These are promising times in Latin America. Despite expectations of a profound and prolonged recession following from the global economic crisis — as the popular saying goes, “when the US sneezes, Mexico catches a cold” — this time around, the region has weathered the global storm better than most and has seemingly emerged stronger than ever.
General Growth Trends
During the early stages of the economic crisis in 2007/2008, “decoupling” became a popular theme. Although the effects were not immediate, the region was eventually affected by the crisis, as country after country fell into recession, in particular Mexico, which suffered greatly as a result of the US economic crisis. That said, the recovery has been dramatic in the last year. According to United Nations ECLAC statistics, the region’s GDP grew at a pace of roughly 6 percent in 2010, with some countries such as Peru at 8.6 percent and Brazil leading the charge at 7.7 percent. This represents the strongest performance for the region in the last decade. Many leading economists are predicting more positive growth in 2011.
Much of Latin America has undergone an unprecedented period of democracy and sound macroeconomic policies, which has had a direct correlation to investment and growth in the region. Not surprisingly, 2010 was a banner year for Latin American M&A and private equity. As a firm, Latham & Watkins saw a substantial increase in M&A activity with almost US$20 billion dollars worth of deals in the year, including four deals that each exceeded a US$1billion. According to Dealogic, Latin America had the highest volume of M&A deals on record and the largest percentage it has ever had of global M&A deals.
We have noticed a number of interesting trends in the deal flow. The first is the diversity of the buyers and investors. For example, last year we worked on one of the largest M&A deals in the region, representing Repsol in a US$7.1 billion sale of a significant interest in its Brazilian operations to Sinopec from China, forming the second largest oil and gas company in the region with a total capitalization of over US$17 billion. It’s no secret that Chinese companies have become one of the largest investors in the region, surpassing the US as Brazil’s largest trading partner. Chinese companies are mainly focused on natural resources, which are abundant in the region. Latham also represented Norsk Hydro ASA in its US$5.2 billion acquisition of Vale’s aluminium business in Brazil. We expect investments in natural resources to continue to be a driver in Latin American M&A in 2011 and the years to come and have made it one of the primary focuses of our regional strategy.
That’s not the only interesting trend. Two other trends evidenced by deals from last year are the rise of (1) the “multi-latinas” (Latin American companies expanding outside of their borders) and (2) private equity. In 2010, we saw Colombia’s Grupo Aval make one of the largest ever acquisitions by a Colombian group outside of its borders when it bought BAC-Credomatic, a prestigious financial institution operating across Central America, from Latham client GE Global Banking for US$1.9 billion. This deal was signed in July and closed by the first week of December after obtaining regulatory approvals in eight countries.
Historically, the private equity business has been very challenging in Latin America. The last private equity boom in Latin America occurred around the turn of the millennium (late 90s through early 2000s) and investor returns were mixed as a whole. Those that were successful are still in the business and raising new funds. There has been a relatively quiet boom in Latin American private equity business over the last couple of years with new funds reaching unprecedented sizes — Advent and Southern Cross both raised new funds last year of reportedly $1.6 and $1.7 billion respectively.
There are many reasons for this new increase in fund raising for the region. For starters, we have seen a number of new funds over the last few years successfully exit their investments and show positive results. In addition to the traditional strategic buyers, private equity funds now have the possibility of exiting through capital markets, particularly in Brazil which boasts one of the largest stock exchanges in the world, the Bovespa. The convergence of the Bovespa with other stock exchanges should increase the liquidity of investors in Brazil. As noted above, there are also more potential buyers interested in Latin American assets including the “multi-latinas” and those from different regions such as Asia expanding the possibilities for exits. The availability of financing for deals will be a big contributor to this trend.
Another important development for private equity fund raising has been the availability of local pension fund money. In the past few years, a number of countries (including Brazil, Chile, Colombia, Mexico and Peru) have facilitated pension fund investment in private equity. This is still a developing story and some fund managers have shied away from local pension fund money because of some of the conditions tied to it, particularly in Brazil and Mexico. However, for the first time we have seen even large US private equity managers such as Blackstone and Carlyle fund raising in the region.
There are still a number of challenges to doing deals in the region. There are local, legal and political risks that need to be considered carefully in any investment. A recent problematic trend is that a number of countries have taken measures (mainly by imposing taxes or requiring reserves for crossborder financings, and taxing in-bound investments) in order to try to curtail the appreciation of local currencies against the dollar, which in some cases have increased close to 40 percent in the last couple of years. These restrictions will likely make financing large deals more expensive. However, by and large, most countries in the region have been successful in creating a much improved environment to encourage investment and stimulate growth, and we expect that trend to continue.