• PE buyers as partners: backed incumbent teams in 75% of deals; retained 60% of CEOs.
• 80% of returns in Latin American PE exits studied were driven by organic growth.
• Strength of networks critical: 65% of deals were proprietarily sourced.
• PE buyers exert influence through finance function and alignment with management: CFOs replaced 90% of the time; senior management received equity incentives in 93% of deals.

16 May 2012, Washington, D.C.: Private equity firms’ hands-on approach and focus on partnership is resonating with entrepreneurs and leading to successful exits in Latin American markets, according to a study conducted by the Emerging Markets Private Equity Association (EMPEA) and Ernst & Young LLP.

An entrepreneurial approach

The study showed private equity buyers in Latin America to be highly entrepreneurial, employing their own networks to find opportunities and in most cases seeking companies where they could partner with existing management to enhance the core business model. Two-thirds (65%) of deals sampled were proprietarily sourced. In three quarters of deals studied, the investment thesis hinged on backing incumbent teams or entrepreneurs with a vision for the business; new management was introduced in only 25% of deals.

Sarah Alexander, EMPEA’s Founding President and CEO observed, “Our study illustrates that private equity investors in Latin America provide more than just capital, they employ strategies that are yielding larger, more professionalized companies ready for the next stage in the region’s development.”

Commenting on the findings, Philip Bass, Ernst & Young’s Global Private Equity Markets Leader said, “We are finding that the rest of the world is evolving to replicate the model in the emerging markets – focusing on minority deals, equity deals and working closely with portfolio companies to add value.”

Growth-driven performance

Mean IRRs among the deals sampled compared favorably with returns from the best years of Ernst & Young’s North American and European exits studies, building in part on impressive growth dynamics in the region. Among the Latin American deals sampled, underlying EBITDA growth averaged over 45% compared with only 13.5% in the US and Europe. 80% of returns in Latin American PE exits studied were driven by organic growth versus bolt-on acquisitions or cost reductions, the source of the majority of revenue growth in the US and Europe.

Influence and alignment

PE buyers in Latin America take an active ownership role, even though in most deals they are minority owners. In nearly all deals analyzed, PE owners worked with management to create a value creation roadmap, in many cases deploying their own employees to the investee company to implement that plan or to act as interim CEO or CFO.

Although most investments are non-control, Latin American PE buyers exercise influence through Board-level engagement and financial controls, with CFOs replaced in 90% of deals sampled. Incentives and alignment with management were also key features in the deals studied, with senior management receiving equity incentives in 93% of deals. In 75% of deals the PE firm exited by a path agreed upon with management at the outset.

The majority of deals studied were exited via sales to trade buyers or via IPO, with over half (55%) of Trade/PE exits going to a single buyer. Exits via sales to other PE firms represented only 5% of the exits sampled. Jennifer Choi, EMPEA’s Vice President for Industry and External Affairs, and a co-author of the study, noted, “A robust secondary market, and the greater cohesion that would bring to the ecosystem, may become more critical as these markets continue to attract investors.”

About the study

This joint study of private equity exits in Latin America examined the results and methods of PE exits occurring between 2007 and 2011 drawing from initial research into 60 transactions executed across the region and in-depth interviews with former PE owners on over 25 exits. The aim of the study is to develop an understanding of the exit modalities and strategies in these markets and the underlying drivers of value creation.

About EMPEA

The Emerging Markets Private Equity Association (EMPEA) is an independent, global membership association whose mission is to catalyze private equity and venture capital investment in emerging markets. EMPEA’s 300 members share the belief that private equity can provide superior returns to investors, while creating significant value for companies, economies and communities in emerging markets. Our members include the leading institutional investors and private equity and venture capital fund managers across developing and developed markets. EMPEA leverages an unparalleled global industry network to deliver authoritative intelligence, promote best practices, and provide unique networking opportunities, giving our members a competitive edge for raising funds, making good investments and managing exits to achieve superior returns.

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com.

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