Private Equity in Emerging Markets Securities

1
Private Equity in Emerging Markets Securities
Enrique Ruete Aguirre Chairman - HSBC Private
Equity Latin America
2
The Opportunity in Latin America - The Virtuous
Circle
9
1- Fiscal discipline Central Bank autonomy
8
2- Deregulation of markets and Foreign Exchange
freedom
7
6
3- State reform and Privatisation
5
4- Mercosur trade agreement, opening of the
economy and the initiative of the Americas
4
3
2
5- A well educated work force
1
6- Has led to a stable environment (low
inflation) and significant productivity gains
7- That has attracted important foreign
investments
8- That has caused meaningful yearly GDP growth
9- That has attracted more local and foreign
investments
3
Characteristics of the Latin American Monetary
System

• Latin American Monetary System is in an infant
  stage...

4
Characteristics of the Latin American Monetary
System
...but has shown a positive evolution during the
90s
5
Characteristics of the Latin American Monetary
System
...but has shown a positive evolution during the
90s
6
Characteristics of the Latin American Private
Equity Market

• Characteristics
• Private Equity market is also in an infant stage
  (less than 0.3 of GDP in Latam vs. over 2.5 in
  the US)
• LBOs and MBOs are very unusual (only
  exceptions)
• There is no mezzanine financing
• Mainly growth capital required
• Most likely exit Strategic Buyer
• IPO could be an option in the middle term

• Latin American Private Equity attracted capital
  during the 90s

• Private Equity Fund Raising

7
Private Equity Investments in the Region Pros
and Cons

• PROS
• The Globalization Process forces local companies
  to react against the entrance of large
  multinational players. They are obliged to become
  more competitive, increase volumes and therefore
  raise capital
• Private Equity has overcome cultural hurdles and
  is becoming an important financing alternative
• Transparency is a condition to access the
  financial markets. As a consequence, transparency
  in well run businesses has increased.
• Family Owned Companies are becoming more
  professional
• Scarce supply of other LT financing instruments
  gives PE a competitive advantage and increases
  its negotiation power

• CONS
• Lack of Transparency and good Information
• Poor Compliance with Rule of Governance
• Respectful attitude towards minority shareholders
  not very common
• Volatile Markets
• Debt is not an option to enhance Return rates
  (expensive and Short Terms)
• Deficient and narrow Public Markets limit exit
  alternatives

8
Private Equity Investment Strategy in Latin
America

• Disciplined Investment Criteria

1) Choose Companies that can support a Volatile
Environment - Market Dominance or Leadership -
Natural Competitive Advantages, Defensible
Positions - Stable Cash Flows - High Growth
Potential and/or Potential for Regional Expansion
2) Very Careful Selection of Partners/Managers -
Strong Management Teams Experts in their
Markets, Respectful of Rule of Governance and
Transparency - Alignment of Interests between
Partners/Managers and The Fund
3) Conservative Deal Structuring Strategy -
Minority Stakes with Strong Protection Rights
(Veto, Liquidation Preference, Right to Force the
Sell of a Controlling Stake, Drag Along, Tag
Along, IPO, and others) or - Majority Stakes
(Excluding Turn Arounds)
4) Disciplined Approach after Investing -
Maintain Focus on the Core Business of the
Company and Maintain the Agreed Business Plan -
Upgrade the Company in the Financial Markets
5) Clear and Well Defined Exit Strategy - Plan
focusing on Exit Strategy - Be ready to Sell when
a Good Opportunity Arises (Exit Timing is a Key
Element to Enhance Returns)
9
Key Success Factors

• Conditions to Choose the Best Candidates and
  Mitigate Risks

• Local Presence Local Management Local
  Expertise
• Deep Understanding of the Markets and the Players
  (including the ones not based in the principal
  cities) Understanding of the Competitive
  Environment No Language Barriers Quick
  Reaction Close Monitoring

• Being part of a Banking Organization Covering
  the Entire Region
• Strong Access to High Quality Deal Flow Quick
  Access to Market Information

• Strong Fund Management Team
• With Local Business Experience and a Successful
  Track Record in Managing PE Investments in the
  Region

• Disciplined Investment Strategy
• Follow the Strategy and Maintain a Conservative
  Approach

• Support of a Worldwide Private Equity
  Organization
• Share Relevant Information, Processes and
  Research Sources. Transfer and Adapt.

10
Conclusions

• Latin America is expected to continue on an
  accelerated growth process
• Monetary System in the region is in an infant
  stage, but evolving positively
• The Private Equity Market in the region is still
  underdeveloped, and has certain particular
  characteristics when compared to the US Private
  Equity Market
• The region presents an opportunity to achieve
  attractive returns from Private Equity
  Investments. However, it is not an easy task
• A Strict and Disciplined Investment Strategy is
  needed to succeed
• Local presence, institutional and management
  experience in managing Private Equity Investments
  in the region and the support of a Banking
  Organization are Key Success Factors

? There is an Opportunity to achieve superior
return rates
11
Private Equity in Emerging Markets Securities
Enrique Ruete Aguirre Chairman - HSBC Private
Equity Latin America