New Private equity record in Latin America. Time to invest?

While Fund-raising decreased by 7 % in the U.S., European Latin America Private equity firms raised a record $8.1 billion for investments in the region, representing more than twice the previous year, according to the Latin American Venture Capital Association. Are prices going up too fast?

Brazil among peers in Latin America

Brazil is the top country on the list and deal prices have risen sharply. “There are a lot of private equity firms now active (in Brazil) and it is inevitable that prices will go up,” said Ernest Bachrach, co-head of Latin America for Advent International to the Wall Street Journal. Mexico, Colombia, Peru, Chile and Argentina show good opportunities and less competition for existing assets.

More expensive deals or a long term bet?

While the number of deals closed did not change much since 2009, the number of deals over $100 million doubled. The average deal size also increased to about $41 million last year from roughly $19 million in 2009. It can be that private equity investors are beginning to perceive the long-term benefits of investing in Latin America which makes prices go up or it can also be that capital flows are inflating the local market because EM are the new trend and developed economies will not perform.

Malcolm McLelland

An outsider with a local perspective

“So much money is washing into Brazil lately it seems conditions are about right for asset bubbles to form.  It seems the Brazilian central bank is doing it best to prevent such bubbles, but there is so my hyperbole about Brazil recently (some of it quite true, of course) I think there are real risks of asset bubbles forming.  I remember hearing construction industry professionals in SP saying they thought prices were getting high about 1-2 years ago and speculating that unless pricing pressure resulting from available debt financing slowed, the prices would be unsustainable.  Now with the addition of foreign inflows–much of which is being directed at real estate–I think the risks of real estate asset bubbles are quite high in places like SP” says Malcolm McLelland, director of Equilibrio Capital in Sao Paulo.

Malcolm thinks that this is largely the result of US and EU managers pushing for acquisitions in Brazil because they don’t want to appear (to shareholders) as being unaware of the opportunities.

Balancing caution with opportunity

One or another can be true. From now on, the difference between a good bet or a bad investment will be in details and careful planning. That is why assessing opportunities is becoming a rather sophisticated enterprise in Brazil. Yes, the market is growing and there is a very promising outlook. But bubbles can form and it is not a good idea to rush into an investment without a careful approach. It is crucial to keep an eye on the micro aspects of an investment and look for ridden drains of profitability. Brazil is a peculiar business environment. Market oscillations, cost of doing business and local legislation are factors that can foster or jeopardize an investment.

Published by Hildete Vodopives

Hildete de Moraes Vodopives is founder of Brazil Global and of the Harvard Strategists Group. She has a PhD in Economic History and advises companies and investment agencies in international business development.She served as Corporate Relations Director and later, on the board of the Brazilian Investment Analysts Association (APIMEC).

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