PRIVATE EQUITY SCENARIO IN LATAM MAY 2013 UNIVERSIDAD DE ALCALA BANCO SANTANDER

Master in Finance & Banking (2012/2013)

THE PRIVATE EQUITY SCENARIO IN LATIN AMERICA
Rosado Iturralde, Gabriel

Madrid, España 21/06/2013

Index
1. ABSTRACT____________________________________________________________________________
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2. INTRODUCTION 2.1. Purpose of the Study __________________________________________________________ 3. ECONOMIC PANORAMA

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3.1 Economic Background Overview Latin-America _________________________________ 3.2 Evolution in Present Economic Tendencies ______________________________________ 3.2.1 Evolutionary Trends Regulating Panorama _______________________________________ 3.2.2 Latin American economy dominated by Brazil and Mexico _____________________ 3.2.3 Middle Class Evolution in Latin America __________________________________________ 3.2.3.1 Latin America Middle Class Overview Last Recent Years _____________________ 3.2.3.2 BRICs Compared to Latin America Middle Class Growth Evolution _________ 3.3 Last Economic Indicators in Latin America _______________________________________ 3.3.1 Strong Growth and Widening Current Account Deficits _________________________ 3.3.2 Strengthening Regional Financial Sectors ________________________________________ 3.3.3 Uneven Inflation and Monetary Policy Convergence _____________________________ 3.3.4 Improved Sovereign Debt Profile and Fiscal Position ____________________________ 3.3.5 Active Official Intervention in Exchange Rate Markets ___________________________ 3.3.6 Leadership Transition and Challenging Governance______________________________ 4. PRIVATE EQUITY AND MOST COMMON TYPES OF INVESTMENTS

3 6 6 7 8 8 10 12 12 12 13 13 14 15

4.1 Private Equity Firms Definition _____________________________________________________ 4.2 LBOs ___________________________________________________________________________________ 4.2.1 LBO Characteristics __________________________________________________________________ 4.2.2 LBO Candidate Criteria ______________________________________________________________ 4.2.3 LBO Transaction Structure __________________________________________________________ 4.2.4 LBO Transaction Figures and Analysis of Performances ________________________ 5. PRIVATE EQUITY SCENARIO IN LATIN AMERICA

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5.1 5.2. 5.3 5.4 5.5 6. 7. 8. 9.

Background of PE in Latin America ________________________________________________ The evolution of private equity in in Latin America _______________________________ Fundraising in Latin America _______________________________________________________ Returns and Performances in Latin America ______________________________________ LAVCA Scorings for PE in Latin America __________________________________________

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RECENT NEWS PE IN LATIN AMERICA _____________________________________________ 31 OUTLOOK AND CONCLUSIONS _____________________________________________________
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BIBLIOGRAPHY ________________________________________________________________________ 35 ANNEX __________________________________________________________________________________
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1.ABSTRACT
“Private Equity Scenario is increasing its presence in Emerging Markets because developed countries have more barriers to entry as it is more crowded by funds looking for benefits. PE in Latin America has been difficult to predict because of the characteristics of the region. However, with the new economic outlook and the stability of the region over the last ten years, both politically and economically, countries have begun to show promising and sustainable growth, getting the attention of several VC and PE funds. In this new scenario opportunities to invest in high quality, private companies have increased, supported by socio economic trends that have allowed millions of people to become part of the middle class, with this activating the economy and the quality of the enterprises. This paper analyses the private equity outlook and opportunities across the principal countries in Latin America, focusing in the main causes that the author believes would be relevant for investors.”

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2. INTRODUCTION
2.1 Purpose of the Study
Nowadays with the present characteristics of the global economy, investing firms, pension funds and other investing institutions are looking for alternative investment ways than in the market mainly because it has been too volatile and they are looking for bigger spreads in other sectors. The private equity funds and private capital investors get their well-founded and attractive place in this investment scenario, where alternatives are contemplated in which the private equity activities have a coarse history of successful transactions through the years. Emerging markets such as Latin America and Asia create new possibilities for this kind of investors that look for better opportunities regardless the location of the investments but having into account the quality, forecast and profitability of these transactions. The question of whether Latin America is safe and profitable enough to be center of investment arises; presenting the main reason of this paper that will show the characteristics of this region and will propose reasons to back the role that it has in the Private Equity Investments as a strong and potential target.

3. ECONOMIC PANORAMA
3.1 Economic Background Overview Latin-America
Latin America shares a common background, similar political and economic structures, similar history lines of both problems and commemorations, similar governments and similar culture. Being independent from the 1800s the region has had ups and downs and nowadays they have a potential scale trends, since periods of instability have been surpassed in most of the countries with exception in some specific cases. This predictable and not so volatile scenario started in the 90s after several recessions where inflation was a key issue and governments started to have more control of their political and economic strategies.

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Description of market Countries

Total GDP (USD Bn)

Forecasted Gini Ease of GDP Populati coefficient doing growth on (in of business (2010 millions) developme (Global 2020) nt (0=best) rank)

Mature (and largest) market Mature Markets

Brazil Mexico Chile Colombia Peru Panama Costa Rica Argentina Paraguay Venezuela Ecuador

2.5 1.2 0.2 0.3 0.2 0.03 0.05 0.4 0.02 0.3 0.06 5.26 9%

4% 2.50% 3% 4% 7% 6% 4% 1% 5% -1% 3%

196.7 114.8 17.3 46.9 29.4 3.6 4.7 40.8 6.6 29.3 14.7 504.8 8%

0.55 0.59 0.44 0.59 0.52 0.55 0.45 0.45 0.47 0.56 0.59

130 48 37 45 43 61 110 124 103 180 139

Maturing Markets

Frontier Markets

TOTAL GLOBAL PERCENTAGE

Table 1. Characteristic of Latin America principal countries Source: Unigestion, World Bank, IFC, CIA, Others. From the previous times of volatility in the past century Latin America has learned that in order to inspire confidence to external investors it has to gain stability, issue that has been attended for the last decades and it is now perceived to foreign countries and possible investors. The GDP has been a clear indicator of this matter in which we can observe that has been stabilizing its growth rate for the last few years. (See Annex 1)

Figure 1. Latin America GDP Growth 1970-2010 Source: Unigestion, Bloomberg.
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Average annual real GDP growth rates, in % Latin America & Caribbean Brazil Chile Colombia Mexico Peru

19801989 2.10 3.00 3.60 3.40 2.40 0.60

19901999 3.00 1.70 6.40 2.90 3.50 3.20

20002009 3.10 3.30 3.70 4.00 1.80 5.10

20102016E 4.40 4.70 4.80 4.50 3.90 6.40

Table 2. Average annual real GDP Growth Rates Source: Bloomberg, IMF, Partners Group. Some of the major changes in the regulatory and economic framework are:  Central Bank:

In Latin America after some major political changes the Central Banks were separated to this class in the 1980’s. The pioneers were Chile and Mexico, and then Brazil by President Fernando Cardoso implemented this strategy (Unigestion, FT. 2012). An independent bank allowed a country to control some of the inflation expectations and reduce interest rate volatility, with this, the potential for a currency crisis, after the speculations against the fixed currency rates most of the countries opted for a floating rate instead the fixed one. Other countries like Peru, followed the example, and the achievements are now visible in the low levels of inflation in the region over the last 10 years, with exception of some countries like Argentina and Venezuela.  Fiscal Target Policies:

Starting the century 21st, Brazil began to look for a fiscal surplus of 3% of GDP (Unigestion, FT. 2012). This goal allowed the country to take a firm budget control measure and boost tax income by reducing evasion. Brazil has now had 6 consecutive years of surpluses where tax receipts have exceeded government expenses, allowing to pay down debt and strengthen its financial health. This has become a trend in the region, with governments engaging to pursue fiscally positive policies.  Trade Treatments:

Mexico became a member of NAFTA (North American Free Trade Agreement), a treat proposed by president Carlos Salinas, while other countries pursued free trade agreements with the world, like Chile with the US and Korea. This set the scenario for more open economies willing to compete both domestically and globally. It created new markets for local products, as well as the development of global business leaders in some industries like manufacturer Embraer or Chilean airline LAN (nowadays LATAM). (Unigestion, FT. 2012).

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

Tax Reforms:

Tax reforms have been instrumental in increasing competition between countries, as in the case that has been previously said in Brazil, reducing evasion and boosting collections. Also Brazilians reduced to almost zero the remittance of dividends of its subsidiaries of foreign companies, while Chile lowered its corporate tax rate to under 30%. This has contributed to a sense of stability and predictability for foreign investors, as well as reduced the bureaucratic burden of tax filing by foreigners. Other countries like Panama and Mexico also offered some incentive taxation for foreign companies.  Privatizations:

Privatizations of state-owned entities have brought efficiencies to the market and redirected funds to other uses. For example in Telephone Companies, wait times for an installation in the 80’s could be up to six months. Nowadays performance is better. In Mexico appeared one of the main companies of the business tycoon Carlos Slim, TELMEX as result of these privatizations. Later on banks were privatized aggressively.

3.2 Evolution in Present Economic Tendencies
3.2.1 Evolutionary Trends Regulating Panorama As stated above, the reasons for the region’s economic progress over the past decades are known: privatization and de-regulation affects several parts of the economy, trade and capital market liberalization as well as prudent fiscal policies, like the Brazilian, played central roles and enable Latin American countries to restore macroeconomic stability and bring fiscal finances under control, and even surpluses in some cases. After years of very high inflation in the 80s and 90s, with consumer price inflation as high as 480% year over year in 1995, during the “Tequila Recession”, policy makers realized that low inflation was a necessary and mandatory condition for macroeconomic stability. Vital changes to the monetary policy framework were implemented, ranging from the reformation of the countries’ central banks to increased exchange rate flexibility. These developments enabled monetary policies to be able to fight against consumer inflation expectations, breaking the high inflation expectations and diminish inflationary trends. Today the result in annual average inflation in consumer prices in most of Latin America is reduced to acceptable levels due to recent stability.

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Inflation Averages
1,60 1,40 1,20 1,00 0,80 0,60 0,40 0,20 1980-1989 1990-1999 2000-2009 2010-2016E

Figure 2. Inflation Averages Across Latin America 1980-2016E. Source: IMF, World Bank. 3.2.2 Latin American economy dominated by Brazil and Mexico Leading the charts of the countries is Latin America’s largest economy, Brazil, which in 2012 growth target was 5.5% , nowadays with some revisions in that figure that suggest a more conservative figure of around 4.0%. Brazil, a leading commodities producer, has developed sophisticated manufacturing and technology sectors to complement its traditional industries. In addition, Brazil has begun reaping the benefits of financial reforms it enacted during the 1990s as is stated above in the previous section of the present paper. On the heels of Brazil’s growth is Latin America’s second largest economy, Mexico, which had in 2012 an estimated growth of around 4% by the IMF, nowadays revised around 3%. Mexico is followed by Chile and Peru, which are projected to grow in the 4-5% range. The most notable laggard is Venezuela, where fears of more business expropriations after the death of Hugo Chávez are, to no surprise, dampening investment activity and dragging the economy to a projected negative growth rate.

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Total GDP (USD Bn)
1% 0% 4% 6% 4% 47% 0% 8% 1% 6% Brazil Mexico Chile Colombia Peru Panama Costa Rica 23% Argentina Paraguay

Figure 3. GDP Comparison in Latin America. Source: IMF, World Bank, CIA.
Despite the overestimations made in the past differ from the data that is actually coming out in 2013, central banks have been successful in fighting inflationary pressures while avoiding a hard landing scenario, as shown by the lower and more sustainable GDP growth outlook.

3.2.3 Middle Class Evolution in Latin America 3.2.3.1 Latin America Middle Class Overview Last Recent Years Latin America is experiencing a dramatic evolution of its middle class. In the last 10 years, the proportion of people in Latin America with a daily per capita income (in PPP) between $10 and $50 a day went from around 20% to 33%. For the first time in Latin American history, in some countries, there are similar number of people in the middle class as in moderate poverty, that would not make us too optimistic since the extreme poverty is a main problem in several countries across the region. Middle Class has shown a socioeconomic shift largely due to the sustained rates of economic growth in the 2000s that in most countries trickled down and generated higher incomes, this take us to presume that the structure of Latin America is really changing.

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Figure 4. Income Distribution in Latin America 2009. Source: SEDLAC.

Figure 5. Class Composition in Latin America by Income Percentile 2009. Source: SEDLAC.

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Figure 6. Middle Class vs. Economic Growth in Latin America. Source: SEDLAC and WDI. 3.2.3.2 BRICs Compared to Latin America Middle Class Growth Evolution Growth is not exclusive of Latin America, while the industrialized world was facing a tough decade, many emerging economies resisted the global turbulences and continued to grow, lifting people out of poverty and feeding the ranks of their middle class for example in the BRICs countries. A comparison in the growth of the Latin American middle class with its counterparts in BRIC (Brazil, Russia, India, China) countries shows that, even in comparative terms, the early 2000s have been very good for the region. Between 2000 and 2009, 50 million individuals were added to the middle class in Latin America bringing the total from around 115 million persons to over 165 million. The growth in the middle class goes beyond the good performance of Brazil: more than 30 million non-Brazilian citizens of Latin America entered the middle class during that time. The growth in the middle class in Latin America reflects dramatic trends that can be observed in all the BRICs, with the exception of India. In Brazil, Russia and China, the middle class has achieved impressive growth in a relatively short time. Around 2009, the middle class consisted of 61 million people in Brazil (up from 39 million a decade earlier), 75 million in Russia (up from 31 million), and 83 million individuals in China (a jump from just 10 million). Still, these numbers mask strong differences across the BRICs when the middle class is measured as a proportion of the population. In Brazil, the emergence of a middle class is not entirely new. In the early 1980s, the middle class made up more than 15 percent of the population; nowadays it makes up almost one third. The most spectacular transformation toward “middle-class society”
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occurred in Russia, where the middle class grew from being one-fifth to more than one half of the population. On the other hand, in China, the 83 million people defined as middle class only represent less than 10 percent of the population. Today, Russia seems to be a true middle class society with a majority of the population being middle class, while in Brazil and in many Latin American countries, almost two thirds of the population has yet to reach middle class status. The performance of Russia is, however, eclipsed by the stunning growth of the middle class in China, where sustained economic growth led to an eightfold increase of the middle class in a decade. And although China, with less than 10 percent of its population being middle class in 2009, may not yet be as much of a “middle-class society” as Brazil or Russia, it has an enormous growth potential. Among the BRICs, India’s comparatively poorer performance may come as a surprise. Both in relative and absolute terms, the Indian middle class grew significantly less than in the other BRIC countries. In 2010, only 9 million Indians had reached middle-class status, which is less than 1 percent of the population. These low estimates reflect that, despite a good growth performance in the 2000s, India’s GDP per capita remains below the levels of the other BRIC countries. Of all the BRICs, China is forecast to experience the greatest growth of the middle class, overshadowing the good performance of Latin America. China’s middle class is expected to grow from 54 million in 2005 to more than 1 billion in 2030, or 72 percent of the population, adjusted for population growth. On the other hand, despite growing in absolute terms, the Latin American middle classes will gradually lose ground internationally. While in 2005 the region’s middle classes represented more than 40 percent of all the middle classes in low and middle income countries, the forecasted dramatic rise of the middle class in China will reduce Latin America’s share to less than 20 percent in 2030. Even without China’s contribution, the next two decades will be characterized by a massive increase of the middle class all over the emerging world, from around 300 million households in 2005 to almost 1.9 billion. According to the forecasts, however, the increase is likely to remain modest in South Asia, where the middle class is predicted to reach 100 million people in 2030. In two decades many factors could affect, in one way or another, the parameters underlying the forecasts. In particular, an average annual growth rate of the Chinese economy of 7% between 2005 and 2030 is a key driving assumption behind these results. These changes are here to stay. Thanks to more sophisticated consumption habits, the middle classes in emerging countries will influence global trade patterns. Domestically, the middle classes will have a growing voice by means of higher purchasing power and by demanding better education. And with a growing critical mass, they will push for institutional reforms and improved service delivery in areas that are beneficial to them. The magnitude of these changes will depend, however, on the continued growth of the middle class and on the nature of its demands on the public sector. They will likely be more dramatic in regions where the middle class will grow the fastest, such as East Asia.
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While it is difficult to forecast these changes with precision, it is possible with some margin of error to assess in which countries the middle classes have been growing and will grow the most. (Rigolini 2013)

3.3

Last Economic Indicators in Latin America

3.3.1 Strong Growth and Widening Current Account Deficits As was said previously and in conjunction with the increasing middle class and richer economies, growth rates are being set to moderate in 2013 after a strong forecast made in 2010 where the average GDP across the LATAM region (grew an estimated 5.7% in 2010) was too high to follow nowadays, this principally driven in large part by higher than expected private consumption fueled by a rapid recovery in job growth and wages and increased lending to the private sector, that pushed to very optimistic predictions around the world regarding the growth of LATAM. The global economic recovery is gaining momentum, setting a positive tone for the major economies in Latin America. Nonetheless, the pace of growth will be uneven across the region as exports in the most trade-intensive economies remain affected by erratic global trade dynamics and competiveness challenges due to appreciating currencies. Colombia and Brazil will show a recovery trend in the second half of the year, following a marked slowdown in industrial activity in 2012, while Peru and Chile will continue to outperform, influenced by shifts in relevant commodity prices and still-robust domestic demand. Mexico’s prospects remain closely linked to the US business cycle with a positive growth outlook reinforced by the implementation of micro and macroeconomic structural reforms. Both Venezuela and Argentina are poised for a steep economic deceleration, as a result of erratic policy implementation. The core group of countries in the developing Americas is not immune to financial turmoil in Europe, aggressive shifts in commodity prices (gold, copper, oil and soybeans) and uncertain growth dynamics in Asia and the US. Current account deficits are widening in most countries due to declining export flows and terms of trade adjustments. (Scotiabank.2013) Unemployment has continued to trend lower, dropping from 10.0% to 9.4% across the region, mainly because of the stability and also of a big self-employment culture in LATAM. 3.3.2 Strengthening Regional Financial Sectors Domestic demand has shown a growth in the last few years around 9.6% across the region, with many economies posting double digit gains, including Brazil, Peru and Chile, showing that the countries are developing infrastructures that enable them to depend little less from the developed economies regarding technology, production and financing. Well capitalized and adequately regulated banking sectors are becoming the norm in most countries in the region. The strength of the financial sector, credible monetary regimes, stronger domestic demand, coupled with improving labor market conditions have allowed domestic credit to continue to grow at moderate and manageable rates. Private pension funds are playing an increasingly relevant role as a local source of financing (and
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institutional investment) in Chile, Peru, Mexico and increasingly Brazil and Colombia. Rising foreign exchange reserves also reinforce the region’s preparedness to face adverse global financial market shocks, particularly those which may arise once major global central banks withdraw sizable liquidity and monetary stimulus. The region holds almost US$800 billion in foreign exchange reserves – mostly as a result of large purchases of US dollars in local exchange markets – with Brazil and Mexico accounting for 70% of the total. (Scotiabank.2013) 3.3.3 Uneven Inflation and Monetary Policy Convergence Inflation is relatively well-contained within the official targets established by national authorities across the region save for Argentina and Venezuela. Those countries which have embraced inflation-targeting schemes together with solid institutional frameworks are successfully containing price pressures. Nonetheless, monetary policy actions have been divergent in the region. Mexico maintains a stable outlook after reducing its reference interest rate for the first time since July 2009, while Colombia will keep a bias towards monetary policy accommodation after an aggressive easing cycle. Peru and Chile maintain a neutral stance while Brazil and Uruguay have begun to tighten monetary conditions in response to mounting inflation. The monetary environment in high-income economies remains accommodative, driven by a pro-growth interventionist bias; nonetheless, any policy shifts in the world’s major central banks will influence monetary conditions in Latin America. Argentina and Venezuela, refusing to adopt inflation-targeting regimes, are still flirting with hyperinflation. (Scotiabank.2013) 3.3.4 Improved Sovereign Debt Profile and Fiscal Position Improved Sovereign Debt Profile and Fiscal Position Debt sustainability represents a macroeconomic strength in the outlook for Latin America. Most countries in the region enjoy a manageable fiscal deficit position and an improved sovereign debt profile, paving the way for credit rating upgrades. The steady development of local sources of financing through improved banking sectors, developing private pension fund systems and well-regulated local-currency bond markets has diminished the need to access external sources of financing. However, both Mexico and Colombia count on a pre-emptive Flexible Credit Line Arrangement approved by the International Monetary Fund. Long-term equity investors continue to see enormous potential in sectors connected either to infrastructure or energy and mineral resources. Colombia’s energy sector, Mexico’s automotive and telecommunication industries, Peru’s mining segment and even Uruguay’s forestry sector are notable foreign direct investment targets. (Scotiabank.2013) We can appreciate the stable fiscal debt structures within most important countries in Latin America, in the following table:

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Country Brazil Chile Colombia Mexico Peru

2000 66.70 13.70 36.30 42.60 N/A

2005 69.10 7.30 38.50 39.80 N/A

2010 66.10 8.80 36.50 42.70 24.30

2016E 58.60 8.00 29.90 41.40 16.10

S&P Credit Outlook Ratings BBB AABBB BBB BBB Negative Positive Stable Stable Stable

Table 3. Stable Fiscal Debt Levels and Attractive Credit Outlook Source: Bloomberg, IMF, Partners Group.

Figure 7. Stock Market Performance, 2002 - 2012. Source: Bloomberg, Unigestion. 3.3.5 Active Official Intervention in Exchange Rate Markets Excess global liquidity and the pursuit of high-yield investment alternatives led to large-scale portfolio capital inflows in Latin America, driving currencies to record strong gains vis-à-vis the US dollar (USD). Central banks have intensified their intervention in both exchange rate and money markets, aiming to mitigate the adverse economic impact from currency volatility and excess liquidity. Central banks in Brazil and Colombia have been the most active in the region, guiding their currencies to weaker levels against the USD. Authorities in Peru remain committed to the de-dollarization process, leading to a steady and controlled appreciation of the Peruvian sol. In Mexico, despite recent currency appreciation, the central bank has refrained from initiating any USD purchase programs. In Venezuela and Argentina tight capital controls have generated informal currency trading channels, which we expect to remain in place in the foreseeable future. The Chilean currency context remains sensitive to commodity price adjustments. (Scotiabank.2013)

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3.3.6 Leadership Transition and Challenging Governance Major economies in Latin America continue to show progress in developing democratic institutions and more predictable policy environments. Nonetheless, Colombia’s peace negotiations, Mexico’s fight against organized crime, increasing protectionism and allegations of corruption scandals in Brazil, Chile’s electoral cycle, Peruvian social unrest in the mining sector and erratic government policy-making in Venezuela and Argentina are some of the political and social challenges the region faces. Mexico has unveiled an ambitious process of structural reforms aimed at increasing the pace of long term economic growth. Presidential elections will take place in Chile in 2013 and Brazil and Colombia in 2014, pushing all national governments to implement a more aggressive pro-growth fiscal stance. Based on these indicators, economists expect rates to moderate over the coming 2013, as the impacts of a sluggish recovery in developed markets, especially in Europe, and the necessity of monetary tightening across Latin America fastest growing markets assert themselves, A more real and sustainable scenario is now contemplated. Latin America’s political and regulatory framework, the positive economic outlook and rising consumer purchasing power as well as the low private equity and medium stock market penetration, with a strong performance, make the region an interesting destination for investments. (Scotiabank.2013)

4. PRIVATE EQUITY AND MOST COMMON TYPES OF INVESTMENTS.
4.1 Private Equity Firms Definition This part of the present paper will provide a definition of private equity funds by listing the following main characteristics (For more details see Annex 2): 1. Act as a financial intermediary, meaning that it takes the investors’ capital and invests it directly in portfolio companies: Defines PE funds as financial intermediaries and differentiates it from angel investors and private investment companies that use their own capital. Typically these funds are organized as limited partnerships, with the venture capitalists or the buyout firm partners acting as the general partners (GPs) of the fund and the investors, often pension funds, endowments and other institutional investors, acting as the limited partners (LPs). Potential agency conflicts between GPs and LPs are addressed by contractual provisions in the limited partnership agreements. 2. Invests only in private companies. This means that once the investments are made,

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the companies cannot be immediately traded on a public exchange. It is the most obvious defining feature of private equity and distinguishes it from both the traditional investment assets of stocks and bonds as well as the other alternative asset of hedge funds. Figure 8 illustrates the relationship between various asset classes within private equity and also between private equity and other asset classes. Within private equity, there are four main subclasses, of which VC and BO are the largest and most important two. Overlapping circles in Figure 8 indicate where the scopes of neighboring groups overlap: for example, the mezzanine category comprises both growth equity (that overlaps with later-stage venture capital) and the subordinate debt layer of buyout transactions (which is often attached to some equity ownership) and thus overlaps with both venture capital and buyouts. Distressed investing, on the other hand, can be thought of as a specialized segment of buyouts that target mature and distressed companies. In all four cases, portfolio companies of private equity funds are private companies for which little public information exists. Thus, information asymmetry is thought to be far greater in private equity compared with investments in public companies that must file regular reports with the SEC and also are often covered by Wall Street analysts. As a result, portfolio values of private equity funds are not marked to market and fund returns are not finalized until the end of the funds’ lifetime. In contrast, while some hedge funds participate in private equity transactions (especially larger companies that buyouts and distressed investors invest in), they are primarily investors in publicly traded assets such as stocks and bonds and their portfolios are marked to market

Figure 8. Four main types PE Investments. Source: Metrick, Yasuda, Tuck School of Business. 3. Takes an active role in monitoring and helping the companies in its portfolio. This characteristic is central to the entry reason of private equity and potentially a key determinant of a given PE fund’s performance. While all ‘active’ investment fund managers, mutual funds, hedge funds, and private equity funds, select their stocks and are
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evaluated on their ability to pick winners, not all of them actively influence actions of the management of the companies they invest in. Except for large block-holders who gain seats on the boards of public companies, public company investors’ ability to influence the management is severely limited. In contrast, private equity investors often condition their investments on contractual provisions, such as board seats, veto rights, and various contingent control rights, that enable them to influence the actions of the management while they hold their investments. 4. A PE fund’s primary goal is to maximize its financial return by exiting investments through a sale or an initial public offering (IPO). Since PE funds are financial intermediaries, they need some mechanism to give money back to their investors, which gives rise to this characteristic. Exits can occur through an IPO, with a subsequent sale of the PE stake in the open market, through a sale of the company to another investor (especially to another BO fund), or through the sale of the company to a larger company. The requirement to exit and the focus on financial return differentiates PE from strategic investments done by large corporations. While corporations are active both in VC and BO markets, their investment criteria are different from professional PE because of the lack of need for exits and greater emphasis on synergy with their existing operations. To summarize, PE funds differ from both mutual funds and hedge funds in that they invest in illiquid, private companies, and differ from corporations in which they are required to return money to investors within a finite investment horizon and therefore have to focus on objectives with a clear path to exits. These functional differences are reflected in the ways PE funds are organized, in contrast to hedge funds and mutual funds, and PE funds have a finite life, typically 10 years, and a fixed fund size that is determined at the time of the fund inception. Both hedge funds and mutual funds are open-ended and do not have a finite fund lifetime. Within the fund lifetime, investors in PE funds must commit to illiquidity of up to 10 years, unlike hedge funds and mutual funds, both of which allow redemptions on demand, subject to some waiting period. Because of the illiquidity and the long-term nature of PE investments, reinvestments are not permitted or restricted to a modest fraction of the fund size; in contrast, hedge fund and mutual fund investors are offered options to automatically reinvest any dividends and distributions from funds on an on-going basis. PE fees are often highest first and decline in later years, because successful managers are expected to raise follow-on funds with new fee streams; hedge fund and mutual fund fees are flat percentages of assets under management, so that total fees would rise over time as assets grow. And finally, despite the common perception, hedge fund and PE fund carried interest are earned quite differently. In hedge funds, carry is a fixed percentage (usually 20%) of the market value of the portfolio in excess of cost basis, and can be earned each year as long as the former exceeds the latter, subject to high watermarks. In contrast, carried interest in PE is earned only on realized basis – i.e., only if investments are exited and cumulative exit values exceed the contractually specified threshold amount. Since exits typically are concentrated in the latter half of the funds’ life, PE managers often wait for many years before they earn any carry from their funds. (Olsen, John.2003)

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4.2

LBOs

4.2.1 LBO Characteristics In a successful LBO, equity holders often receive very high returns because the debt holders are predominantly locked into a fixed return, while the equity holders receive all the benefits from any capital gains. Thus, financial buyers invest in highly leveraged companies seeking to generate large equity returns. An LBO fund will typically try to realize a return on an LBO within three to five years. Typical exit strategies include an outright sale of the company, a public offering or a recapitalization.
Exit Strategy Sale IPO Comments Often the equity holders will seek an outright sale to a strategic buyer, or another financial buyer. While an IPO is not likely to result in the sale of the entire entity, it does allow the buyer to realize a gain on its investment. The equity holders may recapitalize by re-leveraging the entity, replacing equity with more debt, in order to extract cash from the company.

Recapitalization

Table 4. Investment Exit Strategies in LBOs. Source: Tuck School of Business. 4.2.2 LBO Candidate Criteria Given the proportion of debt used in financing a transaction, a financial buyer’s interest in an LBO candidate depends on the existence of, or the opportunity to improve upon, a number of factors. Specific criteria for a good LBO candidate include:   Steady and predictable cash flow  Clean balance sheet with little debt  Strong, defensible market position  Limited working capital requirements  Minimal future capital requirements  Heavy asset base for loan collateral  Divestible assets  Strong management team  Viable exit strategy  Synergy opportunities  Potential for expense reduction

4.2.3 LBO Transaction Structure An LBO will often have more than one type of debt in order to procure all the required financing for the transaction.

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Offering Senior Debt

Percent of Transaction 50-60%

Cost Of Capital 7-10%

Lending Parameters 5 -7 Years Payback 2.0x -3.0x EBITDA 2.0X Interest Coverage 7 - 10 Years Payback 1.0x - 2.0x EBITDA

Likely Sources Commercial Banks Credit Companies Insurance Companies Public Market Insurance Companies LBO/ Mezzanine Funds Management (MBO) LBO Funds Subordinated debt holders Investment banks

Mezzanine Financing

20-30%

10-20%

Equity

20-30%

25-30%

4 - 6 Years Exit Strategy

Table 5. LBO Transaction Structure. Source: Tuck School of Business. It is important to recognize that the appropriate transaction structure will vary from company to company and between industries. Factors such as the outlook for the company’s industry and the economy as a whole, seasonality, expansion rates, market swings and sustainability of operating margins should all be considered when determining the optimal debt capacity for a potential LBO target. (Olsen, John.2003) 4.2.4 LBO Transaction Figures and Analysis of Performances The amount of fundraising and investment activity in the buy-out industry is currently at record high levels. These amounts are economically sizeable and affect both the way industries are restructured and the working of financial markets (e.g. the M&A market). Policy makers, investors and academics alike need to know more about this opaque industry. One of the most striking facts from previous research is the finding that the final performance of a private equity fund is related to the final performance of the private equity fund previously raised by the same firm (Kaplan and Schoar, 2005). They find strong evidence among venture capital funds and mild evidence for buyout funds but less data, hence potentially less power, may explain the lesser strength on the buyout side. A deep study of dataset enables (Phalippou 2007) to analyze a unique and comprehensive sample containing the gross of fees performance and characteristics of 5,965 buyout investments made by 193 private equity firms in 38 countries from 1973 to 2006. Resulting that the value weighted multiple of these investments is 2.3. Hence, buyout firms have returned a bit more than twice the money invested before fees. The overall gross-of-fees performance is relatively low. IRR averages 21% and multiple averages 2.7 while the average duration of an investment is 4.5 years. Median IRR and multiple are respectively 21% and 1.9. This is a lower bound for true performance which cannot be computed by Phalippou because does not know the timing of intermediate cash flows. Average return is 7% and median return is 17% and returns are widely dispersed and beta is slightly above 1. Performance has been particularly high in countries like Sweden, the Netherlands and Italy and low in countries like Germany and Italy. In its study it is found that poorly performing firms have similar chances to end up

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in top or 4 bottom performers on their subsequent investments. For top performers, however, past performance is a strong predictor of future performance. These two channels explain entirely the persistence effect for experienced/large/old firms while it explains little of the persistence effect for the other firms. It demonstrates also that, persistence is not achieved by different risk attitudes. “Winners do not seem to offer any extra systematic nor total risk”. (Phalippou 2007) It is also found that the work-load/busy-ness of the firm is significantly related to performance. The inter-quartile range in busyness is 3 to 10 investments in a year and predicts a performance spread of 8.4% p.a. The widely held belief that firms with long track records and a lot of experience are good investments appears incorrect. The performance of ‘star’ firms is similar to that of others. They may be refusing capital because they do not want their performance to drop below average. Hence the puzzle seems to be more on “why investors think star firm are superior investment opportunities, rather than why star buyout firms refuse capital”. (Phalippou 2007) The buyout industry is known for being a boom and burst industry with very pronounced cycles. One explanation could be that in some periods in time many investments are made, firms are then very busy and underperform which in itself would reduce capital flows and then improve future prospects. Also, if credit spreads increase again then less investments are made, firms are less busy and future prospects are better.

5. PRIVATE EQUITY SCENARIO IN LATIN AMERICA
5.1 Background of PE in Latin America During the pre-reform years, even as international players were mostly out of the market, there were some private equity investors who were net “winners” in the market For the most part, they were local families, who used their knowledge of local networks, politics and the nature of cycles in their respective countries to increase their wealth substantially by buying good assets in bad times. Only a few savvy foreign investors thrived, but that was the exception, not the norm. However, once institutional reforms began in the 1990s, the composition of the “winners” changed. The lower perceived risk of investing in the region attracted institutional (private equity, large asset managers) and strategic capital (companies such as Telefonica of Spain) to invest, mainly focusing on companies providing services to the new middle classes. “Thus, the slow arrival of institutional investors gave way to the development of institutional private equity as a viable asset class”. (Unigestion 2012) 5.2. The evolution of private equity in in Latin America

As mentioned, the first private equity firms to be formed in the late 1980s and early 1990s where those supported by wealthy local families, who, seeing that reforms had opened

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up a whole new set of opportunities, developed platforms that allowed them to leverage third-party capital to improve their access to such opportunities. This was the genesis of firms like “GP Investimentos” in Brazil or BISA in Argentina. These firms opened the door of medium sized companies to private capital and the eyes of foreign investors to the opportunity to invest private capital into promising companies. As a result, in the mid-90s, the first foreign institutional private equity firms entered Latin America. Most of these were US-based firms, who opened local offices and seconded US-trained employees to the region. Advent International entered the market in 1996, buying a credit card administration company in Brazil called CSU. They were soon followed by Texas-Pacific Group and General Atlantic. In the early 2000s, new entrants began to participate in the market. These new players ranged from local firms, such as Exxel, merchant banks such as Deutsche Private Equity and opportunistic firms such as Hicks Muse - everybody wanted a piece of the pie. These firms bought iconic consumer brands, football teams and even funded internet companies. Unfortunately for many of them, the Argentine and Brazilian currency crisis of 2000-2001, coupled with the NASDAQ market crash, rendered many of their investments worthless. It appeared that, again, the region was providing only disillusionment to investors. It would take a few years for investors to regain faith in the region. But investors did come back, and in a big way. By 2005, as Brazil was able to demonstrate years of steady growth and joined the club of “BRIC” countries, a new wave of private equity fundraising began. This wave accelerated when developed countries entered into protracted recessions in 2007, while emerging markets were able to escape relatively unscathed. This gave investors the confidence they needed to increase their allocations to emerging markets, and, in particular to countries such as Brazil. With this background, Advent and Southern Cross raised USD 1 billion-plus funds, and new, smaller firms emerged all over the region. “The asset class grew dramatically, from just a few firms to almost 100 by 2011”. (Unigestion 2012)

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Figure 9. Timeline of PE in Latin America. Source: Unigestion. 5.3 Fundraising in Latin America

The success of any fundraising by a private equity sponsor and the time it takes to raise a fund and get to an initial closing depends on a variety of factors, including:     General economic outlook. Economic outlook of the target sectors of the fund and of the geographic region in which the fund will invest. Track record of the sponsor. Strength of its (or its placement agent’s) relationships with prospective investors.

Fundraising in the region has more than doubled since 2007, as private equity in developed markets has been maturing and investors were generally looking for better returns and diversification away from central economies.

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Figure 10. Geographic Composition of Current Fundraising in PE. Source: Preqin.

Figure 11. PE Fundraising in Latin America, 1993-2011. Source: LAVCA, Unigestion. Unigestion reports expect fundraising volumes to stabilize in the range of USD 5 – 9 billion range per year over the next 5 years. In addition, it is expected that fundraising will go primarily to generalist funds, but, in the coming years and as the industry matures, to start veering towards strategy specific funds such as distressed debt or agricultural land development funds. An interesting point is that despite this new influx of capital, private equity investment as a proportion of GDP remains low in Latin America as compared to other developed and emerging economies. In addition, with investment amounts ranging over the last few years in the USD 5 – 8 billion per year, virtually no capital overhang exists. Both factors are likely signaling that, overall, private equity still has growth potential in
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the region without an apparent risk of overheating. (For more details see Annex 3)

Figure 12. Penetration of private equity in Latin America, % of GDP, 2010. Source: Ernst and Young, Unigestion. 5.4 Returns and Performances in Latin America

As can be seen in Figure 13.1 and 13.2, investing in public markets in Latin America has, over the last 10 years, provided a way to capture returns and diversify risks in a global portfolio, as returns were high and correlations between Latin America and other economies was fairly low. In spite of this, during the crisis that started in 2007, the rate of growth in the public markets in Latin America dropped from 46% per year (2002 – 2006) to around 7% per year, while correlations with other markets increased, all but eliminating the diversification effect without a corresponding increase in returns. We expect that correlations will remain higher than in the past, with a likely reversion to the mean over the next few years. (Unigestion 2012, Scotiabank 2013)

Figure 13.1. Latin America Equity Market Performance 2008 - 2013. Source: Scotiabank.
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Figure 13.2. Latin America Equity Market Performance 2008 - 2013. Source: Scotiabank.

Date 02.03.2003 02.03.2004 02.03.2005 02.03.2006 02.03.2007 02.03.2008 02.03.2009 02.03.2010 02.03.2011 02.03.2012 Increase / (decrease) in correlation

Latam / Europe 0.393 0.651 0.683 0.658 0.862 0.855 0.936 0.865 0.793 0.897 10%

Latam / USA 0.414 0.526 0.745 0.736 0.814 0.803 0.836 0.863 0.765 0.823 8%

Latam / Asia 0.353 0.545 0.591 0.587 0.802 0.734 0.834 0.624 0.779 0.883 11%

Table 6. Correlation between Latin America and other major markets, public market indexes Source: Bloomberg, Unigestion.
Note: Regional indexes are: MSCI EM Latam, Dow Jones Stoxx 600 (Europe), S&P 500 (US), MSCI Asia Pacific (Asia)

Returns for private equity in Latin America, on the other hand, have also been fairly strong but have appeared to be mostly de-coupled from other regions, particularly in the observation period from 1997 through 2008.

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Figure 14. Latin America PE Returns Vs. Other Regions, Multiple 1997 - 2008. Source: Preqin, Venture Economics, Unigestion.

Table 7. Return of Funds in Latin America, different geographies and transactions. Source:Unigestion. One of the main reasons private equity market returns remained strong even in the light of public market return convergence and lower returns is that private companies in the region, derive most of their revenues from their domestic markets or the regional market, and thus can succeed and grow even as other economies don’t grow. In addition, the greater inefficiencies in companies in Latin America allowed and allow private equity firms to create value in addressing these inefficiencies, providing a way to improve profitability even under poor macroeconomic scenarios. In summary, the returns in private equity in Latin America, while certainly exposed to global crises, appear to be driven more by the performance of the regional economy than the global economy, and will certainly offer some level of diversification when

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compared to other regions. (See Annex 4) 5.5 LAVCA Scorings for PE in Latin America

The 2013 LAVCA Scorecard on the Private Equity and Venture Capital Environment in Latin America reflects ongoing efforts by regional regulators to foster a stable climate for investment. Both large and small economies have improved their capacity to monitor the development of the PE/VC industry, improve transparency and disclosure laws and create better conditions for local entrepreneurs. Although there was little movement in the overall regional rankings, six of the twelve countries showed improvements in their scores this year. All changes were positive, and even in countries with precarious overall investment climates, scores and rankings remained stable. Improvements in the Dominican Republic allowed it to jump from the bottom of the list to tie Argentina for second to last place, and Mexico and Colombia are slowly closing in on Brazil and Chile’s leadership positions. Chile continues to rank number one with a score of 76, followed by Brazil (72), Mexico (67) and Colombia (61). Chile led the regional ranking for the eighth consecutive year, and in 2013 improved its score due to the adoption of international financial reporting standards by non-listed firms. The country heads the region in intellectual property protection, judicial transparency and perceived corruption. Chile maintains active government support of SMEs and start-ups, most recently through Start-Up Chile, a program aimed at fostering entrepreneurship that has positioned the country at the heart of efforts across the region to create an entrepreneurial culture. However, a new funds law that would simplify fund formation, ease tax burdens and create other advantages for the PE/VC industry is still pending. Brazil continues to stand out as a pioneer and innovator in PE/VC specific regulation in Latin America. With unique fund structure laws and streamlined restrictions on foreign investment, the country remains in second place in the regional ranking. A robust self-regulation code aimed at improving fund transparency and disclosure that went into effect in 2011 will have its first results reported in 2013, although enforcement and penalties for non-compliance remain uncertain. Investors and regulators from across the region are paying close attention to the successes and challenges stemming from these new laws. Mexico increased its overall score for the second year in a row due to an improvement in the indicator for entrepreneurship. The time and number of procedures required to start a business were reduced below regional averages, and university and government incubator and accelerator programs continue to expand. Added to this, the new administration is focusing on competition while promising important reforms in key sectors including telecoms and energy. The Mexican stock market outperformed most regional exchanges, and the economy has continued to grow while other countries in the region have suffered slowdowns. Colombia also increased its score on entrepreneurship, reflecting the active role of state development banks and growing government support to improve the entrepreneurial ecosystem. Bancoldex, the main state development agency, has launched a new credit line
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and program to promote innovation. A local private equity and venture capital association, ColCapital, was also formed this year with the assistance of Bancoldex alongside the Multilateral Investment Fund. Even with this significant progress, the basic PE/VC framework needs improvement, and the country continues to suffer from high levels of perceived corruption and a complex tax environment. Peru posted the region’s most significant score improvements of 2013, with the implementation of a long-awaited change by the banking superintendent to reform pension fund investment laws. The new laws enable PE/VC funds to manage a larger share of the country’s growing pension assets, causing the score for restrictions on institutional investors to return to its 2011 level. Peru is recognized for being a capable and serious reformer in the region, with macro level reforms and a commitment to economic stability spurring rapid economic growth. A counterpoint to the good news across the region, Argentina continues to deteriorate in both its macro environment and approach towards private investment. With no score change this year the country remains near the bottom of the regional rankings, now tied with the Dominican Republic for second-to-last place. With the nationalization of Repsol-YPF, ongoing legal action by international creditors, tightening currency restrictions and a lack of local institutional investors, the country remains broadly unattractive for PE/VC investment. This negative environment hinders the country’s otherwise vibrant entrepreneurial community, with Argentine start-ups beginning to look elsewhere for funding and expansion opportunities. There were few major score changes in small countries across Latin America and the Caribbean. Changes for 2013 include a score increase for the second year in a row for the Dominican Republic, which set up its first seed fund last year in collaboration with the Inter- American Development Bank. There has been a steady increase in fund managers taking note of smaller opportunities, particularly in Central America and the Caribbean. With pan-regional investors looking opportunistically at new deal flow and comparatively low valuations in smaller economies, local governments are beginning to awaken to opportunities to improve their countries’ respective PE/VC environments. The full list of scoring criteria is as follows:              Laws on PE/VC fund formation and operation TAX treatment of PE/VB funds and investments Protection of minority shareholders rights Restrictions on local institutional investors investing in PE/VC Protection of intellectual property rights Bankruptcy regulation Capital market development and feasibility of local exits Registration/reserve requirements on inward investments Corporate governance requirements Strength of the judicial system Perceived corruption Use of international accounting standards and quality of the local accounting industry Entrepreneurship
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Table 8. LAVCA Scorecard Latin America 2013. Source: LAVCA Industry data.

Figure 15. LAVCA Overall Score Against PE/VC Investments Latin America 2013. Source: LAVCA Industry data.

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Table 9. Ranking LAVCA Scores. Source: LAVCA data industry.

Figure 16. LAVCA Evolution PE/VC Markets Latin America 2006-2013. Source: LAVCA Industry data.

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6. RECENT NEWS PE IN LATIN AMERICA.
                              Actis Joins Mainstream on $1.4 Billion of Clean Energy in Chile. Latin America’s TOTVS Ventures leads $22m deal for GoodData. ACON Investments Exits Investment in InverCap. Gerbera Capital and Mexico Ventures Close Series B for ID90T. Gávea Invests R$ 1.5b in Vehicle Rental Company, Unidas (em português). Natue, Backed by Project A Ventures, Announces New Investment Deal. Blackstone, Patria Closer to Buying Brazil Gafisa Unit. Brookfield Closes Second Brazilian Timber Fund on $270m. 500 Mexico City to Invest in 18 New Startups. Nulu raises U.S. $ 1.75M to Consolidate in Latin America. Wayra Perú Launches Tourism Incubator, Andes Factory. e.Bricks Early Stage Invests in Fasion & Accessories Social Commerce Startup Juv&You. Brazilian Banks Intensify Private-Equity Investments. Promotora Venture Capital Exits Easy Solutions. RI Happy Aims to Reach IPO by 2015. Monashees Capital & 500 Startups Back Management SaaS Runrun.it. CADE Approves the Acquisition of 32.7% of CCRR Participações by BTG Pactual). Sinimanes Joins NXTP Labs. Despite Stumbles, a Promising Path for Start-Ups in Brazil Mexican Hotel Readies IPO Confrapar’s HorizonTI Closes Investment Period with $24.8 Million in Committed Capital Project A has € 50 million to invest in startups in Germany and Brazil. Educational start-up Eduk Raises Series A Funding from Monashees Capital. GP Investments Buys Stake in Switzerland’s Apen for $33 Million Rock Content Announces Abril Participações Investment Rocket Internet Ups Investment in Brazil’s Airu LarrainVial and Mineria Activa III Launch Mining and Agriculture Funds (en español) MRV’s Log will receive an investment of R$278 Million. Privalia receives EUR 25 million from Belgian fund. Brazilian Private Equity Fund Kinea Investimentos Invests in Medical Diagnostics Company Grupo Delfin.

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7. OUTLOOK AND CONCLUSIONS
Public equity markets in Latin America do not adequately reflect the sweet spot of economic growth which has consumer related sectors (consumer services, consumer goods, education and healthcare) at its center. Instead, public equity markets are often skewed towards the more volatile commodity companies and financials. Latin American countries are highly diverse in terms of GDP composition, natural resource endowment and institutional and political stability. Therefore, a local presence, local market knowledge and a wide network of local players are key to successful investments in the region. There is enough room to grow as we can see looking at the PE investment compared to the GDP as a percentage.

Figure 17. PE Investment as % of GDP, “Chance to grow in Latin America” Source: Partners Group, Goldman Sachs. The private equity industry has been developing in recent years and becoming much more local. Most funds no longer operate from New York or Miami, but instead have offices in Latin America. Private equity activity in Latin America is expected to be reinforced in the following months and years, due to the region’s sustained economic growth and the fact that there are still some large global funds that have not entered the Latin American market yet, creating a great opportunity for the region. In fact, surveys by LAVCA in the sector revealed that 65 percent of investors expect to initiate or expand their private equity investment projects in the region. A lot of PE funds are being raised and firms are expanding rapidly expecting the next 10 years to have a positive evolution. We estimate fundraising activity as it follows.

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Figure 18. Fundraising in Latin America, Figures in $USD Bn. Source: PEHub, Rosado, Gabriel.
Note: Took into account correlations between countries and expected GDP growth.

Figure 19. Investments in Latin America, Figures in $USD Bn. Source: PEHub, Rosado, Gabriel.
Note: Took into account correlations between countries and expected GDP growth.

While some funds will inevitably go away, other investment companies are likely to be founded, although the growth rate might not be as high as what we’ve seen in the last decade, they will grow up around 2013 levels. (See Anex 5) This positive outlook on private equity opportunities in economies characterized by political stability and strong macroeconomic fundamentals raises interest in Latin America. Among these countries that hold the most potential for PE investments, Brazil would be the most important one, followed by Mexico, Chile and Colombia. Peru could also be promising.

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While the Brazilian private equity market is becoming more crowded and valuations in the large cap space are rising, the country still offers compelling long term opportunities in selective sectors and should continue to be the main private equity market in the region. We have to be slightly cautious with Peru and take a “wait and see” approach in the short term. Mexico is attractive on an opportunistic basis. Despite its strong macro-economic fundamentals, Mexico has a high correlation to the USA, which ties the economy to the recovery of the advanced world. Argentina is currently politically challenged and while it was the world’s 7th largest economy in the early 20th century, it has since been severely mismanaged. But it’s a resource-rich country with low valuations, so I believe there’s a lot of upside potential if the economy can be managed properly; asset values could rise very quickly if the right policy decisions are made. But fundamentals in Argentina have improved; a regime change in the upcoming elections may create a more favorable investment environment. The most attractive sectors in Latin America are definitely the energy & natural resource industries (mining, energy, oil & gas) given that several Latin American economies are resource-based. Also, the financial services industry, because consumer demand is quickly growing in Latin America and is expected to continue that way. Despite growing projections, PE investors will remain conscientious and cautious in the coming year, as focus has directed to global economic concerns derived from the US slowdown, Europe’s economic uncertainty and China’s potential deceleration. Additionally, the region has its own domestic issues that require close monitoring such as decelerating growth, inflation and currency volatility. Going forward, small and middle market PE deals should continue with a major share of the region’s activity, as Latin American companies increasingly work with PE firms for start-up funding, growth capital, and expansion/consolidation needs. However, large PE investments are anticipated in resource intensive sectors. Exits from the funds who invested in the last five/six years are also expected.

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8. Bibliography
Bréard , Pablo F.G. - Blancas , Daniela. Latin America Regional Outlook The Bank of Nova Scotia Apr 2013. Cumming, Douglas and Uwe Walz J.W. PRIVATE EQUITY RETURNS AND DISCLOSURE AROUND THE WORLD* Lally School of Management and Technology - Goethe-Universität Frankfurt/Main. Ferreira, Francisco H. G., Julian Messina, Jamele Rigolini, Luis-Felipe López-Calva, Maria Ana Lugo, and Renos Vakis. 2013. Economic Mobility and the Rise of the Latin American Middle Class. Washington, DC: World Bank. doi: 10.1596/978-0-8213-9634-6. License: Creative Commons Attribution CC BY 3.0 Hernandez, John Article: ¡Viva La Economia Nueva! Latin America Emerges from the Financial Crisis, Managing Director, Sales and Relationship Manager - Latin America, BNY Mellon Treasury Services 2010. Judge, Steve - Bailey, Bronwyn. PEGCC. Interim President and CEO andVice President of Research. Kaplan, S.N., Schoar, A., 2005, Private equity performance: Returns, persistence, and capital flows, Journal of Finance 60, 1791-1823 LAVCA. 2013 Scorecard The Private Equity and Venture Capital Environment in Latin America. 2013 Olsen, John - Blaydon Colin and Gagliano, Salvatore. Note on Leveraged Buyouts under the supervision of Adjunct Assistant Professor Fred Wainwright and Professor of the Tuck School of Business at Dartmouth College. September 2003. Phalippou, Ludovic - Lopez-de-Silanes, Florencio and Gottschalg, Oliver. The Performance of Leveraged Buyout Investments, 2007. PREQIN. Moving Forward on Shifting Sands. Global Private Equity Report. 2012. Rigolini, Jamele Article: Latin America's Middle Class in Global Perspective. Scott W. Naidech, Chadbourne & Parke LLP Private Equity Fund Formation. World Bank. 2013. World Development Indicators 2013. Washington, DC: World Bank. doi: 10.1596/978-0-8213-9824-1. License: Creative Commons Attribution CC BY 3.0 World Bank. 2013. Doing Business 2013: Smarter Regulations for Small and MediumSize Enterprises. Washington, DC: World Bank Group. DOI: 10.1596/978-0-8213-9615-5. License: Creative Commons Attribution CC BY 3.0

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9. ANNEX
ANNEX 1. GDP IN LATAM

GDP MAP Source: World Bank

GINI COEFF Source: World Bank

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The Gini coefficient, a common indicator of income inequality, measures how much the per capita income distribution within a country deviates from perfect equality. (A Gini coefficient of 0 represents perfect equality, and a value of 100 perfect inequality.) Trends in developing countries over the past two decades suggest that many countries have become less unequal, but trends differ by region and by income. Inequality in Latin America and the Caribbean fell notably in almost all upper middle-income countries but remains among the highest worldwide. The Gini coefficient is higher than the Latin America and the Caribbean average in only two other upper middle income countries and in only a few low- and lower middle-income countries.

ANNEX 2. GENERAL FUND STRUCTURE The structure of a private equity fund generally involves several key entities, as follows:

FUND STRUCTURE Source: Scott W. Naidech, Chadbourne & Parke LLP The investment fund, which is a pure pool of capital with no direct operations. Investors acquire interests in the investment fund, which makes the actual investments for their benefit. A general partner (GP) or other managing entity (manager),which has the legal power to act on behalf of the investment fund A management company or investment adviser, which is often affiliated with the GP or manager and is appointed to provide investment advisory services to the fund. This is the operating entity that employs the investment professionals, evaluates potential investment
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opportunities and incurs the expenses associated with day-to-day operations and administration of the fund. Other related fund entities, which may be formed to account for certain regulatory, tax and other structuring needs of one or more groups of investors Private equity funds are structured as closed-end investment vehicles. A fund’s governing documents generally permit the fund to raise capital commitments only during a limited fundraising period (typically 12 to 18 months), after which the fund may not accept additional investor commitments. During the capital raising period, the sponsor seeks investors to subscribe for capital commitments to the fund. In most cases, the commitment is not funded all at once, but in separate capital contributions called on an as-needed basis to make investments during the investment period and to pay fees and expenses over the life of the fund. In the US, funds typically raise capital in private placements of interests in accordance with exemptions from the registration requirements of the federal securities laws. Private equity funds are typically formed as limited partnerships (LPs) or limited liability companies (LLCs). The principal advantages of using an LP or LLC as a fund vehicle include: LPs and LLCs are “pass-through” entities for US federal income tax purposes and, therefore, are not subject to corporate income tax. Instead, the entity’s income, gains, losses, deductions and credits are passed through to the partners and taxed only once at the investor level pass-through entities LPs and LLCs are generally very flexible business entities. US state LP and LLC statutes are typically default statutes, which allow many of the statutory provisions that would otherwise apply to be overridden, modified or supplemented by the specific terms of the LP or LLC agreement. This flexibility allows partners in an LP and members of an LLC to structure a wide variety of economic and governing arrangements. The investors in the fund, like the stockholders in a corporation, benefit from limited liability. Unlike the partners in a general partnership, as a general matter, the limited partners of an LP and the members of an LLC are not personally liable for the liabilities of the LP or LLC. As result, an investor’s obligations and liabilities to contribute capital or make other payments to (or otherwise in respect of) the fund are limited to its capital commitment and its share of the fund’s assets, subject to certain exceptions and applicable law.

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ANNEX 3. BREAKDOWN OF LATIN AMERICA FUNDRAISING BY COUNTRY 2006-2010

BREAK DOWN Source: Preqin Special Report: Latin America ANNEX 4. BEST INVESTMENTS OPPORTUNITIES LATIN AMERICA,

SURVEY Source: Preqin Special Report: Latin America

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ANNEX 5. LARGEST LATIN AMERICAN FOCUSED FUNDS 2013

CLIENTS Source: Preqin Special Report: Latin America

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