you looking to take a pan-regional or country-specific approach?

DS: LACERA’s exposure to Latin America to date has been through global buyout firms that have made investments in the region. However, staff members and Board of Investment (BOI) members have made several trips over the past few years setting a foundation to undertake our first fund

After a 15 year career in corporate finance, mostly in financial services at Charles Schwab & Co., I elected to switch gears to utilize more of the money management skills I had obtained in graduate school in pursuit of the CFA charter. In addition to LACERA, I have had the privilege of working with three world class portfolios, including the Southern Ute Indian Tribe in Durango, the City and County of San Francisco. I spent four years in Dubai directing investments for the Starling Group, a highly regarded Saudi family office with 25 plus years in the asset class.

2. How is your portfolio diversified across asset classes and geography?

DS: By sub-asset type, the LACERA portfolio is predominantly buyout (74 percent) followed by venture capital (18 percent) and special situations (8 percent). While the portfolio is currently tilted towards the large buyout space, we are culling many of those relationships and establishing and deepening relationships with the small and medium-sized buyout firms for a few reasons (and I would include growth capital in this category). First, they have consistently been amongst the best performers in the portfolio. We believe that adept managers in this space have greater ability to impact the growth trajectory curve of their portfolio companies ultimately leading to outperformance. Furthermore, their exit avenues (including larger funds) and a greater swath of strategics, provide a flexibility that larger companies don’t have. And finally, as LACERA looks to commit $100 million to $200 million to each commitment, we can be meaningful Limited

1. Give us a brief background on LACERA and your career experience in private equity.

DS: LACERA is a $45 billion pension plan serving 50,000 Los Angeles county employees. The portfolio is comprised of domestic equities (25 percent), international equities (27 percent), fixed income (23 percent), real estate (10 percent) private equity (8.6 percent) and to the relatively nascent asset classes in the portfolio of commodities and hedge funds at just under 4 percent. It should be noted that our target allocation to private equity is 11 percent, but with the high rate of distributions and the appreciation evidenced in public equities, both the numerator and denominator are vexing that target. We anticipate deploying over $5 billion in the coming three years.

LACERA to Make First Latin America Fund Investment

LPEJ Interviews David Simpson Investment Officer at LACERA

investments. We continue to evaluate strategies to obtain exposure through fund of funds, pan-LatAm funds, regional funds and country-specific funds. We do like the diversification, risk mitigation and size of the broader funds bundled in one relationship. Conversely, we embrace the deeper on the ground teams and local networks of the narrower-focused country funds. We are planning to take a Brazilian fund to our BOI in the near term. We anticipate adding 1-2 more relationships in the coming 24 months that will provide exposure to the Andean region and Mexico.

4. As an asset class, how can private equity be advantageous globally and in Latin America? What is your outlook for emerging markets in light of account deficits in some countries, and capital flows potentially returning to developed markets?

DS: I often revert to Harry Markovitz’ concept of the efficient frontier – the idea that adding non-correlated investments into the portfolio can enhance returns and reduce risk. Given the dispersion of results in private equity, we obviously still believe it’s an inefficient asset class and that manager section is critical to obtaining performance. That having been said, obtaining exposure to different countries and currencies, and economies at various stages of evolution that have their own distinct drivers of growth is prudent tactical asset allocation policy to ensure the long term health of the LACERA portfolio and ensure our ability to meet our long term obligations.

When you look at the global financial crisis of 2008, while it impacted everyone to some extent, what was evident was that many of the emerging markets had learned from their own prior experiences with banking crises and as a result had implemented policies to safeguard against the exigencies wrought in the impacted developed markets. Conversely, the end of tapering has signaled a strengthening of certainly the US but in its wake is creating lots of volatility for the currencies in several emerging markets.

5. Which sectors and themes have you focused on with private equity in Latin America?

DS: On one hand, in emerging markets

as a whole, we tend to avoid those sectors that are heavily regulated and politically exposed. Accordingly, natural resources, infrastructure, in some countries media and health care are sectors we may shy away from. Our constituencies (including the Board of Investment) is very attentive to Environmental, Social & Governance (ESG) issues. Our members in public forums have asked that we require firms to be signatories to the United Nations Principles of Responsible Investing. This may be aspirational, but at day’s end, we want to believe that the money LACERA deploys to emerging markets creates jobs with fair wages, embraces safe work conditions, protects and improves the environment, promotes the best practices in corporate governance, protects human rights and provides opportunities for children, women, people of all races, religions and sexual orientations. If the private equity construct is used just as a device for those who’ve been in political power for decades to funnel SOE privatizations to their children, it’s contrary to our value system and we would respectfully pass.

Conversely, we gravitate towards managers addressing the predictable consumptive behavior patterns at similar stages of evolution that we’ve seen in other markets. So proven business models where the risk is primarily around execution. Specific sectors tend to encompass the broad consumer sector, which can mean clothing, food, cell phones, cars; education, healthcare, financial services; and often we see managers pursuing opportunities in logistics, transportation; and often service providers to infrastructure, engineering and oil & gas concerns.

6. What characteristics are you looking for in a manager?

DS: We probe for sustainable competitive advantages in the marketplace at each stage of the investment process (sourcing deals, disciplined entry valuations, proven competence employing the value-add tool kit, and proven exits using multiple avenues). We gravitate towards established teams with serial top quartile performance across economic cycles comprised of individuals with diverse skill sets (private equity, investment banking, consulting, accounting, law and operations) and boasting flat economics. I look for portfolios where the GP

is uniquely positioned to advance the cause of each portfolio company. And I would be remiss if I omitted to say that we look for LP friendly terms and fees structures and strong alignment of interest with the GPs.

The added ingredient that we look for in an emerging market manager are partners that balance local networks, culture and languages with educational credentials and work experiences amassed in the global financial centers, typically New York and London. We believe this combines in individuals and firms on one hand global best practices in private equity in terms of constructing portfolios, implementing systems and investment processes, embracing top tier service providers for systems, accounting and legal services, embracing ILPA best practices and UN PRI, and the ability to tap into global networks as needed. The local perspective often finds individuals committed to building an industry and country, leveraging the growth prospects of private equity to create legacies and sustained institutions in their communities. I believe those are powerful internal motivating forces that differentiate such a team from the foreign team that helicopters in to make a deal.

7. What are you looking forward to at the Private Equity Latin America Forum?

DS: The PE LatAm Forum promises to be a great opportunity to expand network, conduct numerous due diligence meetings, hear from knowledgeable speakers, rub elbows informally with folks immersed in these markets whose viewpoints are derived from living in and breathing the air of the markets. I’m especially interested in understanding how much money these markets can truly absorb and prudently deploy.


LPEJ JULY 2014: LACERA

JL: We actively target the growth markets in Latin America – countries with stable political, institutional and regulatory frameworks, improving educational and living standards, rising income levels, flourishing capital markets and inflation rates that are usually in the single digits. These growth markets include Brazil, Colombia, Mexico, Peru and Chile.

Compelling opportunities include those with a strong focus on the consumer. We have a bias towards high growth markets and to experienced GPs with a strong focus on consumer discretionary industries that target the growing middle class. Sectors of interest include consumer, education, healthcare, financial services and business services. In addition to the consumer, there is a push by governments and the private sector to invest in infrastructure. Around that, we are seeing private equity funds looking at logistics and services. There are a lot of bottlenecks getting goods to market, which create opportunities for areas like warehouses and logistics/IT services.

3. What private equity strategies does your firm prefer?

JL: In Latin America, we aim to create a portfolio of high quality private equity funds with an appropriate level of diversification to minimize risk. We look for both pan-regional and country-specific funds. We like country-specific funds because the managers are often well plugged in and target smaller

1. Give us some background on your career experience investing in private equity as well as a brief background on Pantheon and your role at the firm. What are your assets under management?

JL: Pantheon Ventures is a leading global private equity fund investor that manages regional primary investments (US, Europe, Asia and Emerging Markets), global secondary and infrastructure investments and customized separate account programs. We have 189 employees, including a team of 70 investment professionals, with approximately $27.4 billion in assets under management. Pantheon was established in 1982 in London. In the late 1980s Pantheon opened the San Francisco office, then in ‘92 the Hong Kong office, in ‘07 the NY office and we just opened an office in Bogota, Colombia. The firm has been investing in emerging markets for over 25 years. Our first investment in Asia was in 1983, Latin America and CEE in 1988, and then Africa in 1999 and Russia in 2001. Regarding my background, I have more than 12 years of PE experience focusing on the sourcing, selection and monitoring of private equity funds in the US and Latin America. I joined Pantheon over two years ago to open our Bogota office and lead our investment efforts in Latin America.

2. Which countries and sectors are you currently invested across in Latin America?

LPEJ JULY 2014: Pantheon Ventures


Where Bottlenecks are Leading to New PE Opportunities

Jaime LondoñoPrincipal and Head of

Latin American Investments

is conducted in each country, and how fluctuations in the political and economic environment affect PE markets. Our primary investment teams are based in the region where they make their investment decisions. Although Pantheon has an International Investment Committee that oversees all investment decisions taken on behalf of our clients, the regional primary investment teams make the investments out of their respective local offices.We opened our office in Bogota, with local people to lead our Latin American investment efforts and better serve our regional investor base. From a geographic perspective, Colombia is centrally located in Latin America with easy access to the countries that we target. Within a couple of hours you can get to Brazil, Mexico, Peru, and Chile.

Regarding local/regional managers, there’s a universe of PE funds that are evolving and growing. Many PE groups are now raising their third, fourth or fifth fund. They have experienced teams that have been investing for several years in different economic conditions. There are groups that have been working together and were captive within larger organizations, and due to misalignment they have left to raise their own independent funds. Also there are emerging groups who are new to PE with interesting backgrounds that we’ll track how they develop during the first couple of funds. The firm’s allocation to Latin America will increase as the number of GPs with strong track records, well-aligned teams and differentiated strategies targeting specific industries, stages and/or countries expands to meet the investment opportunity set.

for investments and business development such as Colombia, Peru, Chile, Mexico and Uruguay; 2) Countries with a greater degree of protectionism such as Brazil, and; 3) Countries with a stronger state intervention such as Argentina, Paraguay, Venezuela, Ecuador and Bolivia.

Even though growth has slowed, Brazil is still the largest and most populous country in Latin America, with great opportunities for PE investing. In Brazil in particular, we look for PE managers with strong capabilities in sectors that are expected to experience positive inflection points such as healthcare, wellness, education, food, logistic services, agribusiness and BPO/IT. Additionally, we look for PE managers with strong operating capabilities and experience in consolidation plays given that fragmentation is very common in many domestic industries and companies are more often than not under-capitalized, usually in sizes that are smaller than optimal to benefit from economies of scale.

Beyond Brazil, we avoid populist countries in group three above and we like those countries in group one, in particular Mexico, Colombia, Peru and Chile. Each have their own traits that must be taken into consideration, but in general these are countries that are experiencing positive reforms, healthy government policies and an investor-friendly climate, supported by a middle class that is expanding and hungry for consumer goods. In these countries, a less competitive segment of the market is the small and mid-market, mainly comprised of family-owned companies who are in need of growth capital but lack access to the capital markets. These companies stand to benefit from the strategic, corporate governance and management input that private equity can offer to grow companies and transform sectors of the economy.

6. What have been some of the advantages to moving the office down to Colombia? What has been your experience with due diligence and the quality of managers in the region?

JL: In Latin America, it is very important to be local, speak the language and develop strong relationships with PE managers and local investors. Being local allows you to understand the culture, how business

deals that can generate outsized returns. On a regional basis, our managers are opportunistic and have the expertise to grow companies pan-regionally. Sectors of interest include consumer, education, healthcare, financial services, and business services. Opportunistically, we are seeing opportunities in infra-services, oil & gas services and mining services.

In Brazil, debt is very expensive (15-20 percent in interest rates) so leverage is rarely used. Consequently, we look for PE managers that historically have generated strong returns from organic and expansion growth as a result of operating initiatives rather than financial engineering.

4. What are your thoughts on investing in emerging markets in light of account deficits in certain countries?

JL: Part of our due diligence process is to understand the sort of pressures that are building across the different countries we target. We have been investing in emerging markets for over 25 years and have done so during different economic cycles. The Asian financial crisis in the 90s was a difficult period with massive currency devaluations. In these types of situations it is very difficult to deliver private equity returns. Based on our experience, we are very cautious. During the last couple of years, we identified red flags in Turkey, South Africa and even India, adjusting our views and investment activity in such countries. Today, we are paying close attention to the different economies in Latin America. Each country has its own specificities, but the current account deficits in countries such as Colombia, Peru and Mexico appear to be adequately financed by foreign capital inflows.

5. With lower growth in Brazil, how are you finding PE opportunities in the country? What is your outlook for Latin America in the coming years and which areas would you like to focus on outside of Brazil?

JL: Latin America is a large region with many countries in different stages of development; however, Latin American economies are mainly divided into three groups: 1) Countries with open market economies that have a great environment

LPEJ JULY 2014: Pantheon Ventures


Where Bottlenecks are Leading to New PE Opportunities

1. Give us a brief background on your firm.

DS: Munich Private Equity Partners (“MPEP”) is a specialized advisory firm with an exclusive focus on private equity. We manage a $2.3 billion global private equity program, providing customized private equity investment solutions. In short, our objective is to build world class PE portfolios for our clients. MPEP operates out of offices in Munich, Shanghai and Luxembourg, with a multicultural team of 22 permanent staff with diverse backgrounds. We all share a deep passion for private equity.

Within our investment program we have defined the US, Europe and Asia as our core markets. Therefore, our investment team is split into three specialized and dedicated investment teams, focused on those regions. The majority of our Emerging Markets team operates out of our Shanghai office and focuses on the Asian markets. I belong to the Emerging Markets team and cover the

opportunistic investments we do outside of our core markets, which represents around 10% of our annual investment activity.

2. What is your timeline for making investments in Latin America and how are you approaching the region?

DS: Latin America is a large and fragmented market. We constantly screen the private equity market across the region but invest very selectively. Our general preference in Latin America is to invest in established managers with a multi-country investment approach. In Latin America we believe more in the opportunities in the lower-middle market instead of those at the higher end of the market, particularly in Brazil, where competition has increased in recent years.Besides Brazil and Mexico, which are the two largest and most mature individual private equity markets in Latin America, we have seen a positive trend in Peru and Colombia. Those markets are growing quite nicely and more and more managers have become active in these countries. Some of the bigger private equity firms have started to open offices in Bogota and Lima in recent years. Columbia and Peru are still young and emerging private equity markets but offer promising investment opportunities in an investment environment with limited competition. On the other hand, those markets are still immature and local managers in particular often still need to adopt international standards in terms of compliance, reporting and so on, in order to attract more investors from the US or Europe.Going forward we have a couple of interesting managers on our radar screen that could be a good fit for our investment program. I expect that we will expand our portfolio in Latin America with at least one further manager within the next 12 months.

3. Which market would you say you’re going to be most focused on moving forward?

DS: 2014 could be a record year in terms of fundraising in Latin America, specifically in Brazil, where many managers with funds above $1 billion in fund size are already in fundraising or are expected to be back soon. So the larger end of the market is expected to become more crowded and we expect more dollars chasing deals than in the lower-middle

market, which is less competitive, with only a couple of established managers in Latin America.

Therefore our preference would be more at the lower end of the market, with managers which have a multi-country investment approach and an experienced local team on the ground. We expect to see good investment opportunities in Peru, Colombia and Mexico. We also track opportunities in Chile, which is an interesting market but there aren’t really too many managers active there. 4. What are the advantages of continuing to invest in emerging markets?

DS: We have expanded our investment program in the Emerging Markets in recent years since we believe in the long-term growth prospects of the private equity markets in Asia and Latin America. We have a solid pipeline of promising managers and the emerging markets generally provide some “low-hanging fruit” where experienced managers with local teams can professionalize and scale companies with appropriate business models substantially.

5. Do you plan on increasing allocations to Latin America?

DS: We will most likely extend our investment program in Latin America a little bit and add at least one more manager to our existing portfolio. We believe that three to four managers are enough for us to cover the region within our global investment program.

6. And you said your current investments were performing well?

DS: Yes. So far our portfolio in Latin America is doing well. In some cases, it’s a little bit early to judge because some of the portfolios are still young, but from where we are today, we are on track. I hope and expect that the managers we have invested in will continue to perform well and we look to add one or two further managers in Latin America to our program.

David SchaferAssociate Director Munich Private Equity Partners

LPEJ JULY 2014: Munich Private Equity Partners


1. You mention in your paper, “We Have Met the Enemy and He is Us” how the venture capital model in the US has failed investors. What did you find in your research that led you to this conclusion?

DM: My research was done on the US venture market and the conclusion of the paper is that venture capital returns have underperformed for well over a decade and this continues to be the case. If you look at the most recent returns data from Cambridge Associates and the National Venture Capital Association, venture capital continues to underperform: venture capital fails to generate better returns than the public market. Investors seek to invest in venture capital to achieve greater returns than the public markets by at least 300 to 500 basis points. Put another way, a venture capital fund should return a minimum of a 2x investment, net of fees and carry. Otherwise, why take on the fees and illiquidity? What we found was that over the past decade and a half, VC funds on average

fail to deliver the performance investors expect.

2. You mentioned how this underperformance has led to misalignment with fund managers. Why is due diligence so important in venture capital investing?

EG: It’s important for investors in VC to understand the economics of the funds they’re going to invest in. VC funds are paid by their investors the standard 2 and 20 – a 2% annual fee on committed capital, and 20% of fund profits (known as “carry”). What happens is that many VC funds underperform and don’t generate any carry, so the VCs are living entirely off the fees. For a larger sized fund, the fees can be substantial – on a $1b dollar fund charging fees of 2% of committed capital, the fees are $20m annually. Investors end up paying for VC partners to take in seven figure sums in annual cash compensation for over 10 years regardless of their investment performance. So there’s a disconnect between how VC managers are paid and their actual investment performance.

3. What are some of your recommendations for LPs when getting involved in a venture capital transaction?

DM: The most important recommendations focus on due diligence. One of the things I suggest repeatedly in our paper is for investors to do the same analyses that we’ve done. If you’re doing due diligence, get the VC firm’s cash flows and do a public market equivalent analysis. See if the fund has outperformed a low cost, fully liquid public market index. Map out the valuations over time and see if there is a J-curve or an N-curve. We also recommend doing significant due diligence on firm economics such as compensation history, how the carry is allocated, what kind of fees the fund is receiving and where these fees are going. Without this kind of transparency it’s difficult for investors to know what they’re paying for.

When I speak about this topic, I tell LPs that you can learn a lot from the conversation with a GP. If you start asking a GP about their firm economics, i.e., how people are compensated, what the carry allocation is, how you think about succession, and how you measure

partner performance — you can tell by their reaction what the level of transparency will be. Many are transparent and are happy to talk about these issues but some GPs say ‘we don’t share that information’ or ‘we don’t want to talk about that.’ That’s a red flag.

4. What are your thoughts more broadly on venture capital investing in the context of emerging market fears from some investors right now?

DM: The venture capital markets in emerging market countries aren’t well developed so I don’t think they’re a great investment opportunity yet. The European VC market has been around for some amount of time, but performance has been disappointing. If you look around the world, the US and Israel have been the most successful cases of countries that have developed a robust venture capital industry. But, even in the most developed market of the US, VC has underperformed for over a decade. For developing economies, it can be an uphill battle.

5. Is there something just inherently wrong with the asset class itself? How can the asset class be improved?

DM: If you look at VC in the US over the last 20 years, keeping in mind that VC bills itself as an industry of innovation, the VC business model has remained the same, despite all the changes that have taken place in the ecosystem. That seems inherently wrong. I think the industry is ripe for change and innovation. The innovation is coming about, but it’s coming from outside the VC industry in the form of crowd-funding, from platforms like Angel List, and the syndicates being created on Angel List, and in new ways for LPs to invest, like Maiden Lane (disclosure: Kauffman is an investor in Angel List). So we’re seeing innovation but it’s coming primarily from outside the industry.

Ms. Mulcahy spoke on the “Foundation and

Endowment Roundtable” at the Private Equity Latin

America Forum on May 19-20, 2014.

Diane MulcahySenior Fellow Ewing Marion Kauffman Foundation


LPEJ JULY 2014: Ewing Marion Kauffman Foundation

start gaining exposure to Mexico through a regional fund with exposure Chile, Peru, Colombia and Mexico. For the time being, we are very much focused on private equity fund managers but we are also covering real assets on a global level. We’re starting to see nascent opportunities in infrastructure, energy and agribusiness. In the medium-term we need to see the managers growing and building a track record. On the private equity side, we haven’t yet invested in a pure Brazilian fund. We want a manger that has local connections and the ability to open doors. These regions have gone through a lot of volatility so we need to make sure the manager can create value in tougher times and isn’t over-paying for deals.

4. What are your thoughts on emerging markets investments right now?

EP: In some ways, the slowdown in emerging markets is good news. Competition and valuations will change and this will allow investors to separate the good from the bad in terms of managers. We are going to see which managers are able to create value in a harder environment. If you take a region like Asia and look at the number of fund managers that have been grown over the last 10 years, it was amazing. In India, one or two managers were setting up shop every week, so maybe there was too much going on there. In the end, the conditions are positive for investors. If you remain disciplined and selective, I’d expect good returns in the coming years.

to the smaller end of the market where there are strong managers. If you compare South America with Asia, the depth of the market is smaller in terms of fund manager opportunities. There’s been an increasing interest in Latin America over the last seven years and the number of opportunities is still somewhat limited, which is good for the GPs because the competition is slightly less than it is in Asia. For the LPs, it is tougher because you have to build strong relationships with the top names. Over the last two or three years, I’ve been spending a lot of time with the managers that we like in order to secure an allocation in the next fund.

3. In which countries and sectors do you see the most opportunities in the region?

EP: Of course you shouldn’t follow the crowd. We think today that Brazil is becoming an attractive market actually because less capital is flowing into the country and valuations are coming down. There might be further devaluation of the Real which is a risk, but if this does occur, it would be the perfect time to buy at a lower currency level and exit at a higher level – though we’re not trying to time the market. Mexico is becoming the hottest market right now in Latin America. This has changed from Colombia to Mexico. One year ago, Colombia was very hot on a valuation level. We could see some of the same phenomena in Mexico especially on the macro level with all of the reforms being voted on and implemented. This could potentially create an increase in valuations, so we might

1. Give us a brief background on your role at Altius Associates.

EP: Altius is a global advisor and fund of funds manager in private equity and real assets. We have a global platform with offices in London, the US and Singapore. We’ve been in business since 1998 and serve very sophisticated investors such as CalSTRs, CalPERs, the Church of England and Commonwealth Superannuation Corporation in Australia. I joined the firm in 1999. Today, my role is to cover Latin America and broadly emerging markets ex-Asia. I also cover credit strategies on a global level.

2. When did your firm begin advising clients in Latin America? What was your approach?

EP: A large majority of our clients are in the US and we help them to diversify in Europe, Asia and emerging markets. Latin America was a marginal or non-existing market, so we started with some of our clients who already had good diversification and started looking at the region. We looked at the funds which were the most established as well as pan-regional funds. Given the volatility in the region, we wanted to get to know the region through strong established names and once the clients had diversification, we would go into the smaller side of the market. We are at this stage now.When the client is building a core exposure we work with them to gain exposure

Elvire PerrinPartner, Altius Associates

Advisor to CalSTRs and CalPERs talks LatAm Due Diligence

LPEJ JULY 2014: Altius Associates


October 2, 2014Cartagena, Colombia

Herman B. Santos

Chairman - Board of Investments

Los Angeles County Employees Retirement

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Chief Risk Manager

AFP Skandia (Colombia)

Head of Alternative Investments

Seguros Bolivar (Colombia)

Strategy ManagerAFP Colfondos

(Colombia)

Chief Investment Officer

Metlife Colombia (Colombia)


AFP Integra (Peru)


Profuturo AFP (Peru)

Principal Investment Officer

International Finance Corporation (US)

Pablo Medina

Paula Delgadillo

Alfonso Vargas

Oscar Rocha

Renzo Castellano

Vicente Tuesta

Katherine Downs

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was more advanced in Chile than it was in other markets. Chile is a great country.

4. Could you talk a little about your business model and its execution in Latin America?

PM: The model as a virtual operator is that you buy on a wholesale basis from a network operator and then you create your own packages and pricing and retail it to the market. For us, we focus on the youthful user segment which is 18 to 34 year olds, which in Latin America is a big percentage of the overall population, but we leverage the use of our brand and a focus on a particular segment to have success. That’s a sort of simple way of looking at it.

Mexico whose mobile base of customers is more than two times Chile and Colombia combined. So there’s an opportunity for us to really hit a new inflection point of growth.

2. Is that because of the younger demographic in Mexico or just the population?

PM: It’s just the population size. It has a population of 120 million, and a lower penetration rate for mobile services in Mexico compared to smaller markets in Chile/Colombia.

3. What was the rationale behind starting in Chile?

PM: The appetite of the mobile network operators in Chile to host virtual operators

1. Give us a brief background on Virgin Mobile Latin America and your role at the company.

PM: The company was formed in the late part of 2010 and we launched our first business in Chile in April of 2012, followed by the launch of Colombia in May of 2013. Virgin Mobile Mexico went live in June and we plan to enter the Brazilian market in 2015. We had this nice stair step progression from the smaller Chilean market to Colombia and Mexico. There’s been a good learning process over the first couple of years.

Today, we have one million customers in our first two countries with annualized run rate revenues of $100 million, in just over two years which I believe is a great success. This comes on the doorstep of launching in


Peter MacneeCEO AT VIRGIN MOBILE LATIN AMERICA

company interview

LPEJ JULY 2014: Virgin Mobile Latin America

8. What advantages do you find attending Latin Markets’ Private Equity meetings?

PM: We believe it’s important to develop the visibility of our business with respect to network operators, regulatory bodies and prospective investors. Attending conferences likes Latin Markets Private Equity meeting presents an opportunity to meeting with a variety of people. We raised $86 million and are fully-funded for Mexico and Brazil. From a capital standpoint we’re in good shape. This event is a great value for us to share the gospel of Virgin Mobile and what we’re doing so people sort of register us and keep an eye on what we’re doing.

Mr. Macnee spoke on the panel “The Dynamics

of Minority vs. Control Investments in Latin

America” at the Private Equity Latin America

Forum on May 19-20, 2014.

PM: Generally speaking they saw the opportunity that I described to you -- that there is an opening in the market for change. They liked our team and the focus of the countries that we were looking at. In the panel discussion, I referred to our pan regional strategy, but I don’t think we’ll go to every country in Latin America because the value drivers are going to be the countries that we are currently focused on, Chile, Colombia, Mexico and Brazil. As a virtual operator, it is a challenge to successfully enter smaller markets. We will evaluate each country as we continue to develop.

7. What are your thoughts on the opportunity in Brazil right now?

PM: We think there’s a tremendous opportunity in Brazil. We would have liked to have been there sooner, but we had other opportunities come up sooner in other markets. We’ve learned a lot from those first markets and we can apply this before we launch in Brazil. Mexico and Brazil are not without their challenges, obviously, from regulatory and marketing standpoint, there are very strong competitors, a high penetration rate of users, though there is still a high level of dissatisfied customers that want a change.

5. Why do you think the business has been successful up until this point and what themes do you see as being vital to your business in Latin America? Is it the growth of this middle class and the new consumer in Latin America?

PM: In most countries, especially Colombia, Mexico and Brazil, there’s very high consumer dissatisfaction with the existing operators and so that sets up a very fertile ground for giving people a real choice and an opportunity to switch and be treated differently than they’ve been served before. We have a world class brand and even though it was not well known in Latin America at the beginning, people grew very quickly to understand that we have great customer care. It’s a brand that they can trust and rely on for good quality service. We’ve had great success raising capital to power our businesses and we’ve got great management teams in every country that are building these businesses. All these things have come together quite nicely.

6. You have had a couple allocations from some big international investors to the company recently. What are you hearing from investors on their appetite for investing in Latin America?

“We’ve had great success raising capital to power our businesses and we’ve got great management teams in every country that are building these businesses.”


1. Give us a brief background on your firm and your role.

CR: The W.K. Kellogg Foundation was founded by the breakfast cereal pioneer Will Keith Kellogg in 1930. Mr. Kellogg funded the foundation with $60 million of Kellogg stock. His gift has funded $3.5 billion in grants to help vulnerable children and is currently an $8 billion portfolio. The portfolio holds about $5 billion of Kellogg stock. We also have about $3 billion that we manage in our investment portfolio.

2. How are your foundation efforts and investments divided up?

CR: Every year the foundation pays out 5 percent of its capital so our investment program is focused on meeting that short-term requirement while also investing over the long-term to fund the annual distribution as well as to offset inflation.

3. How is your portfolio currently diversified? How much does private equity play a part right now?

CR: We divide our portfolio in functional buckets. The functional buckets are liquidity, real assets, deflation and capital appreciation. Roughly speaking liquidity is 5 percent of the portfolio, deflation another 5 percent and real assets, which includes real estate, accounts for 13 percent of the portfolio. Real assets include energy related investments in

THE PUBLIC TO PRIVATE DISCOUNT IN MEXICO

and Breakfast Cereal

Carlos RangelDirector of Investments and Risk Management


LPEJ JULY 2014: WK Kellogg Foundation

the companies in terms of operations. If you find opportunities where capital is scarce, besides the potential for higher returns, you may also find more opportunities for co-investments because the fund sizes may be smaller than the opportunities available. We are hopeful that we will have additional co-investment opportunities.

10. Are you looking to increase your exposure to private equity in Latin America?

CR: We’re browsing more than shopping, but we do expect that over time our allocation will increase. It could be that we go through a local or regional manager. Latin America is an area of great interest.

11. What are the advantages of attending Latin Markets’ events?

CR: One of the challenges as an allocator and a generalist is that you are asked to know about a lot of things and you never know enough. These events are very effective at giving you a lot of quick glimpses. It’s like sitting through the previews of the best movies.

You get to see the trends that are developing right now that you should know about. It is also a very efficient way of meeting GPs and hearing different perspectives and meeting other LPs. The Latin Markets’ events are great sources of actionable investment knowledge.

Mr. Rangel spoke on the “Foundation and

Endowment Roundtable” at the Private Equity

Latin America Forum on May 19-20, 2014.

on an EV/EBITDA basis. Meanwhile, if you looked at Mexico, private companies were trading at a steep discount to the public market peers even when they were slated to go public.

When we first looked at investing in Mexico PE most investors were concerned with safety issues in Mexico which we believed was scaring potential investors away from what would otherwise be a very attractive opportunity.

7. Scary in light of the drug cartel violence?

CR: Yes, drug cartels were definitely a big concern and I think a legitimate concern in many ways, of course, but if you look at

Mexico City, the homicide ratio is lower than it is in São Palo. I had to double check the statistic when I first heard it, but it shows that Mexico suffered from a perception issue at the time we first looked at it.

8. What was your investment focused on in Mexico?

CR: We focused on managers in the growth equity or mid-market buyout space that gave us access to this dynamic sector of the economy that does not have the same access to the capital markets that larger companies do. We wanted a manager that could give us some exposure to the potential of energy reform in Mexico, but we did not want an energy-specific fund.

9. How is your investment currently performing?

CR: It’s still early to pass judgment on how the portfolio will perform, but so far we’re excited about the metrics we’re seeing out of

private and public equity as well as through commodities mandates. The largest bucket of the portfolio, or 80 plus percent, is capital appreciation. The capital appreciation bucket includes a private equity sleeve as well and that’s about $600 million. To sum it up, private equity is a valuable tool that we use in our capital appreciation and our real asset buckets. 4. How are your investments broken out across geography?

CR: Currently, the majority of our private equity investments are in U.S. and Western Europe, but we are expanding our allocations outside of those geographies. We have a couple investments in Mexico in private equity. Additionally, we have one

in China that’s China-specific and then we have three regional funds in Asia.

5. What has been your due diligence experience in Latin America?

CR: Latin America has been easier to grasp for us compared to other markets. The universe is more manageable in terms of the number of managers. The time zone difference is not a challenge. You get many of the positive factors that you find in other parts of the world and it is easier to visit regularly which helps you build a context for the private equity ecosystem and local business culture.

6. Why did you select Mexico for your Latin American investment?

CR: We think that you can often get the best return on your capital where supply of capital is low. So it’s just a supply and demand issue. At the time, we were looking at Brazil as a very interesting market, but the private equity valuations were very high

“ If you looked at Mexico, private companies were trading at a steep discount to the public market peers.”


LPEJ JULY 2014: WK Kellogg Foundation


LPEJ JULY 2014: Bessemer Trust

from New York to London, with our investment research stretching across borders to capture compelling opportunities around the world. Since most of our investors are Americans, I’d say the U.S. is typically the baseline. When we invest outside the U.S., it is in pursuit of opportunities that we view favorably from a risk-return perspective, and Latin America would certainly factor into that. When making investments in private equity outside the U.S., we generally take a three-pronged approach. First, we gain exposure through global managers. Second, we get more concentrated regional exposure through pan-regional funds. And lastly, we get even greater geographic concentration through in-country managers. Whenever we consider a region or country for investment, we engage in an extensive market-mapping process, which includes in-depth research on such factors as the current and projected macroeconomic picture, fundamental drivers for growth, key demographics, rule of law, leading industries and companies, the environment for private investments, the depth of local capital markets, and potential investment opportunities. We build a case for investing within a region and then we start meeting with local managers, mapping them against

committees for our private equity and private real assets funds, I am also on the investment committee for our hedge funds. I also serve as a member of the Firm’s Investment Policy and Strategy Committee. Prior to joining Bessemer Trust 15 years ago, I spent 10 years in investment banking. I spent five of those years working with Latin American financial institutions at Merrill Lynch and, before that, was engaged in M&A, corporate finance and project finance work at Morgan Stanley and First Boston.

2. What is the geographic makeup of your clients?

MdeSP: The majority of our clients are American, either domiciled in the U.S. or abroad, followed by Europeans and Latin Americans.

3. How does your firm go about evaluating opportunities in Latin America?

MdeSP: We are global opportunistic investors. Our investment platform spans

1. Give us a brief background on the firm and your role.

MdeSP: Bessemer Trust is singularly focused on private wealth management for families and their businesses, trusts, and foundations. Over 2,200 wealthy families and individuals have entrusted us with approximately $97 billion in assets. Henry Phipps founded Bessemer Trust in 1907 as his family office, and we are still owned by his descendants today. Our headquarters are in New York City, where I am based, and we have 14 other offices around the U.S. and two abroad. Bessemer has a flexible investment management platform which uses both internal and external managers. As Director of Private Equity, I am responsible for our clients’ investments in private equity and private real assets. Also, my team exclusively uses external managers. We offer our clients proprietary comingled funds that provide exposure to investment opportunities throughout the world in venture capital and later-stage private equity, as well as in real estate and other private real assets, including for example power & energy, oil & gas and infrastructure. In addition to the investment

Marc de Saint PhalleDirector of Private Equity at Bessemer Trust

LPEJ Interviews

specific opportunities. We spend considerable time market-mapping a region, getting to know all the relevant players and then travel there, sometimes many times, to get to know the market, the investment opportunities and our potential partners even better before we start making investments directly into a region.

4. What is your current experience investing in Latin America?

MdeSP: We’ve been very targeted, focusing mainly on Brazil, however, we’ve also done a lot of research on the Andean region, Mexico and other parts of Latin America. In my career, I have spent a lot of time in Mexico, Brazil, Argentina and Chile, and to a lesser extent, Colombia, Peru and Venezuela. With the exceptions of Argentina and Venezuela for the foreseeable future, I could envision us becoming active investors in all those countries over time. We plan to invest in Brazil again this year and may add exposure to the Andean region, particularly Colombia and Peru, within the next couple of years.

5. How much is lower GDP growth in Brazil right now factoring into your investment decision process?

MdeSP: The overall macroeconomic picture is very important and we’re certainly concerned about current growth rates. That said, however, we’re able to take a longer term view in private equity and really focus on finding the most experienced local managers that can acquire or build growing businesses, particularly ones that benefit from increasing local consumer spending. Developing markets used to be all about exports to the developed world, but now many of them have growing middle-classes and related opportunities to meet greater local consumer demand, as well as higher levels of foreign direct investment. In public equities, investment opportunities in developing markets are oftentimes limited largely to industrials, basic materials, financials and energy. If you really want to participate in emerging consumer growth in those markets, the best opportunities to do so today may be through private equity.

6. Have you seen increased interest from your clients when it comes to investing in Latin American private equity?

MdeSP: Bessemer Trust is a global investor so our clients may gain exposure to Latin America through our various portfolio

strategies. For example, they could increase their exposure to large, multinational companies that are based in Latin America through our large-cap public equity portfolios. Beyond that, they could up their exposure through our small and mid-cap portfolios, real return portfolio, which is largely commodity-focused, and strategic opportunities portfolio, which invests across asset classes, as well as through our private equity, private real assets and hedge fund programs. Our firm does not have a dedicated Latin America product or a set allocation for the region. However, many of Bessemer Trust’s portfolio managers consider investment opportunities in Latin America. In order to invest there, we all must consider and evaluate the relative global position of companies and measure the risk-return profile of owning them versus other opportunities in the U.S. and other parts of the world. As global, opportunistic investors, we look for the best investments around the globe and if those investments happen to be in Latin America, then that’s an area where we’ll be active.

7. What are your thoughts on current international capital flows and trepidations in public markets? How correlated are these public market fears in emerging markets to private equity?

MdeSP: Private market valuation trends certainly follow those of public markets. I think that when emerging market stock performance is down significantly, it provides an opportunity for private equity investors. In our view, that may be the best time to invest because that’s when the relative valuations are going to be more attractive. If capital flow is scarce and you’re willing to invest there, you have an opportunity to get more for your money.

8. Are there current themes or sectors in Latin America that you’re particularly interested in?

MdeSP: In Latin American private equity, consumer spending is a major theme for us, but our interests vary by strategy. In venture capital, we’re seeing some interesting developments. I think it started with the “me too” consumer internet plays, some of which are still very attractive and gaining a lot of traction. Now we’re seeing a burgeoning venture capital community, particularly in Brazil, and that has caught our interest. We’re already fairly active in that market segment through U.S and global managers, but we’ve also been meeting with interesting local venture capital managers. We’re also

quite active in the Brazilian real estate market where we believe there are opportunities in commercial office, for-sale housing, retail, and industrial sectors.

9. What has been your experience with finding managers in the region?

MdeSP: In 1999, when I first joined Bessemer, I found that the more you learned about Latin American private equity, the less compelling it became. There were few firms with track records and even fewer with successful realizations. The current proposition is much improved and I now find that the more time and effort we put in to researching the region, the more we become interested in investing there. A lot of the managers are now highly experienced, not just in making investments, but also in exiting them. They’ve developed more of a proven track record and reputation so it’s a lot easier to perform due diligence on them and gain a greater level of comfort to invest with them.

Many local managers in Latin America now use U.S. or global placement agents and law firms who assist them with their offering materials and data rooms. As a result, they should meet expectations of global institutional investors. We’ve had Spanish and Portuguese speakers on the team since I joined so language has never been an obstacle for us. Today, however, we’re finding a lot of managers with senior investment professionals who were educated or trained in the U.S. and are therefore fluent English speakers so language should not be a barrier for anyone. One major advantage we’ve developed over many years is our deep network of GPs, LPs, service providers, well-connected families and others in the region with whom we can vet potential investment opportunities. As a result, the whole experience of finding managers in Latin America is dramatically different now than it would have been 10 or 15 years ago and we’re very well equipped to do so.

10. What is your timeline for increasing allocations to Latin America?

MdeSP: We expect to increase our allocation to the region, but more likely over a two- to five-year period. We tend to think very long-term, so it’s a question of capital availability and the competition across the globe for our clients’ precious capital. Also, factoring in to our timetable are the GPs’ fundraising schedules and when the best opportunities may be accessible. Sometimes the stars just have to align, but if you’re patient enough, they always do.

LPEJ JULY 2014: Bessemer Trust


Silicon Valley people, but I think there’s an opportunity to grow internationally in emerging markets. I do think there’s an opportunity in lots of emerging markets both in Asia and Latin America and Eastern Europe, but particularly in Latin America and Asia for a firm like ours that runs a portfolio that’s diversified. People will say, why not diversify their investments from their home EM country and have someone like Seven Bridges run a more developed market oriented, alpha oriented portfolio?

3. Where did you invest previously and where are you currently investing in emerging markets and Latin America?

RL: When Landis and I joined Howard Hughes, private equity was about 20 percent of the whole fund, which is actually a lot. Their previous CIO made a great bet in ‘02 and put a lot of money into EM, though this was mostly in the public markets. So we were always trying to make that trade-off between really three assets – public equities, real estate and private equity. We didn’t have much of a focus on real estate within the US at the time either. We didn’t have a focus in EM real estate, but because it’s an asset, and it’s a relatively simple asset, there were times we felt like it was one of the easiest ways to just play on the basic growth of the country. It’s not as complicated as a company. So we didn’t have a big focus on real estate in the US. We would do it opportunistically. The main thing we did is we logistics in India. So we were generally looking for things where we thought there was a real market dislocation or where the market really needed something that wasn’t there. We looked at retail a lot because retail is the natural way to play to the consumer. The hard part about retail is that real estate is so location specific – more so than industrial or an office. On the logistics side it was easier because it was really more about who knew the

Seven Bridges, Larry Cohen. Larry had been the Managing Partner at EhrenKranz Partners, one of the largest and oldest multifamily offices in New York.. Larry has also been the chair of the Brown University Investment Committee. He wanted to create a different model based on the outsourced CIO model.

I met him through an endowment colleague and it was a good opportunity to take what I had done at a much larger endowment and apply it to smaller endowments. I joined with the team that he largely already built with people from Harvard Management Company, Carnegie, Man Group and Goldman Sachs. I joined Seven Bridges in August of 2013. We have three partners. Larry is the CEO, I’m the President, and Rich Gardner is the CIO who runs the investment team and focuses more on managers. I focus more on asset allocation and what’s interesting in the world. I’m very much more focused on what should we be doing next and what should we be focused on. Where should the marginal dollar go.

For example, should we be looking at distressed in Europe? I’ve looked at that for a long time. Or things in Latin America. I’m the only one on the team that has experience across all assets and I have the most EM experience too. We have money in EM mainly on the public side. A lot of it is long-short, but we have a comingled private equity fund that we call our opportunity fund. The thing with EM private equity is if I can’t access it through the public market somehow, I’ll consider accessing through privates. But I don’t want to lock up just to lock up. So I’m always assessing emerging markets across all asset areas and liquidity parameters.

2. What is the geographic make up of your investors?

RL: It’s mostly US. Actually, a lot of it is from Silicon Valley. Our biggest clients are all

1. Give us a brief background on your career experience in private equity and the creation of Seven Bridges Advisors.

RL: I spent the past 14 years mostly in the endowment world. The first four years I was at the UPenn endowment and then the next nine years I worked at the Howard Hughes Medical Institute, which is around a $17 billion fund. It was actually the largest in the country for a long time before Gates created his. At Howard Hughes I did a little bit of everything. In American football terms, I was sort of the free safety. I was the generalist managing director for the CIO, having worked with the same CIO at Penn and Howard Hughes. When I got to Penn there were no alternatives, so I was part of the team that built that up. Part of that team is Narv Narvekar who now runs Columbia University’s endowment, the head of hedge funds for the Moore Foundation. There were several other people who are now CIOs who were part of that team: a sort of a Penn diaspora. I went with Landis in 2004 and did a little bit of everything. Specifically in private equity, I was less focused on the more programmatic portion.

We had managers we had known for a long time, doing middle market US private equity -- really basic stuff in my view. I focused more on where there was an opportunity to do something different or maybe there was a market dislocation, or inefficiency. HHMI did a lot of in energy private equity which seemed to be an inefficient market. I spent a lot of time in the emerging markets in general across public and private equities. About every 18 months I would go to India, Brazil, Hong Kong, China, or a Russia and see what was going on in the world and look across all assets – private equity, real estate and public equities. So I after nine years at Howard Hughes, I connected with the founder of

The FORMATION ofSEVEN BRIDGES

LREJ Interviews Ram Lee, President at Seven Bridges Advisors

LPEJ JULY 2014: Seven Bridges Advisors


7. And where are you right now with your PE investments?

RL: We have one PE fund that invests with managers. The last PE fund was focused just on US energy because that’s really where we saw the opportunity. That’s been doing phenomenally well. There’s a real inefficiency in the energy boom in the US. We think that there could be some international opportunities both potentially in EM and particularly in European distressed. That’s more of a private, illiquid play. So, that’s a more broad investment coming out of the opportunity fund. That goes for real estate too.

8. Are you actively looking for managers now for new investments?

RL: We are although it’s less manager driven and more markets driven. We’re trying figure out what assets are selling at, where it seems like there’s the greatest opportunity to add value particularly to buy things cheaply or if we think there’s less money chasing it.

9. As far as a timeline, is there a point where you can see yourself making a pan regional allocation to Latin America or country specific?

RL: In private equity or real estate, we’re more likely to do Brazil. That’s just the reality. In real estate actually, I’m willing to go to what might be considered riskier markets. I consider the asset to be less risky. Real estate is very tied to the economy and if you can get in at very good cap rates, it can be an attractive way to play it. There are a fair number of players compared to other markets, but it’s still pretty underpenetrated.

10. What advantages have you found attending Latin Markets’ events?

RL: I definitely meet managers that may not have been on my radar. It also focuses me for that moment on what is happening in LatAm and opportunities there outside of public markets. Just taking the time to focus on the combination of macro and micro opportunities is helpful, with good speakers and presentations is helpful.

Mr. Lee interviewed Arthur Levine, President &

Founding Principal of Levine Leichtman Capital

Partners at the Private Equity Latin America

Forum on May 19-20, 2014. 19-20, 2014.

advantage. That being said, that’s a little bit more on the public side. I think on the private side it’s very hard to be pan-regional. It’s hard to have good networks in Mexico, Colombia, Peru and Brazil. It’s possible, but you actually have to have someone on the ground in a couple of those countries. It’s hard to compete with cash in Brazil for equities. The question is, are things really still cheap in privates? Fortunately it appears in Latin America they still are.

5. How is forming relationships with managers and companies in Latin America different than other regions?

RL: I think they’re a little bit more… I don’t want to say more commercial, but Latin America and particularly Brazil is very oriented toward a strong majority shareholder who’s driving things. They really feel like that everything has to have an owner and someone who’s responsible and they look to that person like you’re responsible for this company. Other places don’t really want that. They don’t want it to be all one family, not so personal. If I like you one year, but next year I don’t like your business, I’m out. It’s not personal. But in Brazil it seems like the people… it’s a little more personal.

6. What is your take on investing in the public versus the private markets in emerging markets and Latin America right now?

RL: PE is such a longer term orientation that six months of flows doesn’t matter. Valuations all get pegged off of public markets in all markets and the private market is related. So it does affect short-term valuations, but the flows aren’t the same. People commit. They’re committed. Private equity for us is really an opportunistic play. Many investors have sort of a private equity benchmark that they have to pay attention to and if emerging markets is in the benchmark they have to think about filling that box. We don’t have to fill the box. We don’t have any private equity benchmarks. So, we’re only going to do it if we think there’s a special opportunity to make money there. The truth is that if I thought I could get the same return and risk vs. reward with more liquidity I wouldn’t invest in private equity. I would never lock up if I thought I could get it somewhere else. I’m happy to have zero and there’s a max amount I’d be willing to have which in general for most portfolios is in the 10 to 15 percent range.

multinational companies and had those relationships and could give them what they wanted. That was a little easier for us to ascertain and figure out who was connected that way. It’s a little hard on the ground to figure out who really knows which side of the street you should be on. We also had little bit of office and a couple other things, but the main place that we put money was in Indian logistics. We didn’t do much Indian private equity. It’s the most over-penetrated private equity market, I think, in the world. You can see by the private equity amount raised and when you look at Latin America and you compare it to the amount of private equity in Asia, even adjusting for the different sizes of the country or GDP, Latin America is very under-penetrated with private equity. India is the poster child for having more private equity than they can ever know what to do with, which is why all those firms wind up buying public equities. Not all of them, but a lot of them wind up buying public equities.

At Seven Bridges, we currently have investments across EM. We have more of our money right now in Asia than any other part of EM. The two areas I look at most seriously are Brazil and actually South Africa. It’s an inefficient long-short market. It’s not a long opportunity there, but it appears to be a pretty inefficient market and it’s a market no one else looks at. Brazil is more likely to be long. It’s just more of a long theme, though Brazil has a higher probability of social unrest. Not necessarily political problems, but there’s social unrest.

Each country has its own risks. Brazil has mostly social risk. There are politics and corruption, but there’s corruption everywhere. Brazil has a real functioning capital market, which is not true in China. Although there’s obviously a lot of activity, it’s controlled and India is a fairly closed market, too. There’s a lot of activity, but the government makes it hard for foreigners. We don’t have much money in Latin America right now. Mexico may be interesting for the first time since I’ve been an investor. I think Mexico has actually gotten itself together. The fact is they seem to be reforming the oil & gas sector. This is very important for the country to do in terms of actually allowing some foreigners to be involved because they just don’t have the expertise. That is a huge tailwind.

4. What has been your experience with the talent of managers in Latin America?

RL: I think that pan Latin managers have an

LPEJ JULY 2014: Seven Bridges Advisors



LPEJ JULY 2014: UBS Wealth Management

Narendra Modi. If Modi’s government could improve India’s investment cycle, as we expect, the country’s economic growth prospects would also brighten. Now, there’s marginally reduced political in the fragile five overall. We went past elections in India, Turkey and South Africa. We still need to see Indonesia and Brazil. Brazil is still a particularly large question mark.

4. More specifically, what is your firm’s experience investing in Latin American private equity and real estate?

AC: What I can tell you, Seth, is that we’ve been looking at the Brazilian real estate sector. The question there is whether Brazil is experiencing a bubble -- in particular in the residential real estate sector in central cities like São Palo and Rio. So we’ve done some analysis and we do believe there’s a case where prices in this sector could adjust relatively fast. However, it really remains as a risk case. It’s not our base case. You did see that property prices in these two cities, for instance, have tripled in nominal terms since 2008. They have grown 10 times faster than inflation and mortgage lending has increased quite rapidly, so this raises red flags. However, when you look at the country and compare it with peers, you see, for instance, that mortgages represent a very small part of outstanding credit.

part of the year. Now, how does that impact the emerging markets? There has been a lot of talk on the Fragile Five, a term coined last year when the whole taper discussion came up. This term includes countries with large current account and budgets deficits, those expected to be most affected by tighter global liquidity conditions. These and other EM countries struggled during all of 2013 and delivered asset-price underperformance not seen since the global financial crisis.

We reviewed how fundamentals have evolved for the Fragile Five and EM more broadly over the last 12 months to ascertain whether they are better prepared to face expected tighter global liquidity conditions this time around. We concluded that EM countries are better prepared for the challenge, having improved their FX reserves and current account positions, also having adjusted nominal exchange rates and used monetary policy tools adequately. The fiscal front is one area many EM need to work more on. The Fragile Five countries remain relatively more exposed than other EM, Turkey and South Africa in particular.

3. And what are your views on India?

AC: India looks better than it used to a year ago. First of all, we got through political noise. Neither the polls nor the markets’ predictions proved bullish enough for

1. Give us a brief background on your role at UBS.

AC: I joined the Chief Investment Office of UBS Wealth Management around a year ago and I work with the emerging markets team headed by Jorge Mariscal. Our main responsibility consists of generating investment strategies across asset classes for emerging markets. Jorge oversees Asia, EMEA and Latin America. My role in particular is focused on Emerging Markets and LatAm macroeconomics, sovereign credit, and cross-asset tactical asset allocation. We have a team that focuses on liquid real estate and a team that does alternative investments. I am more focused on macro research and strategy.

2. Could you give us a high level view of your take on the opportunity set right now in emerging markets?

AC: Why don’t we start with the global picture and then zoom into Latin America? What you see nowadays is that there’s a lot of talk of normalization of global bond yields. It’s a process that’s taken longer to occur than most people expected. We thought global yields would slowly creep up during 2014. It hasn’t realized yet, but we still expect that to happen in the second

INTERVIEW WITH ALEJO CZERWONKO Emerging Markets Professional, UBS Wealth Management

THE OUTLOOK FOREMERGING MARKETS

For instance, nowadays you see mortgage lending as a percent of GDP is only 8 percent. If you compare that to countries like Chile, 20 percent; Thailand, 12 percent; Italy, 23 percent and the U.S., 68 percent -- you understand that the potential for a bubble burst is rather limited. We might see a cap on appreciation but not really a bubble.

5. What do you see as some of the challenges to growth in Latin America?

AC: Latin America is facing two main headwinds. The first one is the normalization of liquidity conditions globally I referred to earlier, and the second one is the adjustment process that China is undergoing. The exposure to these two factors is rather heterogeneous for the countries in the region. Brazil with iron ore, Argentina with soy, Chile and Peru with copper, for instance, are relatively more exposed to the China factor, and the increasing fears in the property sector in that country, etc.

We still think the region offers interesting growth prospects compared to the rest of the world. The region will not suffer from a big adjustment or big crisis as was the case in the 1980s and 1990s. You have larger reserves, current account deficits all that are close to fully covered by FDI, and you have flexible exchange rates. The region is better prepared than it used to be for the two challenges that it’s facing nowadays.

Mexico is by far our preferred play in Latin America across asset classes. We see that their reform program is really transformational. We think it can add between 75 basis points and 175 basis points in growth over the next five years. The energy reform will boost earnings, the fundamentals of credit and help the currency appreciate. We like Mexican equities and sovereign bonds. In Brazil, we remain neutral across the board. We are relatively concerned about the future of the country and the political noise.

6. And who will win the World Cup.

AC: Exactly. It’s the first time that the outcome of a sports event is so important for the politics and economics of a country. The other risk beyond the World Cup is the energy rationing one.

7. How so?

AC: Right now, Brazil is a country that depends a lot on water damns for the production of electricity. The water reservoirs are at very low levels. The levels are close to those present in the year 2001 when authorities last had to ration energy in the Southeastern part of the country, which is the most active economically. The rationing of electricity is increasingly becoming a question of when -- not if. The current administration for obvious reasons, given that it’s an electoral year, is delaying the decision to ration, but this carries risks because you’re pushing your infrastructure to maximum capacity and whenever that happens the risk of failure increases.Now, if some type of big failure in the system or some type of energy rationing were to be implemented before the election, this has very clear potential to tilt the results. This is what happened in 2001. Part of the reason why Cardoso lost the election was the implementation of energy rationing measures.

So, we have two risks; World Cup and energy rationing. Base case, Dilma gets reelected. This is not good for the economy and not good for asset prices in the country since we don’t expect major reforms to be implemented. We don’t expect major changes from the current set of macro policies. Now however, the probability of her being reelected is decreasing and it’s being threatened by these two central risks that I just described. If infrastructure at the World Cup fails people will be really upset because they’re already complaining why did the country spend so many billion dollars in this kind of event when basic goods and services, public goods and services, are lacking. Given that opposition candidates are expected to embrace more market-oriented policies, bad news for Rousseff may be good news for the markets.

8. How are you seeing things evolve in the Andean region?

AC: In the Andean region, we’re talking about three well managed economies: Colombia, Chile and Peru. Despite their solid fundamentals, they are facing different realities in terms of business cycles. Colombia is enjoying an economic acceleration, helped by its relatively lower

trade exposure to China, and higher exposure to the US. On the other hand you have Chile and Peru, countries that are relatively more exposed to China and relatively less exposed to the US, both of them are experiencing a deceleration of economic activity. What makes matter worse in Chile is the degree of uncertainty you have surrounding the tax and education reforms that has been proposed by the Bachelet administration. Despite these different dynamics from three well managed economies, your tail risks are very limited; not least since we believe the Chinese administration will be able to walk the fine line between reform and growth.

9. How do you see dynamics playing out in emerging markets broadly given the negative headlines?

AC: We do think that the medium to long-term investment case for emerging markets still stands. You have a group of countries that is very different from the group of countries that used to be involved in crises in the ‘80s and ‘90s. Just like LatAm, EM more broadly have built much larger reserves stocks, and learned to allow nominal exchange rates to adjust and absorb shocks. We don’t see a major crisis in the horizon. Obviously, conditions are not going to be as benign as they used to be in the last decade, but they’re going to muddle through. They still offer higher growth than the developed world and they will still offer interesting country-level opportunities.

10. And lastly, what do you find valuable about attending Latin Markets’ events?

AC: It’s always a great opportunity. On top of the panels, it’s interesting to have the chance to meet one-on-one with different people who come to meet in a single spot from all different points in Latin America. It’s important to test your view against other market participants and see how much yours is deviating from theirs. It’s always a nice sanity check.

Mr. Czerwonko spoke on the panel “Private

Wealth Allocations Into Global Real Estate” at

the 2nd Annual Institutional Real Estate Latin

America Forum on June 2-3, 2014.

LPEJ JULY 2014: UBS Wealth Management


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