| After a decade of steady growth Central America is | | | | American region.” Roberto Zeleya, partner at |
| weathering the global financial downturn comparatively | | | | Batalla & Asociados in Costa Rica, says there are |
| well and continues to offer regional opportunities for | | | | attempts to address this hole in the private equity |
| private equity. Historically, this small, diversified region | | | | market “We have a vacancy in venture capital |
| has suffered from armed conflict, political instability, | | | | because there are no funds investing in start ups or |
| weak institutions and a lack of legal frameworks and | | | | new projects. What we have is some efforts to try to |
| enforcement. However, stable democratic | | | | establish an Angel investor community here in Costa |
| governments allied with disciplined fiscal policies brought | | | | Rica. Those are institutional efforts which were initially |
| an unprecedented period of growth in the past decade | | | | funded by TAMIS, which is a multi-lateral development |
| with steady growth rates on average above 5%. | | | | fund by the Inter-American Development Bank and by |
| According to IMF figures from 2006 Central America | | | | the CAD, Corporation Andino de Developmento. They |
| with 5.5% Real GDP growth was second only to Latin | | | | funded the first stage of Link inversions which basically |
| America and the Caribbean with 5.9%. Through | | | | put together a web of angel investors in Costa Rica |
| interviews with some of the main players in the region | | | | trying to invest in new companies.” |
| Alternative Latin Investor has found that in addition to | | | | Whilst the lack of significant venture capital is a real |
| the countries within Central America nations such as | | | | challenge for growing business in the region, funds |
| Mexico, Colombia, Peru and Ecuador are increasingly | | | | focused on SME (small, medium enterprises) do offer |
| becoming of interest to private equity investors looking | | | | a focus on smaller investments in an area that |
| for more region wide plays as opposed to focusing on | | | | Zeleya says has seen strong activity “SME’s |
| a particular country. Peru and Colombia have been and | | | | – that invest up to 3 million dollars have made a lot |
| are two countries that have demonstrated stability in | | | | of investments in this past couple of years. They |
| fiscal terms for Peru and with internal security matters | | | | engage in transactions from 500 thousand dollars to 3 |
| in Colombia. | | | | million dollars and there are two of those funds |
| The nature of Central America with its small countries | | | | operating in the region. One of those funds is Emerge |
| is dictating that small or regional investments are | | | | Central America growth fund that is managed by |
| attracting the most private equity interest. Mark Bishop | | | | Aureos Capital and the other one is CASEIS |
| from The Provident Group feels that the conditions | | | | Corporation Two Limited. That is a second generation |
| investors have been waiting for are now becoming | | | | fund managed by LAFISE investment management, |
| reality “Initially, back in our earlier days we did a lot | | | | based in Nicaragua.” |
| of work in Central America ourselves. We were early | | | | Central American pension funds have a negligible |
| in the game there. We thought there was going to be | | | | impact on private equity though recent changes to |
| a lot more consolidation regionally. It looks like it’s | | | | regulations in Colombia and Peru are allowing for |
| becoming a lot more interesting now.” When asked | | | | increased activity. Many pension funds in the region are |
| by Alternative Latin Investor if The Provident Group | | | | limited in terms of where they can invest, either not |
| would now be refocusing on the region Mark Bishop is | | | | being able to invest in private equities or only being |
| optimistic but cautious “the problem with Central | | | | allowed to invest exclusively in their own region. |
| America was and remains, very fragmented | | | | However, Aureos Latin America fund reported to |
| economies, small markets and lack of experience with | | | | Alternative Latin Investor that changes to regulations |
| legal transparency –it makes putting capital in there | | | | are slowly opening up possibilities in Colombia and Peru |
| just much more difficult. At the end of the day people | | | | “They have recently enabled regulation that would |
| are going to cherry pick - there is going to be a couple | | | | allow them to invest outside. In the case of Colombia it |
| of selective opportunities but its still a difficult market to | | | | allows a Colombian fund to invest outside of the |
| get your arms round.” | | | | Colombia region. And in the case of Peru they’ve |
| Aureos Latin America fund is the largest private equity | | | | recently authorised Peruvian pension funds to invest |
| fund in the region with over US$200 million under | | | | outside of the region as long as they are essentially |
| management between three funds. They are primarily | | | | qualified and registered private equity funds.” |
| a provider of capital for companies that are looking to | | | | Direct foreign investment in Central America is |
| expand or funds for management buy-outs. The | | | | dominated by US capital according to the sources |
| majority of their investments are around the $5million | | | | Alternative Latin Investor interviewed. Rojas observes |
| dollar mark and Erik Peterson Regional Managing | | | | that whilst the US is providing the bulk of DFI’s |
| Partner Aureos Latin America says they see greater | | | | there are new trends emerging “We are very tied |
| regional integration as the key to their strategy “we | | | | to the US and I would say most FDI – 60 to 70% |
| have a strong preference for companies that have | | | | comes from the US. Nonetheless there has been |
| the potential to become regional players. As you know | | | | more and more FDI from Mexico coming in. Its |
| there is a lot of cross border activity within the region, | | | | Mexico’s back yard and now Colombian |
| which is one of the reasons why we have selected | | | | investments are coming back up. Also the Spanish |
| this region. There are free trade agreements enacted | | | | invest with Telefonica although the Spanish banks |
| with the US and within these regions. And so you have | | | | have not come in yet. So its primarily the US, Mexico, |
| quite a flow of capital say between Colombia, the | | | | and Colombia. Europeans somewhat though not so |
| south end of Peru and north end of Central America | | | | much.” Bishop also noted some interest from the |
| and Mexico going south into the Central American | | | | Middle East but with more of a focus on Latin America |
| region. | | | | as a whole “Where we see interest is not in |
| Mergers and Acquisitions have seen heavy activity in | | | | certainly in the hydrocarbon and the farm sectors. With |
| recent years but are now in a downward cycle that | | | | the issue of food security a number of groups have |
| will present opportunities according to Juan Carlos | | | | targeted growth crops and cattle operations.” In |
| Rojas from Mesoamerica. Having been established in | | | | focusing more on Central America, Aureos have |
| the region for over ten years, Mesoamerica primarily | | | | attracted a diverse group of investors “We have a |
| deals with a group of 15 private business groups in the | | | | strong mix of development financial institutions and |
| region. Rojas says after initially operating a general | | | | multi lateral institutions so we’ve got many of the |
| fund they have refined their strategy for the region | | | | well-known institutions that are generally seeking to |
| “We moved towards industry specific SPV’s | | | | provide capital and invest in emerging markets, |
| instead of managing a general fund. And this was | | | | particularly in mid sized and the S & B segment of |
| mainly because we started on licensing vast | | | | emerging markets. With this fund we’ve also |
| opportunities in specific sectors. We launched an | | | | included some capital from private sector investors |
| investment in telecommunications, raising some US$ | | | | – US private investors – and more recently we |
| 200 million dollars in commitments from our investors | | | | have raised capital from some Colombian pension |
| and did a joint venture with Telefonica to develop | | | | funds and insurance companies.” |
| telecom in Central America. We exited that deal in | | | | Regional stability and new growth countries such as |
| 2003. We created Mesoamerica Energy, which is a | | | | Colombia and Peru look set to be the main drawing |
| company that develops and operates wind power | | | | points for private equity investors to Central America |
| plants in Central America. Basically our strategy is that | | | | in the future. Erik Peterson from Aureos sees Central |
| we do not manage a fund. We have no real need or | | | | America maintaining a steady if unspectacular course |
| pressure to be diversifying and be investing – | | | | in the next ten years “CA countries are rather small |
| committing funds. We are very picky about the | | | | so they tend to fall in margins of places that investors |
| opportunities – it has to be certain types of | | | | are looking to invest in. Yet at the same time they are |
| industries and opportunities that have certain type of | | | | considered relatively stable locations with some |
| scale. We look to be investing US$50-100 million or | | | | exceptions. I would expect this to be the trend going |
| more per deal.” | | | | forward as well that they are not going to be a focal |
| The M & A sector in Central America has seen | | | | point for investors, yet at the same time the region as |
| some large scale activity with Citi Bank, HSBC and GE | | | | a whole is considered a relatively stable region to |
| money moving into regional banking and Telefonica, | | | | invest in.” Even though groups such as Aureos |
| Telmex and Cable & Wireless now operating in | | | | and Mesoamerica currently dominate private equity in |
| Central American telecommunications. Up to US$30 | | | | the region Mark Bishop thinks there is an opening for |
| billion has been spent by multinationals on M & | | | | competitors “Id say there may be more room. The |
| A’s in the region but with many now wanting to | | | | things people are focused on are some oil and gas |
| protect their core business in the present climate. | | | | plays, there are the housing plays and financial |
| Rojas doubts such activity will continue in the near | | | | services plays. Aside from that there aren’t many |
| future thus creating distressed opportunities “I think | | | | other sectors that are that interesting. There may be |
| that in our region many multinational companies are | | | | room for another couple of funds. I think what Aureos |
| going to be faced with, over the next one or two | | | | did, they are already moving into a more regional |
| years, the decision to basically spin off their Central | | | | approach so its basically Central America plus |
| American operations - and that may make opportunity | | | | Colombia and Peru, so I think people are realising that - |
| to invest in corporate orphans. Spinning off their | | | | people are taking more of a regional view instead of |
| Central American operations creates a great | | | | being Central American focused.” Whilst the |
| opportunity for local groups to buy and then once the | | | | current crisis hasn’t affected Central America to |
| economy picks up again you’ll see them coming | | | | the degree of other regions as yet Roberto Zeleya of |
| back in.” | | | | Batalla & Asociados, believes if the right direction |
| Venture Capital and stock markets within the Central | | | | is taken they will emerge stronger “being such small |
| American region play little or no role in attracting | | | | economies we depend on foreign trade for growth. |
| private equity. According to a 2008 IMF report | | | | The external demand for exports would be a very |
| “several Central American equity markets are | | | | important factor or conditioning element in our |
| severely underdeveloped. There are no equity | | | | recovery. I would say that we could navigate through |
| markets in four out of the seven countries (Guatemala, | | | | this fairly unscathed if there is creativity in the business |
| Honduras, Nicaragua and the Dominican Republic), and | | | | sector in the region looking for alternative markets or |
| markets are small and shrinking in the other three (El | | | | our own internal market. If we continue to rely on |
| Salvador, Costa Rica & Panama). At the end of | | | | traditional markets such as the US or to some degree |
| 2006 there 88 equity issues listed in the Central | | | | Europe – we are going to be pegged to them. |