November 3, 2014
Interviewed by: David Snow
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The Macro Impact of the Pacific Alliance

The establishment of the Pacific Alliance trade bloc means its members—Mexico, Colombia, Chile, and Peru—have greater bargaining power on the world stage and more opportunities to engage with neighboring countries. This is a positive for their economies and for private equity, says a panel of experts engaged in the region.

The establishment of the Pacific Alliance trade bloc means its members—Mexico, Colombia, Chile, and Peru—have greater bargaining power on the world stage and more opportunities to engage with neighboring countries. This is a positive for their economies and for private equity, says a panel of experts engaged in the region.

The Macro Impact of the Pacific Alliance
Inside the Pacific Alliance

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

Patricio D’Apice, MAS Equity Partners: Thanks, David.

Michael Rogers, EY: Thank you.

Snow: I’d love to hear about your respective experiences building private equity businesses in a region that is now called the Pacific Alliance.  And to get a sense of how important that alliance is to the way you do business. Maybe we could start with a quick overview of your firms and what makes you unique in the market. Let’s start with Luis from Nexxus Capital.

Luis Harvey, Nexxus CapitalWe started in private equity in 1998 when we raised our first fund. Currently, we have $1.2 billion of assets under management. We have invested in 18 companies. We have exited 10. Basically, the environment in Mexico’s changing well. The private equity market is developing. We believe the opportunities to do business in Mexico are interesting; also, the competition in Mexico is not as difficult as in other countries.

Snow: Patricio, what does your firm do in Colombia? Talk about its history and its focus.

D’Apice: We opened up in Colombia in 2005. At the time, private equity was not institutional in the country. It was mostly done by families or financial groups. We have developed the institutional framework and the regulatory framework. We worked a lot with the government. At that moment, the stock exchange was promoting the industry in Colombia. And, from two funds that we launched in 2005 and two private equity firms, today in Colombia, there are 35 private equity firms with active operations.

Today, we can say we have a fairly developed market with different layers of funds focusing on large infrastructure investments, regional funds, funds focused on midsize companies like ours, smallventure funds and seedcapital funds.

Snow: Mike from EY, can you talk about the rise of the Pacific Alliance and how it is influencing the way people see the countries, including Mexico, Peru and Chile?

Rogers: I think the Pacific Alliance is major, almost a game-changer, if you will, about business in these Latin American countries because it has allowed these countries to focus on increasing trade, reducing barriers. One of the first things they did when they came together was to reduce the tariffs on 90% of the goods that traveled between the four countries.

Beyond that, they really tried to increase their capacity and their scale and be able to compete more on a world stage. I had the opportunity to have lunch the other day with President Santos of Colombia. He did a very fine job laying out some of the key issues around what they’re trying to do with the Pacific Alliance. He framed it in three specific ways. He said we need to have peace, number one. We need to have more equality or reduction in inequality, which the area has been known for over the years. Then, we have to have more opportunity in economic improvement for folks who come from better education. Ultimately, that leads to the opportunity of these countries to make their lives better for the folks who live there.

Snow: Luis, in your view, how important is the creation of the Pacific Alliance and its goals?

Harvey: Mexico’s trade is over 87% of the U.S.; 10% is Europe. Latin American trade is 1%. So, it’s in Mexico’s best interest to look down and look at the South American countries and increase trade because that will benefit everybody.

In the private firms that we invest, when we grow the companies, after we have fulfilled the Mexican market, there are usually two markets we look at. We look at the Hispanic market in the U.S.—that’s one market. The other market is usually Colombia.

Many of our companies actually have started their international expansion with the first food in Colombia, and then, in Peru. It’s very interesting. We believe that fostering trade and developing the relationships in order to have much larger and better trade between the countries are going to make these countries much better. And the economic impact on everybody will be a very important thing, just like it happened between Mexico and the U.S. almost 20 years ago.

Snow: Patricio, how big a deal do you think Pacific Alliance is for Colombia? Then, of course, the follow-up question: will this change and improve the private equity prospects you face in your country?

D’Apice: It’s very important to Colombia because the traditional commercial partner of Colombia has always been Venezuela, with the U.S. in second place. Given the evolution of Venezuela in the last decade, and the different approaches to economic policy in each country, Colombia had to find alternative partners. It found it in Europe and Asia, but specifically, in the Andean region.

The Pacific Alliance countries represent 38% of the population of Latin America and 35% of GDP. So, it’s a large, new player that has a say towards Asia and Europe in trade and, again, in cross-border transactions.

Recently, a Peruvian company bought out a logistics company that was owned by a private equity fund in Colombia. We actually have grown companies from Colombia outside into Peru, Chile, Mexico, and more recently, Ecuador. That’s happening a lot.

Snow: To what extent does the Pacific Alliance help position a lot of the member countries to do better trade with Asia and the biggest market there, China?

Rogers: The opportunities of these countries to come together and be a more formidable player, I think are very important.

One interesting thing I’ve seen is that the alliance has been formed. It’s not only some of the tariff reductions and trying to improve the business prospects, but allowing for visa-free travel for people to come back and forth between the countries, but also simple things like setting up embassies around the world to represent the region that Pacific Alliance grouping, as opposed to each country going to market. I think it’s simple economics.

And when they go to have discussions with China and other key trade partners, they have a bit more strength at the table. Just presenting a united front and being able to use economy of scale and produce even more product to be more efficient and deliver that to the rest of the world puts them in a very good stead.

Snow: One goal is to better integrate the capital markets to make more seamless interaction between the markets. How might that pan out and how might that affect the private equity strategy, specifically on the exit side?

D’Apice: If you ask me, that has already started to happen with integration of the stock markets under the MILA, which is the integrated Latin American market. That has, of course, increased the size and appetite for these kinds of securities.

So, it will provide the window of opportunity for exits for private equity that previously probably did not exist because of the small size of each one of those markets.

Harvey: Yes, at the end of the day, if people have access to capital from different countries, what MILA is doing, it’s giving the possibility for all these potential investors to be able to access companies that they wouldn’t be able to access otherwise. It’s good news. It’s an additional pathway to an exit when you take a company public. And we should welcome that.

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, in Mexico. 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: While 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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