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Case Study: Advent's

Latin American Private

Equity Funds By John Pike


VELA recently spoke with Advent executives, Ernest Bachrach, head

of Advent‘s Latin American Investment program, and Paul Ferrari,

manager of communications for Advent. Bachrach oversees Advent’s

Latin American Private Equity funds I, II, III and IV. The first fund

began in 1996. The most recent fund, LAPEF IV, is capitalized at $1.3

billion, making it the largest fund raised for investment in the region,

says Ferrari. According to their website, Advent has the “strongest

local presence of any private equity firm in Latin America,” with 22

investment professionals working out of offices in Mexico City, São

Paulo and Buenos Aires.



Bachrach says SEC regulations prohibit him from publicly

disclosing the funds’ performance, thus making

independent verification difficult, but he says Advent’s

Latin American portfolio companies have grown

significantly faster than the underlying economies,

showing average revenue and EBITDA CAGRs (compound

annual growth rates) of more than 30 percent

and 25 percent respectively. Bachrach says the funds

invest primarily in Mexico, Brazil and Argentina and

to a lesser extent, Uruguay, Colombia, Chile and other

Latin American countries. “I have a bias towards service

businesses,” says Bachrach . He says that service

businesses generally are more “cash generative, less

capital intensive” and able to potentially grow faster.

Sectors he favors include financial services, airport services

including food and beverage concessions within

airports and business outsourcing.


Bachrach says today is a better time to invest in private

equity in Latin America than it has been during much

of the last two decades. He recounted how in the early

1990s some Latin American industries were privatized,

thus facilitating economic growth and encouraging a

large amount of private equity to flow into the area. But

he says various problems arose for investors around

1994 and 1995 which damaged investments, including

the Tequila Effect and the assassination of a Mexican

presidential candidate. Lower returns were the result for

many Latin American portfolios, though Advent fared

well because of its strategy of taking controlling stakes

in high-growth, cash generative service businesses, he

says. Then the investing climate continually improved

in the late 1990s (along with much of the world) with

the development of the internet. Bachrach says during

this period the amount of private equity funding in Latin

America peaked. But then when the surge of internet

activity deflated, so did the investments and returns.

He says the years 2003 and 2004 were lean for Latin

American private equity investment. The majority of

portfolios lost money. He estimates that perhaps only

two or three portfolios, including funds managed by

Advent, earned profits for their investors out of possibly

as many as thirty.


By 2003 and 2004, Bachrach says Latin American

investors had become “hesitant” after mostly losing

money a couple years earlier. But starting in 2005 and

2006, portfolio managers began to revisit investing

possibilities in the region. And he says there are a

few reasons private equity returns will be better now

than in years past. One reason is that in prior years,

corporate governance in Latin American companies

was less developed than it is now, and many private

equity managers mistakenly believed they could have

more influence running the firms even if they only had

a minority stake.


Bachrach says investors now fully understand that to

have a significant influence in running a Latin American

company, a majority stake is often required. Minority

positions tended to be “unrewarding.” Bachrach says

by bringing in the business and financial expertise of

the private equity firms, the value of the company can

then be increased. “Advent prefers to be very active

in companies.” Bachrach adds that a further benefit

of majority ownership is that it is easier to exit the

company, as it facilitates the sale to a strategic buyer,

which typically will consider buying only a majority



Another reason the climate is now more favorable in

Latin America is that the capital markets are more active

and better suited for firms to go public, says Bachrach.

He adds that the purchase price for companies has

increased recently, from being discounted a few years



Another factor Bachrach finds favorable today in Latin

America is Brazil’s strong agricultural industry, which

is an important driver within the continent. “Brazil’s

agricultural industry is key. Brazil is feeding China.

And the Chinese people are eating more.” Brazil has

the largest sugar industry and produces it at the lowest

cost, he says. Brazil is also strong in pork.


Bachrach adds that many of the Latin American

currencies are stable, with much of their country’s debt

in dollars, so they owe less real value to the United

States because the American currency has depreciated.

The democracies are also stable and inflation is limited.

“There is a better economic picture overall.”


Although the general climate for private equity firms

in Latin America today is “a little better,” Bachrach

acknowledges an American recession will have a

negative effect there too. “For raising private equity, it

is a favorable environment for established investment

groups who have a proven strategy and track record

and unfavorable for non-established firms.”


According to Ferrari, Advent has raised a total of $2.2

billion in private equity funds for investment in Latin

America and has backed 34 Latin American companies

with a combined enterprise value (currently/at exit)

of $5.7 billion. Selected investments includes Dufry

(SWX: DUFN), the global travel retailer; Gayosso,

Mexico’s largest funeral services company; Viena, the

leading casual dining restaurant chain in Brazil; Neuvo

Banco Comercial, Uruguay’s leading commercial bank;

La Mansión, a leading Mexican restaurant operator;

Milano, the largest discount clothing retailer in Mexico;

and Brasif, the No. 1 Brazilian travel retail operator,

acquired by Dufry and subsequently floated on the São

Paulo and Luxembourg stock exchanges.


For more, see the Advent Exits Surety Bonder Provider

article in this issue.