Ernst and Young Report – Private equity value creation in Latin America
They examined the results and methods of 70 private equity exits between 2007 and 2012. Their analysis draws on confidential interviews with PE firms active in Latin America, as well as public data.
The second annual study extends research into PE’s transformational role in Latin America’s continued economic development.
In less than a decade, Brazil has surpassed the UK, Italy and Canada to become the world’s sixth-largest economy. This year, they see more PE interest in the region beyond Brazil—namely Colombia, Peru and Mexico.
This year’s study solidifies the main theme from last year: PE firms are focused on growth and hands-on partnerships with entrepreneurs to transform companies into market leaders. PE investors work with the entrepreneurs they back to identify and develop new products, expand geographically and exit profitably.
They also see a new trend—the emergence of a two-tier model as the ecosystem continues to develop and mature. Finally, they see geographic expansion playing a larger role for many companies in Latin America.
One of the most striking features of Latin American PE compared to developed or other emerging markets is the near-universal focus on portfolio company growth. This stands in sharp contrast to developed markets, where cost reduction plays a bigger role.
Across the sample, organic revenue growth accounted for about 69% of EBITDA growth, with acquisitions accounting for 28% and cost reductions less than 3%. Of the organic revenue growth, 48% came from geographic expansion. New product lines and sales processes accounted for 28% and 22% resulted from overall market growth.
Outlook for the region
As the pace of GDP growth slows and the modest scale of most companies becomes an impediment to returns, the current PE operating model in Latin America will need to broaden its focus beyond growth. This could include an emphasis on cost reduction as a lever to drive value creation.
They also expect to see new strategies reflective of a maturing market. In small- and mid-cap markets, deep local knowledge will drive deal flow and value creation, as PE firms work with entrepreneurs and family owners to instill discipline.
PE buyers will need a full complement of value creation strategies as organic growth becomes harder to achieve. This includes execution and integration skills, bolt-on acquisitions and broader business transformation.
SOURCE: Ernst & Young, LLP