Spanish GPs set sights on Latin America

With their vision for growth obscured by the hazy light of economic uncertainty, Spanish GPs have set their sights on Latin America. "When Spain was doing very well and Spanish companies could hardly cope with their booming domestic market, this ceased to be a priority," explains Eusebio Martin, partner at Mercapital, one of Spain's oldest GPs with a 27-year track record. "But when you realise that you can no longer rely on a buoyant local market, then you begin to think about what you can do with your investees and yourself," he adds. As the old adage goes, necessity is the mother of invention.

The increasing flow of entrepreneurs towards Latin American shores is a well-documented shift. The development of a so-called Chilecon Valley is largely attributed to the success of Start-Up Chile, a project conjured up by Nicolas Shea, a Chilean businessman and former government member. The programme welcomes flourishing startups and their founders, who receive a salary and a year's visa to develop the project on Chilean soil. Chilean and American approaches to attracting foreign entrepreneurs are poles apart and Shea's project attempts to widen Chile's magnetic field, pulling in those entrepreneurs repelled from Silicon Valley by a lack of visas. The continent seems to attract entrepreneurs, but is its attracting investors?

Yes, it is. Bain Capital recently acquired Atento, the call-centre unit of telecommunications firm Telefónica, for €1bn. While the GP bought a Spain-based firm, it essentially bought the largest customer relationship management business in Latin America. Indeed, the pull of Latin America is one reason behind the announced merger of Spanish GPs N+1 and Mercapital. The new investment firm, N+1 Mercapital, will manage €1.7bn - making it the largest in Spain - and will back medium-sized local businesses looking to expand internationally, particularly in Latin America. And it's not just the Spaniards looking to Latin America. In mid-December Gramercy, the $3.4bn emerging markets investment manager, announced the formation of a Latin American private equity team.

Several Spanish GPs have set their sights on the dazzling growth witnessed in Latin America

Combining forces
"At some point we realised that having direct business in Latin America would require a lot of effort and man hours, and we decided that we wouldn't be able to do it alone at the speed we thought was best," Martin explains. "So this is when we started the real discussions with N+1 who also concluded that international growth is the way forward. And we agreed to merge."

Both firms have implemented this two-pronged approach in their investment strategies to harness international growth. Last year, N+1 wholly acquired electronic components manufacturers Rymsa and Teltronic in a €40m transaction. With 90% of Teltronic's revenues coming from abroad, a third of which originate in Latin America, the combined entity, now known as Grupo Tryo, continues to grow both nationally and internationally.

Similarly, in 2008, Mercapital acquired a majority stake in Iberian civil engineering firm Obras Subterráneas in a deal valued at around €180m. Under Mercapital's ownership, the company runs projects worth more than $350m, around half of which are in Latin America, Europe and Asia. International scope is paramount.

And private equity investors are not the only ones riding this wave; venture players are also drifting towards Latin American shores. In September this year Telefónica Digital Venture Capital, the venture subsidiary of Spain's eponymous telecommunications giant, launched a €300m network of venture capital funds. Amérigo unites industrial partners and investors looking to back high-growth tech companies across the globe, with a particular focus on those targeting areas such as Latin America. Spain, Colombia, Chile and Brazil will be the first target countries.

The launch turned out to be the reason behind Active Venture Partners' name change for its second fund. Selected as the first vehicle to partner with the Amérigo network, the fund was renamed Amérigo Innvierte Spain Ventures FCR when it closed on €54m in September. LPs include Telefónica Digital, Innvierte Economía Sostenible (the sustainable investment program backed by Spain's Centre for the Development of Industrial Technology), the Neotec Equity Fund managed by the European Investment Fund and Fespyme, the fund backed by Spain's national credit agency and managed by Axis. The fund's portfolio includes Whisbi, the online communications service provider that recently received funding from BDMI following Active Venture's original investment. Founded in 2009, Whisbi has recently opened offices in London and São Paulo and expects to report a €14m turnover for 2012.

And those investors drawn to Latin America seem set to stay, according to recent research by the Latin American Private Equity and Venture Capital Association, LAVCA, in partnership with Coller Capital. A report released earlier this year by the association revealed that 38% of LPs with exposure to Latin American private equity expect the pace at which they make capital commitments to Latin American PE funds to accelerate in the following twelve months. Given that sample exits in Latin America revealed IRRs averaging twice those in the US and Europe for the same period, attributable to underlying EBITDA growth of 45% in Latin America - according to a study released by the Emerging Markets Private Equity Association - what can be putting other investors off?

Fearing the unknown
Interestingly, the report reveals that for investors already invested in Latin American private equity, the region's political climate and entry valuations are attractive. For those LPs who are considering an initial foray into Latin American investment though, these factors pose a significant challenge and make some Latin American countries more attractive than others.

"Everybody will be looking at Brazil, but they know that it is a very hot market, so prices go up," explains Luisa Alemany, director of the ESADE Entrepreneurship Institute in Barcelona. "On the other hand you have Argentina, where people probably don't want to invest, especially Spanish companies because we had this problem with YPF," she adds. "So that probably isn't one of the markets they are looking at. And then in Venezuela and Bolivia of course there are political issues."

Martin agrees: "In principle, we aren't going to touch Argentina or Venezuela, which have a level of political risk we don't want to mix up with. But Mexico we are very excited about," he explains. "They have the right macroeconomic fundamentals and are very open to foreign investment and trade, and they have a long tradition of cooperating with Spanish companies. So that's a very natural choice for us. We are certain that we will help our investees expand there," he adds.

And now is the time to strike: "The industry there is far less developed that Brazil, which has a booming capital market. They had some pioneers five or ten years ago who are raising some billion plus funds, but Mexico only has a handful of funds, so we can add a lot of value there and really help grow that industry." The underdevelopment of the ecosystem is, interestingly, very attraction for those in the know.

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