December 29, 2014
Interviewed by: David Snow
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The Evolution of Mexican And Colombian PE

Experts from EY, Nexxus Capital and MAS Equity Partners on the Colombian and Mexican private equity space describe their markets’ evolution and the outlook for Latin American PE as the market matures.

Experts from EY, Nexxus Capital and MAS Equity Partners on the Colombian and Mexican private equity space describe their markets’ evolution and the outlook for Latin American PE as the market matures.

The Evolution of Mexican and Colombian PE
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. We’re talking about the private equity industry in the Pacific Alliance countries, and we’re joined by three people who spend a lot of time doing business in those countries: obviously, Luis in México and Patricio in Colombia. Luis, can you talk about the development of the Mexican private equity market? What have been the advantages you have enjoyed and what have been the challenges?

Luis Harvey, Nexxus CapitalThe development of the Mexican private equity market was slow, particularly, for a number of reasons that started in the mid-to-late ‘90s. At that time, it was possible to do a $50million IPO in the 140 foreign market in the U.S. and the dual listing in México.

So, the Mexicans being so close to the U.S.—that means the Mexican SEC just goes and copies the rules of the U.S. SEC. So, many Mexican companies—instead of doing private equity at that time—went directly to do small listings in the 140 foreign market. At the time, there was a tax break by which a company would list his company’s stock in the public market with zero taxes for the southern shareholders. So, the incentive to go into a public listing was substantially hard and to get private equity.

At that same time, companies in Chile, Argentina, Brazil, not Colombia, were doing private equity. In the particular case of Colombia, they did something we didn’t do in México, which was that they allowed the public pension plans to invest in enlisted companies substantially earlier than what we did in México.

So, it’s been a combination of factors that made the private equity industry in México develop slower than it did in other countries, including Colombia.

Snow: Patricio, he mentioned the Colombian pensions playing an important role in the development of your own market. It’s important to note that you are also the president of ColCapital, which is the Colombian—

Patricio D’Apice, MAS Equity Partners: Right.

Snow: —Private Equity Association. So, not only do you know your own firm very well, but you see all the other firms. You’re in touch with them. And you know how they’re developing. Can you elaborate on the importance of the framework put in place for the development of the Colombian private equity market and why it’s been able to develop relatively quickly?

D’Apice: Yeah, that started in 2005 when we started discussing with the government potential loss and regulations that could help the market to promote private equity.

The government did a great job putting in place a regulative framework that mimics the best practices in private equity in the world, in terms of supervision of the fund, in terms of corporate governance and reporting standards and the like. So, we launched our first fund in 2005. The pension funds were quite suspicious and ignorant in a good sense about this industry. It was difficult to get an investment for them, but they provided small tickets.

In our fund, they put an average $4 million each. And we are talking about pension funds that have $90 billion and in management.

In time, they started getting acquainted with the industry. They got more confidence. More GP’s appeared. And today, we have 35 GP’s operating in Colombia. Some are global GP’s or regional funds, but all of them are operating in Colombia. And most of them have offices in Colombia. I think this regulatory framework, which is modern and is transpiring, has helped a lot. And, of course, the money of the pension funds and the insurance companies has boosted the industry.

Snow: Mike, as someone who has a lot of contact with GP’s and many emerging markets—

Michael Rogers, EY: Yes.

Snow: —You’ve seen the big international firms pay attention to developments taking place in places like México and Colombia. Are you sensing a greater interest in them dipping their toes or getting very active in these markets, now that they’ve seen the level of development and a bit of a track record?

Rogers: Yeah, that’s really what it’s all about, David, in terms of watching that track record. And if you go back and look at how the market grew up—many of the companies in Latin America, in the Pacific Alliance, start out as family businesses.

The challenge with that is as these companies get bigger and more complex, sometimes family members don’t want them. It’s a perfect opportunity for private equity to come in and help. And what we’ve seen the last few years, David, is a two-tiered model. In many cases, it might even be three tiers. But where smaller or regional funds might come in and play a role, partner with management. Luis has taught me this on other occasions where you really have to be, in some of these companies, their first migration from family ownership to some other form of capital structure, be it private equity or public markets is really a big transition. So, often, you need local coverage there.

So, what these two folks do very, very well with their funds is go in, make that first level, maybe second-stage investment and take these entities to the next level, bring in professional management, make sure they’re being operated correctly and getting them prepared because both Luis and Patricio know that the next thing they want to do is make the changes. Then, ultimately, find their exit path in five or seven years, whatever their model might be.

So, there’s this thriving model over the next several years, particularly in Colombia, where this build-out will take place. And then, I think there’ll be some opportunity for some of the other funds to come along and take the companies to even another level.

D’Apice: It’s important to mention that one distinct factor about the Colombian private equity market is that because of the size of the companies, and the fact that most of them are owned by families, probably, second or third generation, and because of the limitations of the financial system and the banking sector, growth equity is a very powerful proposition for these kind of companies. And growth equities, what Mike was telling about—it means growing those companies, helping them understand how corporate governance can help their bottom lines.

Snow: Luis, despite the fact that the Mexican private equity market has developed quite a bit—it’s grown and it has attracted some international investors—do you still have a substantial advantage as a local when discussing transactions with other local businesses?

Harvey: Today, we believe that at the investment range that we are in the, let’s say, $40million to $80million per transaction, some of the big players could come in. But in our particular model, we tend to look for companies in which the entrepreneur is a guy who has his eyes set on taking his company public. That’s one of the most important characteristics we look at.

They want to partner with someone to grow the company and take it public. Therefore, in many of those cases, we take minority positions. And that’s fine. Some other firms want to come and do controlled transactions, which is fine. But I don’t think they’re going to find many great businessmen. They’re going to sell their company in the first round of financing. No, they’re going to sell control. And they will likely lose control when they go public. It’s going to happen. But they’d rather lose control when they go public than lose control before they go public.

In the lower levels, in let’s say, the $10 to $30 or $40million transactions, there are many funds now that the industry is growing substantially. And we’re starting to look at companies from those funds. We haven’t done any transaction yet in that space, but we believe we’re going to see some of those companies that we’ll be able to invest in them in the near future to take them to the next level, no?

A final point I’d like to make is that I believe one of the good things that has happened—particularly with Colombia and México, maybe a bit less with Brazil—is that we have been doing private equity the old-fashioned way. And, like in more-developed countries in which leverage is ample and available, those have been financial place in which they put a ton of leverage on the transaction. And then, it’s not about growing the companies. It’s not about growing the EBITDA of the companies. It’s not about expanding organically or acquiring businesses. It’s a financial play.

In our case, we believe what we’ve done is grow companies, generate a ton of income, producing the corporate governance, the transparency, the accounting and paying taxes, which in our country, paying taxes is one of those things that doesn’t necessarily happen. So I feel that the net effect of private equity in our markets is extremely good.

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 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: 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 is around 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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