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Gigliani: More Transparency Needed

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Latin America's business environments are generally more closed and less transparent than the United States.

BY RICHARD BURNS

CARTAGENA -- Marcelo Gigliani is a New York-based partner of Apax Partners, with $40 billion under management and is currently investing out of a $15 billion global fund. Apax is generally acknowledged to be a pioneer in the field of private equity investing and one of its largest active practicioners. Notable investment successes globally for the firm have included Tommy Hilfiger, Intelsat and Yell. During this week's World Economic Forum Latin America in Cartagena, Colombia he sat down with Latin Business Chronicle to share his outlook on private equity and investments in Latin America.

Latin Business Chronicle: I recently read an article that described private equity’s recent experience in Latin America as: “they came, they saw, they went home.” Is this the story?

Gigliani: Private equity as an asset class has historically been primarily a  North American and European phenomenon. There has been no real history yet in Latin America. Private equity investors have come to Latin America from outside the region, from regions where markets are very competitive and penetrated. Private equity has been looking for new areas with less competition -- with higher risk but also higher return. Asia has been the first point of call for last six or seven years outside of developed markets. Asia has the potential but will take longer than expected to develop for local reasons. So we in the industry have now turned to Latin America and Eastern Europe. Latin America has suffered less over the past couple of years during the economic crisis and has to a large degree sat it out. The underlying economies are generally growing and the private equity industry has been looking to deploy capital to take advantage of that. But there’s been a mismatch of value expectations in Latin America from a buyer – seller perspective. As a result, investors have found a rude awakening with only marginally better return prospects for greater investment risk, especially from a currency, regulatory and capital markets perspective. Additionally, North America and Europe now doesn’t look as bad as it did two years ago. So that distracts from Latin America with its higher risk profile. 

As the lead Latin partner at arguably the world’s leading private equity investor, what are you looking for now?

I spend 80 percent of my time looking at opportunities in North America and 20 percent in South America. We are looking for world class companies in our five sectors of expertise within geographies which have criteria attractive for investors. Our five industry sectors are: media, technology & telecommunications, business services, consumer products and health care. The geographic criteria are countries with solid long-term growth fundamentals driven by population growth, rising middle classes, the  establishment of financial infrastructures with expansion of savings rates and the availability of consumer financing. Our key areas of interest in Latin America would be: education, health care and leading consumer brands which have a strong national or regional presence. 

What have you noticed in your conversations and negotiations with South American business owners?

There are very sophisticated businessmen in their sectors and countries. They are concerned about doing things in the right way to maximize value. Also, we find a predominance of family businesses which has generally transitioned successfully to professional management principles and mindset. But the business environments are generally more closed and less transparent than the United States. 

Are you long-term optimistic about prospects for Latin American private equity development? 

I see a similarity with Southern Europe ten years ago, when private equity was in its infancy there. There was no strong market share then, and it suffered from misperceptions. Over time it has become a mainstream and credible way for owners to sell their businesses. Latin America has everything it needs to grow: economic and population growth, an increasingly globalised world in which to play and the added characteristic of generally well educated populations who are bright and hungry. 

Which countries are you most focused on? 

We look for large opportunities where we can put $250 million or more of equity to work. There aren’t many countries where we can find many opportunities in that size range. For this reason, Brazil and Mexico are our high priority countries. In the second rank, countries like Chile or Colombia. 

How important a consideration is the development of capital markets throughout the region in your investment considerations? 

Critical. Debt is a key component of what we do. And it’s another means for an exit of our investment at the right time. Third, a strong and stable capital market is something that indicates strong economic stability and long term prospects for a market.

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