January 5, 2015
Interviewed by: David Snow
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Energy Opportunities in Latin America

Three experts from EY, Nexxus Capital, and MAS Equity Partners on the Pacific Alliance—a trade bloc of four Latin American countries—discuss the changing opportunities for private equity investment in the region’s energy sector as reforms are made to countries’ laws.

Three experts from EY, Nexxus Capital, and MAS Equity Partners on the Pacific Alliance—a trade bloc of four Latin American countries—discuss the changing opportunities for private equity investment in the region’s energy sector as reforms are made to countries’ laws.

Energy Opportunities in Latin America
Inside the Pacific Alliance

David Snow, Privcap: Today, we’re joined by Luis Harvey of Nexxus Capital, Patricio D’Apice from MAS Equity Partners and Michael Rogers from EY. Gentlemen, welcome to Privcap. Thank you for being here.

Patricio D’Apice, MAS Equity Partners: Thank you.

Michael Rogers, EY: Thank you.

Luis Harvey, Nexxus CapitalThank you very much.

Snow: We are talking about investing in the private equity markets of the Pacific Alliance. I’d like to learn a bit more about the types of businesses your two private equity firms are focused on in your respective markets.

Starting with Patricio, what are the most exciting sectors of the economy you’re looking to invest in right now?

D’Apice: There are two main drivers of growth in the Andean region and it’s very similar in the different countries. One of [those] is the growth of the middle class that, in the case of Colombia, has doubled during the last eight years.

The other driver of growth is infrastructure. We target, and we prefer to target, the companies that provide services to infrastructures, industries and projects.

For example, for each oil field, you will find between 30 and 50 small and medium companies that are run by families or professionals that provide services to the oil and gas company. And those companies are in great need of capital and guidance for growth.

Snow: In the event of a large energy transaction that involves a big international investor, would your firm consider taking a position alongside?

Harvey: Sure, absolutely. We do it all the time. Right now, we’re looking at a large, roughly $250million transaction, which we’re going to put money ourselves, but we have a limit on the funds. So we’re bringing co-investors. This is not in energy, but we’re looking at another transaction in energy that’s going to be large. And we’re going to be investing alongside the pension plans and potentially with other investors.

So, the possibilities for co-investments and these larger transactions are there. But I think that, particularly for the groups, the México invested in the past. And they didn’t set up offices in México. This is difficult not to deal with; you have to know your ways. It’s like you send me tomorrow to Colombia—I’m not going to do what he does. He knows the people. He knows the who, when and what that I don’t know. So, people tend to think that regional funds are great. But the reality is that private equity is a local business. You have to have local people in every place. If you have that, then you could probably do a very good business. But if you want to transplant people from Argentina to México, from Colombia to México or from México to Brazil, it’s going to be really tough. You have to know your ways.

Private equity, in many ways, is a trust business. The guy you’re partnering with has to trust you. And you have to trust the guy. So it’s not as simple as it looks.

D’Apice: I have a question, Luis.  For practical purposes, how do you see the development of the oil and gas industry in México, given the energy reform? Because there’s much speculation about how long will it take to—

Harvey: It will take a long time. From what they say to what’s going to end up happening—who knows what’s going to happen? But the important thing is that you have to have the private sector come in. And the private sector does rational things, hopefully. And the expectation is that the oil production will eventually go back to 3.2 million or 3.3 million barrels a day.

México has a problem. They’ve had, in the last 10 years, declining production and growing demand. So, if they don’t do that, the country would’ve become a net importer of oil three or four years down the road.  So they are pressured to make sure oil and the barrels of oil are produced at a fast pace. But when you look at the transactions in that space, I think the probability of interesting opportunities arising out of this is large.

Of course, the energy reform is going to make a whole set of new investments come into the country. And that’s going to be a complete new asset class. The requirements for investment in petroleum and oil, in particular, or in gas are so very large. And we’re going to have a lot of people coming here like they did in Colombia a few years ago.

Of course, it’s of great interest for all the international investors that are already all over the place in México now.

What is EY’s presence in the Pacific Alliance and how does the firm help businesses in the region to thrive?

Mike Rogers, EY:

Our primary focus in the Pacific Alliance is to help private equity funds to not only source ideas and find opportunities, but also to execute the diligence and look at the tax structuring-type work. We’re helping more and more through the value-creation phase as well. Ultimately, we help with exits and we help them monetize and realize if it’s either through an IPO or through a secondary sale or a trade sale to some larger entity somewhere in the world.  But the principal part of our business that seems to be thriving is in the private equity work in Colombia and in México. We have a very big franchise of folks in those markets and we’re growing and adding people.

What kind of help do companies in the region seek from EY?

Rogers: We’ve seen corporate governance continue to improve in many of those markets, and a lot of the companies in those markets understand that if they’re going to be received on the world stage, they have to have good corporate governance and good financial arrangements. A lot of our work around is making sure on the diligence front that we understand exactly what our clients are getting into. There’s not only the financial side, making sure the statements are correct, but looking at the taxes as well. So there’s a lot of focus on the financial diligence along with the tax component, just making sure the investments make sense and fit into the portfolios of these companies.

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