October 26, 2015
Interviewed by: David Snow
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Staying Optimistic About LatAm Opportunities

Sinking commodity prices and political turmoil have roiled Brazil in the past year, and the ripple effects can be felt throughout Latin America. Experts from EY, Victoria Capital, and Harbourvest Partners discuss private equity’s roadblocks and investment opportunities in the region.

Sinking commodity prices and political turmoil have roiled Brazil in the past year, and the ripple effects can be felt throughout Latin America. Experts from EY, Victoria Capital, and Harbourvest Partners discuss private equity’s roadblocks and investment opportunities in the region.

Staying Optimistic About LatAm Opportunities
Investing in Latin America 2015

David Snow, Privcap: Today, we’re joined by Carlos Garcia of Victoria Capital, Scott Voss of Harbourvest, and Mike Rogers of EY. Gentlemen, welcome to Privcap. Thanks for being here.

All: Thanks for having us.

Snow: We’re talking about the state of the market in Latin America for private equity. All of you touch emerging markets and, more specifically, Latin America in certain ways. I’m fascinated to hear your diversity of your views of what’s going on in that very important, very large and diverse market. Why don’t we start with an overview from Carlos Garcia?

Carlos Garcia, Victoria Capital: Over the last few months we have seen this sort of change in the macroeconomic landscape in Latin America, primarily caused by declining commodity prices and by the reverse of capital flows. Latin America has moved down in terms of growth potential from the average that it has over the last 10 years. Now, Latin America is region that is likely to grow, but at a slower pace than the one we had. Inevitably, this is going to have an impact on consumers, because [there are] going to be fewer job opportunities and fewer increases in compensation in the region. It’s going to become more difficult for the consumer to increase its purchasing power over the next few years as a result of the slowdown in economic activity.

Snow: Scott, your firm Harbourvest invests across the world, including the emerging markets. You have relationships with GPs across Latin America. What are you seeing as far as their portfolio and the way the macroeconomic conditions are affecting it?

Scott Voss, Harbourvest Partners: Our Latin American managers have a mix of both consumer-facing investments as well as usually services around the commodity space, delivering natural resources to the rest of the world. And, as Carlos noted, there has definitely been a slowdown. I think there are some defensive consumer-facing industries that have held up fairly well, particularly around healthcare and education. But the discretionary spending related to the consumer I think has been impacted more than the other areas. Probably the biggest impact in our portfolio is around currency. That is not only in Latin America, but in other emerging markets around the world where currency has devalued significantly.

Snow: Mike, what is the EY perspective?

Mike Rogers, EY:

As Carlos mentioned, obviously the slowdown has occurred down there in terms of the growth potential. And we’re seeing maybe a flat-ish GDP growth across the region. One of the things we’ve noted is that the challenges that are going to come forward are going to be more in the heavy equipment, the cars, the electronics—things of that nature wheremost of those things are imported into the region. And the currency, as Scott touched on, is really a big impact there. So, what we’re seeing is maybe a bit more of a migration back into the consumer products that can be, in many cases, produced locally. And I think that opportunity will be there for private equity, because the purchasing power of the consumers in these markets for products brought in from around the world is going to be less and less.

Snow: Carlos, do you see almost a total step change in the region, or do you view this more as a longterm cyclical trend that we’ve seen before?

Garcia: Overall, I think it’s more a cyclical downturn, but also it’s fair to say that not all the region is affected equally. A combination of what is the dependence on commodities and the quality of the economic policies of each country determines different behaviors in front of this crisis. But I should say that we see the fastest recovery probably in the Pacific area—countries like Peru, Chile and Colombia are likely to recover faster and navigate through this crisis or through this slowdown in better shape than the countries in the Atlantic region. So, I don’t think you can generalize, but I think it’s cyclical.

Snow: Are the Pacific economies you mentionedsimply less reliant on commodity-linked necessities?

Garcia: Not necessarily, but they are better-managed economies. They have fiscal discipline and a level of internal savings that is very high; therefore, they have the ability to finance growth. As a matter of fact, if you look at some of the countries like Colombia and Peru, they do have infrastructural initiatives that are likely to carry a bit of the weight of growth going forward as they replace consumer spending as the number-one expansion.

Rogers: Yeah, I think that’s an important comment to make: that it’s very regional in terms of where the markets are going to be impacted. The other thing I think that’s out there is this issue of the Pacific Alliance—the fact that they’ve reduced some of the trade barriers, that they’ve become more pro-growth. They’ve had a solid fiscal and monetary policy, and it’s interesting to draw a parallel back to—if this were 20 years ago, I think we’d be seeing much more damage being done to the economy, much higher inflation in some of these countries. But many of these countries have displayed fiscal discipline over the last several years and actually can weather this pretty well, I think.

Voss: Yeah, I also think the step change, or the secular change, versus the cyclical is an important distinction. I think we all probably feel the longterm secular changes are positive, and over 10 or 20 years, all of these economies are going to be much better off than they are today. But to get there, there are going to be cycles and that’s really where the private equity opportunity is. If your longterm capital can fill a funding gap when capital is scarce, you can actually find very good value in these markets and benefit from the longterm secular.

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