November 30, 2015
Interviewed by: David Snow
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Unique Qualities of LatAm Countries

With a healthy balance of commodity and consumer-driven economics, Latin American countries presents different investment opportunities for private equity than other emerging markets. Experts from EY, Victoria Capital and Harbourvest Partners explain what some of these differences are.

With a healthy balance of commodity and consumer-driven economics, Latin American countries presents different investment opportunities for private equity than other emerging markets. Experts from EY, Victoria Capital and Harbourvest Partners explain what some of these differences are.

Unique Qualities of LatAm Countries
Investing in Latin America in 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 today. Thanks for being here.

All: Thanks for having us.

Snow: Why don’t we compare Latin America against other emerging markets? Certainly investors are very aware that the emerging markets almost everywhere are very different than they were a few years ago. How is Latin America holding up as a region, again keeping in mind that it’s still a diversified place, compared to let’s say China, Turkey? What’s your view Scott?

Scott Voss, Harbourvest Partners: So I think China you have to take and look at it separately. And China I think is here to stay, it will have its challenges, but it’s a big investment opportunity. But if we look at some of the other emerging markets, and the ones I like to talk about, Turkey, Brazil, Russia. All important components in our emerging markets strategy, but very different characteristics. Turkey, I think 75 percent of their economy is driven by consumption. Brazil it’s more balanced both commodity driven and consumer driven, and then obviously Russia I think is much more commodity driven. And they all have challenges. I think given where we are with the commodity cycle, and the challenges that declining commodity prices have put on many of these emerging markets the less dependent you are on commodities maybe the better off you would be. So in the definition I just gave you it would probably go Turkey, Brazil, Russia as the pecking order of who is in the best position versus the worst. They hall have challenges beyond that.

Turkey needs to attract foreign direct investment to fund its growth, and that’s I think creating a challenge for them right now. But this is, I think it’s also the important understanding for the investor to be diversified across these markets that benefit from favorable characteristics but are different in their own unique ways. You can diversify away some of the risk that sits in each of the specific countries.

Carlos Garcia, Victoria Capital: Latin America is probably of the different emerging markets world is one of the ones that is going to be most affected in terms of growth. sBecause it’s a relatively speaking it has a larger component of commodities. I mean when you look at Brazil as Scott said it’s probably 50/50, or a sort of a balanced distribution, but other countries of Latin America are much more dependent on commodities flows. So clearly Latin America, if I were, if I probably would like to be somewhere in Southeast Asia today or in Turkey I mean in terms of opportunities going forward for growth. Having said that I believe that as a private equity investor the fact that Latin America is going to go into a lower growth brings two interesting opportunities. Number one is we’re going to see less capital flowing into the region, and as a result of that I believe that better opportunities could be accessible for us. Let me give you an example. Chile was historically probably the best managed economy in Latin America, but it was the most difficult one for private equity managers to do deals in.

Because there was a lot of capital in the region. There were lots of domestic investors coming in, and making you know, the activities or making the life of private equity investors very difficult. With the macro changes happening globally, the declining in commodity prices plus their own political agenda that has affected the business sentiment in the country you know, we are seeing more opportunities in Chile than historically we’ve ever seen. So I think that you know, we are getting into a slower area, into a lower sort of a growth environment. But with more opportunities going forward, that’s our view.

Mike Rogers, EY: It’s interesting that I think all the countries you mentioned all have similar issues they’re dealing with you know, trying to bring people out into the middle class. They’re trying to you know, make their business or their countries more consumer-driven. And so there is a lot of similarities. The commodities cycle is one that you know, you can kind of go down the list and look and see who has more exposure. That’s always a challenge as well, but I would put a vote in for Latin America for a couple of other reasons though. One is more political stability than some of these other countries right now. There is you know, some places are having you know, war issues or strife or other challenges, and Latin America does not you know, have some of those challenges. They’ve also developed some of these pro-growth you know, sort of policies, and reduced some of the barriers for trade. And so I think if you look at the MPEA study for attractiveness around the world Latin ex Brazil was rated the number one most attractive by their readers and investors for the second year in row. So I think you see that sort of long term people view it’s there even though it’s obviously a much lower you know, growing opportunity right now.

Snow: Maybe actually one final topic. I’m interested in talking about the impact of China on Latin America. China is a huge purchaser of Latin American cooked food and commodities. How has the slowdown in China affected Latin America?

Rogers: Well I think that that is the big question in today’s global economy is how exposed are you know, folks to the Chinese procurement process that really had been going on for the last you know, several years. In fact I think China is projected to grow at seven percent this year. I think that’s the slowest in 25 years. So suddenly you’re seeing who has that exposure, and how quickly it’s hitting them. You know, we sort of expect that China, as Scott said earlier, they’re not going away. It’s going to be a little bit slower approach, but as they, the thing that I think is going to impact some of the commodity producing countries the most is China is trying to drive its economy to be more of a consumer driven as opposed to export driven. And so this could be a trend on the commodities side that could last some period of time, which is why I think we’re seeing you know, some of the stock prices for example in oil and gas companies fall 50, 60 percent. There is a feeling that you know, this is a turn of events that will impact folks for a while.

So we definitely see China having a big impact, and in other parts of the world too. I mean there are certainly places where a lot of Chinese capital has moved in either to help build infrastructure you know, in Africa and other countries like that. But definitely it’s going to have to impact on the consumer in Latin America.

Snow: Scott is the slowdown of China’s economy something that Latin American GPs are talking about? Is it impacting their current portfolio companies and deal flow?

Voss: Yeah, I mean they have to talk about it, but the reality is I think Latin America is in a pretty good position. If you look at the global economy today, right at the nucleus or at the center it’s the US or China. Those are the two major drivers of global growth. Before the financial crisis it was probably the US that was in that position. And then as the US was challenged during the financial crisis, and China came out super strong you saw economies that were connected to China be quite resilient. Brazil was a classic example of that. So I think what’s important for Latin American companies is they tend to be diversified with their reliance on the US and with China. And the US, it’s clearly been the bright spot of the global economy more recently as China has had its challenges. But I think what’s important is you know, China drove this commodity cycle to super commodity cycle. And now that we’re on the back end of that it just forces economies that were so reliant on commodities to really be much more efficient in the way that they run their economies, the way that you run your companies. And in the end of the day that’s going to be better for everyone. So you know, we’ll keep a close eye on China. It’s definitely a big variable in the global economy today.

Snow: By way of comparison in the aftermath of the late 90s meltdown in Latin America there were some investors in the US that said never again right. And I’m not touching that region. People are singing a different tune now.

Garcia: Yeah, yeah, I think so. And look I mean what Scott said earlier today, I mean back in the 90s when everything blew up I mean people didn’t want to hear about it. Now you know, when you talk to the institutional investor community you know, the vast majority is not running away. I mean and everybody is saying, okay what is the renewed opportunity that we have to live with?

Rogers: You know, I’ve actually heard the term being used, stock-picker’s market if you will. Which Scott touched on this earlier in terms of you know, when the tide is running up you know, almost anything you do, anything you buy you kind of ride that swell. And there is a lot of popular thought that you, you know, that it’s going to run for a long time. And I think today we see a much different market where you can still be successful, but you know, describing it similar to a stock-picker’s market where you need to be very select, put more time, energy, effort, diligence in on the front end to make sure you’re making the right investments. Because I think over the past several years you’ve been able to, even if you’ve made a little bit of mistake you sort of got bailed out by the trends in the market that kind of carried you forward and may have made your deal successful regardless of your “mistake” on the front end. So I think it’s just going to take a little bit more diligence, a little bit more patience, and picking your spots. As opposed to just the all investment that we’ve seen in some periods.

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