Private equity-backed IPOs outperform all other exit routes in Latin America
Private equity-backed IPOs in Latin America outperformed the broader public markets and other IPOs in the region by a significant margin over the course of 2013, according to a survey by EY.
The report – Great expectations: what’s next for Latin American private equity? – underscores that exits via IPOs yielded better returns than the other key route in Latin America, sale to corporates.
The report, now in its third year, examines the results and methods of over 107 PE exits between 2007 and 2013.
With PE-backed IPOs worldwide recording their strongest year-on-record in 2013, 38 per cent of IPOs in Latin America for 2013 were PE-backed – the highest level ever recorded in the region and significantly higher than 2012’s figure of 20 per cent. Additionally, PE-backed IPOs outperformed the overall performance of the region’s stock markets.
During 2013, the Ibovespa and MSCI Latin America Indices were down 15.1 per cent and 13.8 per cent respectively, and the average non-PE-backed IPOs were down five per cent. This compares with the average PE-backed IPOs in 2013 that were up two per cent. Moreover, the report highlights that multiples are 9.8 per cent higher for IPOs than trade sales.
Jeffrey Bunder, EY’s global private equity leader, says: “IPOs are becoming an increasingly viable and highly attractive exit route for PE-backed companies across a range of deal sizes and countries in the region. Last year’s results should help reinforce competitive tension at exit between the trade buyer and public markets, enabling Latin American PE houses to improve returns further.
“Beyond Brazil, the Latin American PE market is steadily maturing with more exits also coming from newer markets such as Colombia, Chile, Mexico and Peru. As we move forward, it will be crucial for PE to continue developing and maturing in the region as it will play a vital role in providing the necessary capital, discipline and expertise required to help the Latin American economy achieve its full potential.”
Organic revenue growth is by far the largest component of revenue growth for PE-backed companies in the region. Over 68 per cent of EBITDA growth was driven by organic revenue growth. Less than 30 per cent came from acquisitions and only 3.1 per cent was achieved through cost reduction.
When examining organic growth as a whole, geographic expansion is the primary driver accounting for 47 per cent of growth. This figure is far more significant than growth in the overall market, which accounts for 22.1 per cent of organic revenue growth. New products accounted for 15.2 per cent, while improved sales techniques made up 13.2 per cent.
Bunder adds: “The region’s PE firms are clearly focusing on driving growth through successful geographic expansion. There is a lot of growth capacity in Latin American domestic markets. As local markets continue to mature and larger firms increasingly seek deals beyond Brazil over the coming years, there will be an expectation for international and regional growth to increase markedly as a driver of organic revenue growth.”
Targeting industries directly related to middle class consumption – consumer services and goods, technology and health care continue to be a lucrative and scalable strategy for PE-backed businesses in Latin America. Consumer goods and services accounted for the highest proportion of exits at 32 per cent between 2007 and 2013. This sector has been long popular with the region’s PE houses, where favourable demographics in the form of a rising middle class with increasing disposable incomes have attracted high levels of investment. Financial services and technology accounted for 23 and 18 per cent of exits respectively.
Michael Rogers, EY’s global deputy head of private equity, says: “The focus on investing in sectors that service the growing middle class in Latin America is clearly reflected in PE investments and, ultimately, in exit patterns by sector.”
As the Latin American market continues to mature, there is a clear transition into a two-tier PE model resembles the multistate PE ecosystem in many developed markets. The study shows that the vast majority of sub-USD100m entry value (EV) deals were acquired from private sellers. By contrast, there is a broader spread of deal source in the over-USD100m entry EV category, with private sellers accounting for 53 per cent, 40 per cent coming from corporates and public markets and seven per cent coming from other PE houses.
While the figures for the exit market are encouraging, the coming years will be a crucial time for Latin American PE. In contrast to developed markets where cost reduction initiatives play an important role, focus on portfolio company growth is a main focus in Latin America. The study shows that 27 per cent of portfolio companies remain in the portfolio for more than six years and that holding periods have lengthened considerably since 2011. After a peak in 2011, fund-raising totals in the region have fallen. Additionally, many of the large deals completed between 2008 and 2010 will need to be exited over the coming years.
Rogers says: “Many firms are now reaching the point where they will need to raise fresh capital, and they will need to intensify their focus on exits. They must demonstrate their ability to exit before LPs will commit to new funds. The coming years will be a critical time for Latin American PE as more exits start to come through and the full performance picture starts to emerge.”
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