November 25, 2016
Interviewed by: David Snow
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Advent Remains Bullish on Latin America

The head of Advent International’s Latin America investment platform discusses how Brazil’s downturn has changed his deal flow, a recent roll-up of a Brazilian auto-parts business, the success his firm’s Bogota office and why private equity isn’t a bigger industry in Mexico.

The head of Advent International’s Latin America investment platform discusses how Brazil’s downturn has changed his deal flow, a recent roll-up of a Brazilian auto-parts business, the success his firm’s Bogota office and why private equity isn’t a bigger industry in Mexico.

Advent Remains Bullish on Latin America
With Patrice Etlin of Advent International

David Snow, Privcap:
Today, we’re joined by Patrice Etlin of Advent International. Patrice, welcome to Privcap. Thanks for being here.

Patrice Etlin, Advent International:
It’s a pleasure.

Snow: You are Managing Partner and you are primarily responsible for the Latin American investment program of Advent International. I’d love to hear your views on the market today.

Why don’t we start with the biggest market in Latin America for private equity, which is Brazil? You’re based in São Paulo. You have an on-the-ground view of what’s happening in Brazil. It’s in a downturn. What’s different about this downturn in Brazil and what does it mean for private equity?

Etlin: David, we’ve been 20 years in the region now; we celebrated our 20th anniversary this year. And we went through all the different cycles during this period—the end of the ‘90s, 2001, 2002, 2008. Now, the difference here of what we are facing in Brazil, it’s—this recession has been long. We are in the second year into this recession. Then, you couple on top of that a political crisis that ended in the recent impeachment of President Dilma. That combination has been, in a sense, very damaging to the economy and to companies.

Snow: I would imagine there are a lot of distressed opportunities to be had in Brazil. Does your firm pursue those types of deals? Have you seen that type of deal flow tick up?

Etlin: We don’t look at those kinds of deals, we don’t pursue those, but the amount of companies that came through the office in these situations—debt to EBIDTA levels that are unsustainable—has grown significantly over the last quarters even. But the other side of the crisis is that it had opened to us the opportunity to look at companies that were not being accessible to us—a high quality of assets by the size of those assets and the situation they are, it is a unique opportunity, in fact. Not only because of the crisis, but also remember that there is a big corruption scandal going on in Brazil involving Petrobras, for instance, and major construction companies. Those companies are so forced to sell assets because of that and those are good assets.

Snow: Your firm recently acquired Fortbras, which is a major auto-parts distributor in Brazil. Can you talk about how that deal came about and what your thesis is for its growth?

Etlin: We’ve been looking at this sector for a couple of years now and we source many transactions. We were always facing the issue of size of the company we could find. Fortbras is a consolidation of five companies that we are buying at the same time and creating a holding company on top of it to manage those five assets. This is a roughly $10-billion market in Brazil today and the thesis is you had a boom in the selling of new cars in Brazil back in 2006, ’07 and ’08 at the boom of the credit cycle there. The market there was selling close to four million new vehicles or cars per year and transformed Brazil into the third-largest car market in the world.

Those cars are now getting out of guarantee from the manufacturers and the customers that bought those cars are sourcing parts and spare parts in distributors, third-party distributors like ours. Our company basically distributes to repair shops directly. A huge portion of our customer base—it’s a company growing double digits in the middle of the crisis. We do a lot of opportunities for add-on and consolidations, so that’s the way we look at this deal.

Snow: Moving on around the Latin American region, where are some countries where you’re spending a lot more time and where you see very interesting opportunities?

Etlin: We established our presence in Colombia, opening our Bogotá office back in 2011, and it has developed of being a great opportunity for us. We did six transactions there—all successful, large, doing well. We established a great name in the country, seeing a strong pipeline out of there. From Colombia, we are spending time in Peru and even Chile now—we’re actually advancing also in our first Chilean opportunity. We just concluded our first deal in Peru, which is an add-on of an existing portfolio company we have out of Colombia: a chemical distributor. Peru is a much smaller market, so we have there a bit of same challenge we are facing in Argentina in the sense of finding large transactions out of Peru. But the Andean region as a whole—and, again, particularly Colombia—has been very interesting for us.

The other big market, of course, is Mexico. We are in Mexico since 1996 or so—20 years in Mexico. Out of Mexico, we cover the Caribbean region and Central America. We’ve done deals in Puerto Rico and the Dominican Republic. In Mexico—actually, when you look at the outlook of the economy, this year is probably the best market in the region. [It is] very linked to what’s going on in the U.S., very sensitive to the U.S. election, of course.

Snow: When looking at companies based in places like Peru and Colombia, how important is the idea of taking the business across borders and building revenue by taking a local champion and making it more of a regional champion?

Etlin: It is not the main thesis of our deals in general. We’ve done that. We’ve built Latin American platforms. We’ve done that, as we speak, in chemical distribution.

Snow: What do you sense is the sentiment of your investors, or investors generally in private equity, about the Latin American region?

Etlin: Brazil is the elephant in the room in terms of size, in terms of the number of managers and large managers that were developed and in business in Brazil over the last years.

There was massive fundraising, record fundraising, for Brazil in 2010 and ’11. Close to $10 billion was raised there and a lot of that money was raised into local funds that put the money to work at the peak of Brazil in terms of valuation, but also appreciation of the Real. Of course, in general, that performance was poor. Some of those mangers are out of business and investors lost a significant amount in those cases. So, there is a concern or questioning around what is next for Brazil.

In terms of when they look at Mexico, it’s always this view that that market should be a larger market in terms of PE activity. It is a second economy in the region, but when you see the number of transactions compared to other markets, it is still very poorly penetrated in terms of PE activity there.

Snow: Why do you think that is? Is it just a much strong family business culture in Mexico?

Etlin: That’s a good point. It’s a more concentrated economy. You have big oligopolies there. You have one guy that controls 40% of the market cap of the stock market there: Carlos Slim. The type of concentration, you don’t see in other economies in the region—a big influence of the families, a lot of transactions between them. It is a more difficult market to penetrate, yeah.

Snow: Final question for you. What do you think about when you are thinking about being bullish about the long-term prospects of private equity in Latin America? What facts or trends do you follow that make you feel bullish as an investor?

Etlin: When you look at long term, we will always have volatility. I think that’s the first point also to be clear about the region. If an investor is looking for stable growth, predictability, that’s not Latin America.

But, when you look at those markets, you have a middle class that is still expanding. You have consumers avid for new service, new products in the long terms. Credit should be more affordable, and that will again bring additional consumption, industrialization and huge opportunities on the infrastructure side with private equity returns because there is so much on-tap demand there. [There’s] so much need that you can find growth on those infrastructure assets different than what you see in developed markets like here.

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