In a world of over-leveraged and over-priced stock markets, the investment industry is in need of a good shake-up. In the face of an overextended and over-leveraged global capital markets, the sector needs to be retooled in order to lower its risk profile and return more capital to its investors. The most obvious way this can be done is through increased private equity activity.
Here in Latin America, the capitalization of private equity has declined by over 50% since 2008. This is a worrying statistic, as it dims the shine of the region’s accelerated growth in the last three years. The amount of capital that goes into startups in the region has also dropped significantly in the past three years, to an average of $150 million, a figure that didn’t even exist a few years ago. The question being asked is, is this a bad thing?
What pushed Latin American’s cap rate down?
In a nutshell, the private equity industry has been hit hard by the decline of the oil industry. With the industry in the developed world now largely depressed, the profits of the private equity firms that specialize in this sector have plummeted. The fact that many of the same firms that went bankrupt a decade ago are now back in business has raised red flags for many investors.
In addition, due to the way that private equity’s funds are booked, its profits have also been reduced by a third. This industry has been through a lot, and many of the firms that went through the recent financial crisis have been unable to get back to where they were before.
What is holding it back?
There are a few things holding back the growth of Latin American private equity. The first is the fact that the region is still dealing with the fallout of the financial crisis. Lack of regulated and/or liquid markets in some of the larger cities has been a major issue in the region. But there are also regulatory and tax issues that have to be dealt with first.
Many of these firms are also struggling with finding adequate returns on their investments. It is well known that private equity funds have lower investment yields than traditional equity investments. So the question is, why can’t the sector match the returns of more conventional investments?
The answer is that private equity funds typically do not include the research and development (R&D) and marketing expenses that are necessary to justify the higher capital requirements that are needed for successful investment in the region.
R&D expenses are one of the main reasons that private equity firms fail to justify the higher investment costs that they bring to the table. When firms can’t justify the extra expenses involved in successful investment, they don’t get invested.
The Soaring Cost of Living in the Region
This is the number one reason that investors in private equity are hesitant to bring their money into the sector. The cost of living in Latin America is very high by international standards, with many cities well beyond the reach of the average investor.
This is particularly true for the business community, which often has to pay higher taxes than the private sector. As a result, many of the firms that operate in the region have chosen to raise their prices in order to stay viable.
How to Start a VC Partnership in Latin America
Here are a couple of different strategies that may help you get a foot in the door with Latino investors:
– Target early stage ventures with a technology focus.
– Invest in ventures that are building companies that can employ the technology that you want to see in the product.
– Invest in private equity firms with an emphasis on investing in smaller companies, which may be more cost-effective.
– Target venture capitalists with a proven track record of investing in startups.
– Follow the growth of the firm as a whole. Focus on the areas of greatest growth, not where the firm is located.
– Be patient. Most firms will be looking for financing soon, and if you don’t want to rush things, don’t offer funds until the right time.
– Be flexible. The investment process is about finding the right partner for the right deal. Don’t be afraid to let things ride until the right time.
– Wrap it up. Investing in startups is great, but don’t forget that partnerships can help you get a piece of the pie too.
– #How to Invest in Latin America
Invest in startups. This is the number one rule when it comes to investing in startups. JV’s, joint ventures and equity-for-debt investments are all strategies that private equity firms have used in the past, and many are looking to use them again.
Joint Ventures. In a joint venture, one party (usually the private equity firm) loans its share of the ownership to the other (usually the company that is getting the investment). This is a riskier way to invest, as the private equity firm is taking on all the risk of the investment, but it’s often a necessary step to get the deal done.
Equity-for-Debt Investment. One way that private equity firms have gotten around the risk of JV’s and debt investments is by investing in the equity-for-debt markets. These are markets where lenders such as banks lend money to companies that need cash, but the company issuing the shares doesn’t need to pay back the loan.
Stock Buybacks. Private equity firms have used stock buybacks as a way to boost their own returns at the expense of the funds’ investors. This has happened frequently during periods of strong fund management, such as during the bull market in 2014 and 2015.
M&A Deals. It’s no secret that the private equity industry is hot for M&A. The question is, how can you get in on the action?
M&A Deals can come in many forms, but they usually involve two parties (usually private equity firms and an acquirer) buying or merging their businesses. The acquirer makes the investment, and the acquiring firm takes over the operations.
It’s important to realize that M&A deals are complicated, and even seasoned executives are at a loss when it comes to them. If you want to get in on the action, check out our guide to M&A deals.
#How to Invest in Latin America
There are a few different ways to invest in Latin America. The first is through venture capital funds, which are typically led by venture capitalists and aimed at early-stage investments. The funds may invest in companies that are based either in the United States or Latin America, although most funds prefer to invest in companies that are based in both regions.
There are also funds that invest in private equity firms, which is more common in Europe and Asia. These funds are often open to international investors, but some are also open to domestic investors.
The funds mentioned above are open to both domestic and foreign investors, and funds that are also open to domestic investors may prefer to invest in private equity funds that are also open to international investors.
The private equity industry is in need of a shake-up. The sector is overextended and over-leveraged, and it needs to be retooled in order to lower its risk profile and return more capital to its investors. The most obvious way this can be done is through increased private equity activity.
The question is, what will it take to get the sector moving in the right direction? The answer is simple: investment. If investors are prepared to put their money where their (often very large) mouth is, then private equity will continue to be a major player in the region’s capital markets.