LatAmConfidential06-2014

P R E M I U M I N V E S T M E N T R E S E A R C H J U N E 2 0 14

Our detailed research points to chronic delays and cost overruns

BRAZILS BOTCHED DELIVERY

CONSUMER: DEBT DIFFICULTIES

RESOURCES: NEW FARMING FRONTIERS

FINANCE: PRIVATE EQUITY LOOKS TO MEXICO

INFRASTRUCTURE: OLYMPIC CONCERNS RISE

A research service from the Financial Times

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A research service from the Financial Times

LatAm Confi dential, The Financial Times Limited, Number One Southwark Bridge, London SE1 9HL The Financial Times Limited 2014

JUNE 2014

IN THIS REPORT:1.0 MACRO VIEWBrazils lost opportunity

2.0 CONSUMERThe shadow of debt lengthens

3.0 RESOURCES AND TRADEFarmings new southerncone frontiers s 3.5 Cartes plans to boosts investment

4.0 FINANCEPrivate equity poised to ride out funding challenge s 4.5 Private equity heads to the Pacifi c

5.0 INFRASTRUCTUREBrazil underachieves on World Cup projects s 5.8 14 years in the making Salvadors metro fi nally opens s 5.10 Olympics concerns rise s 5.12 2Q14 Infrastructure Project Tracker

6.0 METRICS THAT MATTER *Based on a survey of 1,500 respondents in Brazil and 1,000 in each of the other countriesSource: LatAm Confi dential

*Based on a survey of 1,500 respondents in Brazil and 1,000 in each of the other countriesSource: LatAm Confi dential

Of Brazilians havea bank account*

90.4%

Of Argentines fi nd it very diffi cult to service their

debts*

24.9%Of Chileans have property insurance*

16.6%

Of Peruvianssave money*

80.4%

Of the 32 private equity managers expressed interest in Colombia

16Of the 32 private equity

managers expressed interest in Mexico

3.0 RESOURCES AND TRADEFarming opportunities are opening

up in Paraguay, where the government is planning extensive infrastructure

investment

13


JUNE 2014

1.0 MACRO VIEW

In March 2011, when we first researched Brazils execution of its World Cup spending commitments, we found that too little has been spent and too little built, warned against the dangers of complacency, and awarded the country a yellow card (LC Mar 31 2011, Infrastructure). Three years on, it is clear that these warnings have not been heeded. As our research in this report shows, Brazil has underachieved, missing an opportunity to catalyse the development of the much-needed transport infrastructure. A fifth of the planned public transport schemes have not been built and others will be only partially operational during the event. The vast majority of planned airport upgrades are unfinished. Overall investment in World Cup related projects has increased by only R$1bn ($450m) to R$26.4bn since the first plans were announced in 2010, but public transport has ended up with about half the funds that were intended for it, with chronic cost overruns on stadiums and airports absorbing the lions share of funding (see chart 1).

The performance of some host cities has been shambolic. R$525m was budgeted for urban transport improvements in the city of Porto Alegre but only R$16m has actually been spent. Many of the projects are of limited use. None of the new BRT (bus rapid transport) schemes operating in Belo Horizonte, for example, will connect to the airport and the project focused on the centre of the city will not be fully operational in time for the World Cup. Poor planning, complicated tendering processes, and difficulties surrounding land expropriation have all played their part in slowing down projects. Wage pressures have added to construction costs, contributing to overruns. We believe that all these factors will continue to hinder the pace of infrastructure development once the tournament is over. It is also possible that frustrations linked to urban transport will feed into the rumbling low

Brazil World Cup failures are likely to make the government even less

popular but we do not envisage any serious political upheaval and still expect the incumbent president to win re-election

Source: CGU, LatAm Confidential

InvestmentProjects

0

10

20

No.

of p

roje

cts

30

40

50

Actual*Planned

4050

Actual*Planned0

2

4

6

R$bn

8

10

12

6.2

11.6

1. Underdelivering on urban transport


JUNE 2014

MACRO VIEW1.1level strikes and anti-government protests that have been surfacing again in many Brazilian cities in recent weeks.

However, we regard this as simply another lost opportunity rather than presaging any broader political upheaval. Emergency security and logistic arrangements mean that the tournament will very probably take place this month in reasonable order and without any major mishap. Although economic confidence is at a low level (LC Mar 20 2014, Consumer Survey) and the popularity of President Dilma Rousseff has been falling in recent months (Update Alert, May 22 2014; Update Alert, Apr 7 2014), we still believe that Ms Rousseff is the most likely winner of this years election, albeit after a much more competitive second round than seemed likely a few months ago. Growth this year will be less than 2%, but low unemployment, recent rises in the minimum wage and increases in social benefits all favour poorer Brazilians and make them more likely to vote for Ms Rousseff. In the longer term, in spite of all the disappointments, the slow urban transport infrastructure build-up will continue to generate some opportunities for suppliers.

MEXICAN FRUSTRATIONMexico too has been a frustrating market for investors. The countrys 1Q14 GDP growth of only 1.8% compared to the same period of last year, led the government to revise down its full year forecast to 2.7% from 3.9%. This dismal result reflects the continued weakness of consumer spending, which we have highlighted previously. Our survey in this report of consumer debt suggests that growing numbers of Mexicans are having difficulty making debt payments, a result which could reflect the countrys relatively high levels of informality and possible dependency on expensive informal credit markets (see chart 2). More positively, there are signs that in spite of delays Mexico is pressing ahead with its energy reform (Update Alert, May 28 2014). Following internal elections in the centre-right opposition National Action party, and the approval of electoral reforms including the creation of a national electoral institute with greater authority at the state level a majority of legislators seem to be ready to approve before the end of next month the secondary legislation needed to make energy reform a reality.

PRIVATE OPPORTUNITIESThe other two pieces of research in the report focus on private equity and other alternative investment opportunities. In what we intend to be an annual survey of private equity prospects, we surveyed 32 private equity and venture capital fund managers and found them to be relatively buoyant about prospects, in spite of recent challenges to fund raising plans. Although 19 of the managers said the economic downturn in the region had had

BRAZILS LOST OPPORTUNITY

Mexicos 1Q14 GDP growth of only 1.8% compared to the same period of last year, led the government to revise down its full year forecast to 2.7% from 3.9%

Source: LatAm Confidential

MexicoLatAm

0

10

20

30

40%

50

60

70

80

Have a credit cardHave a bank account

76.3

59.064.0

46.9

2. Mexicos financial informality% of respondents


The Client acknowledges that FT cannot provide the Client with any advice on dealing in specific investments and accordingly FT is not providing any such advice or making any recommendation to the Client on the merits of buying or selling or otherwise dealing in particular investments.

JUNE 2014

MACRO VIEW

Principal Richard Lapper Senior Researchers Amy Stillman, Luke McLeod-Roberts Researchers Cecilia Lanata Briones, Lucinda Elliott, Denisse Lecerra Head of Production Heidi Wilson Junior Production Editor Caelin Robinson Senior Designer Paramjit Virdee

Head of Sales UK/APAC Garrett MacCarthy Subscription Managers Michael De Coux, Wendy Clarke, Jose Rincon, Dafydd Elias Account Manager Betty Encinales Product Manager David Griffith

FT Confidential: Chairman James Kynge Principal Richard Lapper Commercial Director Marc Thivessen

Email: [email protected] Web: www.latamconfidential.com

LatAm Confidential is published monthly by The Financial Times Limited, Number One Southwark Bridge, London SE1 9HL The Financial Times Limited 2014.

BRAZILS LOST OPPORTUNITY1.2

either a significant or moderate negative impact, 23 of the sample were more optimistic about Latin Americas prospects over the next 12 months (see chart 3). Ten managers said they planned to increase investments in Mexico, six in Peru and four in Colombia, with a number making their first forays into the Pacific Alliance markets. We were not surprised by this interest in the Andes. Peru, whose economy is expected to grow by 5.3% this year, has consistently shown up as the strongest of the six countries covered in our Consumer Survey. Colombia, which is also expected to do reasonably well this year with projected expansion of 4.6%, has been the second strongest performer in our surveys (LC Mar 20 2014, Consumer Survey).

From a sector point of view, our interviewees were particularly interested in healthcare, with retail, education, energy and utilities, logistics, and oil and gas also attracting significant interest. As we pointed out in our last report (LC Apr 17 2014, Consumer), private healthcare has grown substantially in Latin America over the past decade. Private equity houses played a significant part in bringing listed Brazilian companies, such as Qualicorp (QUAL3:SAO), to the market.

Our final piece of research looks at the emergence of agribusiness opportunities in two small but relatively open Southern Cone markets, Uruguay and Paraguay. Uruguayan agriculture has changed radically in the last two decades, with its once dominant beef industry now overshadowed by soyabeans production and forestry. Local groups, such as the Montevideo-listed Union Agriculture Group, are playing an important role in driving this trend. Paraguays soyabean industry is long established in the east of the country, but under President Horacio Cartes, elected last year, the government is seeking to develop the sparsely populated Paraguayan Chaco region in the north-west. O

Our interviewees were particularly interested in healthcare, with retail, education, energy and utilities, logistics, and oil and gas also attracting significant interest


0

5

10

No.

of r

espo

nden

ts

15

20

25

PessimsticThe sameLess optimisticMore optimistic

441

23

3. Private equity optimism How do you feel about investment prospects in Latin America over the next 12 months?


JUNE 2014

2.0 CONSUMER

*Percentage of respondents who answered difficult and very difficultSource: LatAm Confidential

0

10

20

30%

40

50

601Q144Q133Q13

PeruMexicoColombiaChileBrazilArgentinaLatAm

1. Debt difficulties growHow difficult is it for your household to pay its debts (for example loans, credit card, store card, mortgages)?*

Consumer spending has been an important driver of Latin American growth for the last decade. However, family budgets have come under growing strain and the burden of indebtedness has been rising. We examined these dynamics in greater detail in our survey of consumers in Argentina, Brazil, Chile, Colombia, Mexico and Peru, assessing

the extent to which respondents have experienced growing difficulty in servicing their debts. Some of these dynamics are complicated because many poorer Latin Americans are only starting to use the formal banking and financial system. In our most recent Consumer Survey conducted between February 13 and March 10 we therefore asked our respondents about how they used their bank accounts and the extent to which they borrowed money either through mortgage or consumer loans, or through credit cards. We also surveyed them about their insurance use.

THE GROWING DEBT BURDENBrazils consumer debt burden has been a focus of concern on financial markets for at least the last three years. However, our quarterly surveys suggest that in four other countries in the region people are also experiencing increasing difficulties in servicing their debts. There is no question that many Brazilian families are overextended. The average for

Our quarterly Consumer Survey has shown that growing numbers of Latin Americans are facing difficulties in meeting debt payments. A relatively large numbers of our Brazilian respondents are still increasing their use of consumer credit, however.

We found that Argentines and Mexicans made less use of the formal financial system than other Latin Americans.

Outside Chile, the mortgage market remains underdeveloped, although it is growing quite quickly in Brazil and Peru.

THE SHADOW OF DEBT LENGTHENS


JUNE 2014

THE SHADOW OF DEBT LENGTHENS2.1 CONSUMER

Latin America as a whole was slightly higher than for Brazil, however. In our survey of 1,500 Brazilians, 43.4% of respondents in 1Q14 said it was difficult for their household to pay its debts, up from 40.2% in 3Q13 and 41.3% in 4Q13 (see chart 1).

Our data suggests that Argentines and Mexicans suffered much greater difficulties over the same period. 57.1% of Argentines and 53% of Mexican respondents said they experienced difficulty in paying debt in 1Q14, compared to 38.7% and 42.9% respectively in 3Q13. Chilean families were also in slightly greater trouble than their Brazilian counterparts.

Moreover, while only about 10% of our Brazilian respondents said they found it very difficult to pay debts, the number of Argentines facing more acute problems increased from 12.6% in 3Q13 to 24.9% in 1Q14. Similarly, 18.7% of our Mexican sample said it was very difficult to service their financial commitments in 1Q14, up from 12.5% in 3Q13.

Although fewer Brazilians report difficulties in paying debts than Argentines, we are concerned that these difficulties could be growing. Our survey indicates that a larger number of Brazilians is increasing their use of credit than elsewhere in the region. In 1Q14, 44.8% of Brazilians increased their use of credit, compared to an average of 40.4% for LatAm as a whole (see chart 2).

The rise in the perceived difficulty of Argentine and Mexican families is puzzling. Mexican base rates are lower and bank spreads narrower than in Brazil, and the market for payroll loans less evolved. Argentinas high inflation rate makes family budgeting complex, but theoretically at least it should erode the value of local currency debt and make it less, rather than more, of a problem.

One possible explanation for this is the very sharp economic slowdown in both countries during 1H13 and the first few months of 2014. We have repeatedly noted the depth of the malaise affecting consumer sentiment in Mexico. Argentinas economy has been especially adversely affected by the decline in commodity prices. Our survey data shows consumer sentiment in both countries has consistently been weaker than in any of the other four markets that we survey (LC Mar 20 2014, Consumer Survey). In addition, however, we suspect many of our Mexican and Argentine respondents are more dependent than their counterparts elsewhere on informal markets than on formal bank or mortgage credit.

Only 48.9% of Argentines and 64% of Mexicans participating in our survey had bank accounts, a lower rate of bancarisation than the average 76.3% for the six countries as a whole (see chart 3). Mexicans made less use of credit cards. 53% of our sample did not have a credit card and of those that did 63% had only one card (see chart 4). For the region as a whole, 47.6% of those with cards had one card. Mexicans were also more dependent on cash. 78.7% of our sample used cash to pay utility bills, a higher percentage than in any other market


0

20

40%

60

80

100I don't knowDecreasedUnchanged Increased

BrazilLatAmBrazilLatAmBrazilLatAm3Q13 4Q13 1Q14

2. Brazilians still borrow moreHow do you think that your households use of credit changed this month compared to the same month last year (for example loans, credit cards, store cards, excluding mortgages)?

ACUTE DIFFICULTIES IN ARGENTINA AND MEXICO% of respondents who find it very difficult for their households to pay its debts

MexicoArgentinaLatAm

3Q13

4Q13

1Q14

10.5%

12.6%

12.5%

12.7%

20.7%

15.6%

13.6%

24.9%

18.7%


JUNE 2014

The great bulk of consumer borrowing in Latin America finances the purchase of consumer durables rather than houses

THE SHADOW OF DEBT LENGTHENS2.2 CONSUMER

apart from Colombia. In addition, we found that far fewer Mexicans bought property or house contents insurance than the Latin American average. 2.6% of Mexicans had contents insurance compared to a 5% average for the region. 4.5% of our Mexican sample had bought property insurance compared to an average of 10.8% for the region as a whole (see chart 5).

MORTGAGE FINANCEThe great bulk of consumer borrowing in Latin America finances the purchase of consumer durables rather than houses. Outside Chile where mortgage lending amounts to about 20% of GDP mortgage finance remains underdeveloped (see chart 6). This implies that Latin Americans are less able to build up assets than their equivalents in other emerging



0

20

40

% o

f res

pond

ents

Bank

acc

ount

dur

atio

n

60

80

100Do not have a bank accountHave a bank account


76.3

23.7

48.3

51.7

90.4

9.6

70.7

29.3

77.6

22.4

64.0

36.0

70.5

29.5

More than 5 years5 years and less

0

20

40

% o

f res

pond

ents

No.

of c

ards

60

80

100Do not have credit cardsHave credit cards


59.0

41.0

57.3

42.7

67.2

32.8

62.7

37.3

51.3

48.7

46.9

53.1

64.1

35.9

4 or more321

3. Brazil leads bancarisation

4. Mexicans lag in card use


JUNE 2014


CONSUMER2.3markets where mortgage finance is more developed. It also means that the financial implications of any debt bubble are less damaging. In our sample, about a third of our respondents owned their houses and a third of those borrowed money from banks or developers in order to buy.

Predictably, Chile was an outlier. 64.2% of those who owned their homes had borrowed money from a bank to make the acquisition. Official figures show a steady rise in mortgage finance over the last decade in the region, with the increase particularly strong in Brazil, where the Minha Casa Minha Vida housing programme has made subsidised finance available to low-income families. In 2013, mortgage debt accounted for 7.1% of GDP in Brazil (up from 1.6% in 2007) and 9.6% in Mexico (up from 7.3% in 2004). It is also growing very quickly in Peru, reaching 5.4% in 2013, up from 1.9% in 2004.

Our survey suggests that a substantial number of Latin Americans still choose to build their houses piecemeal, buying materials when they are able to afford them and adding rooms whenever possible. 20.9% of our sample said they had bought their houses and built through time, with that share rising to 23.9% in Brazil and over 30% in Peru (see chart 7).

PERU STANDS OUTPerus economy has outperformed every one of the sizeable Latin American economies in recent years, and with growth expected to top 5%, it should again do so this year.


Source: Thomson Reuters Datastream

0

5

10%

15

20House contents insuranceHouse/property insurance


10.8

5.0

16.3

9.813.1

4.1

16.6

8.8 9.46.0 4.5

2.6

11.3 9.9

0

5

10%

15

20

PeruMexicoColombiaChileBrazilArgentina

201320122011201020092008

5. Mexicans less insured % of respondents who have insurance for the following

6. Chile leads on mortgage financeMortgage credit as % of GDP

Of Chileans who owned their homes had borrowed money from a bank to make the acquisition

64.2%


JUNE 2014


CONSUMER2.4Our data suggests that the consumer spending, which has been one of the main drivers of the countrys expansion, remains relatively strong and fairly unencumbered by any debt overhang. Our Peruvian respondents said they were making less use of credit in 1Q14 than in either 3Q13 or 4Q13. However, in 1Q14 only 24.4% of Peruvians experienced difficulty in paying their debts, the same as in 3Q13 and slightly higher than the 23.8% in 4Q13, but a lower percentage than from any of the other five countries surveyed.

We also found that Peruvians were more likely to save than fellow Latin Americans. On average, 63.1% of Latin Americans save, nearly half by building up current or deposit accounts. However, 80.4% of our Peruvian sample said they saved money. Our Peruvian respondents showed a higher than average propensity to hold savings in foreign currency (almost certainly US dollars), land, cars or property bought for rent (see chart 8). The conclusion reinforces our sense gained from previous surveys that Peruvians tend to be more focused on their families future security and well-being than their counterparts elsewhere. We have noted more than once before that Peruvians attach greater importance to spending on education, healthcare and housing (LC Apr 17 2014, Consumer; LC 23 Jan 2014, Consumer).

We also detected signs of relatively rapid financial formalisation by Peruvians. 13.1% of our sample had opened a bank account within the last six months, 27.9% within the last year and 42.1% within the last two years. These were all notably higher percentages than in the other five markets. O


0

5

10

15%

20

25

30

35


30.4

19.8

8.99.2

23.920.420.9

7. The self build trend% of respondents who bought land and built their house over time


0 5 10 15% of respondents

20 25 30 35

PeruLatAm

I buy land

I buy properties to rent

I buy foreign currency

I treasure domestic currency

In a special savings account

In a bank account (savings/current account)

8. Perus saving patternsMain savings mechanisms

PERU LEADS SAVINGS TABLE% of respondents who save money

80.4%PERU

61.3%MEXICO

69.1%COLOMBIA

57.1%CHILE

64.3%BRAZIL

44.8%ARGENTINA

63.1%LATAM


JUNE 2014

3.0 RESOURCES AND TRADE

Sources: MGAP, DIEA

0

300

600

900

1,200

1,500

1,800Total area cultivated

Hect

ares

(000

s)

2013/2014E

2012/2013

2011/2012

2010/2011

2009/2010

2008/2009

2007/2008

2006/2007

2005/2006

2004/2005

2003/2004

2002/2003

2001/2002

2000/2001

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Tonnes (m)

Total production

Uruguayan soyabean production soars

Uruguay began its push into forestry in the late 1980s. With 1m hectares (ha) of timberland, now boasts a sizeable paper and pulp industry, with revenues from wood, chips and pulp and paper generating about 10% of total incomes. The drive into soyabeans came in the late 1990s, with farmers beginning to convert large quantities

of relatively cheap pastoral land along the Uruguay River. In the early 2000s, Argentine agricultural companies such as Grupo Los Grobo made investments in cheaper tracts of arable land along Uruguays west coast. Grown on just 12,000 ha in 2000, soyabeans covered 1.5m ha by 2013. Output has increased at an even faster pace, rising from 27,600 tonnes in the 2000/01 harvest to an estimated 3.67m tonnes by the end of the current harvest (see chart 1). Soyabeans generated 19% of Uruguays total export revenue in 2013. Reflecting this development, land prices in Uruguay have increased sevenfold over the last two decades, rising from an average of less than $500/ha in 1996 to more than $3,500/ha

It has become increasingly difficult for international investors to access agribusiness opportunities in Brazil and Argentina, either because of land ownership limitations or punitive tax and trade restrictions. We examined opportunities in two smaller but more open Southern Cone economies that enjoy similar comparative advantages as food producers: Uruguay and Paraguay.

We visited both countries during April and May in order to assess local agribusiness trends. We found that consolidation in Uruguay, prompted in part by the withdrawal of stretched Argentine investors, has created opportunities for a number of local groups. Some are beginning to expand into Paraguay, where the government is seeking to open up swathes of uncultivated land and is planning extensive investment in infrastructure that should, in the longer term, make the country more attractive to international business.

FARMINGS NEW SOUTHERN CONE FRONTIERS

3.5 CARTES PLANS TO BOOSTS INVESTMENT IN PARAGUAY


JUNE 2014

3.1 RESOURCES AND TRADE FARMINGS NEW SOUTHERN CONE FRONTIERSin 2013 (see chart 2).

Paraguayan agribusiness is longer established, with the 350,000 individuals forming a strong Brazilian or Brasiguayo farming community in the east of the country producing the bulk of the most recent harvest of 8.5m tonnes. However, the election of a business-friendly government last year has opened up new possibilities in the less developed lands of the Paraguayan Chaco. We visited both countries over the last few weeks, interviewed farmers, agribusiness companies, consultants and government ministers. We believe the new agribusiness cluster emerging in Paraguay and Uruguay represent a potential opportunity for investors.

URUGUAYS AGRIBUSINESS ELITEAlthough Uruguays forestry industry is dominated by foreign players including Weyerhaeuser (WY:NYSE) of the US and UPM (UPM1V:HEX) of Finland (see map), we noted the emergence of a number of Uruguayan groups in the soyabean and grains sector. Led by the Montevideo-listed Union Agriculture Group (UAG), these businesses have expanded relatively quickly in recent years, buying up smaller farms and more recently picking up assets from regional and international investors. In February, Argentinas El Tejar sold out its Uruguayan interests to UAG for $170m, giving it control over 67,000 additional ha of land in Uruguay (32,000 ha owned vs 35,000 ha leased). El Tejar is one of the worlds largest farm companies backed by London-based hedge fund Altima Partners, and private equity firm Capital Group (LCG:LSE). Adecoagro (AGRO:NYSE), one of the largest owners of

*Argentinas 2012-2013 prices are for the Province of Buenos Aires. Brazils 2012 price is for 1H12, **Brazils 2013 price is an estimateSources: DIEA, FGF-IBRE, Fischer & Schickendant , IGP-DI, OPYPA (Oficina de Programacin y Poltica Agropecuaria), World Bank

0

2

4

$000s

6

8

10UruguayBrazilArgentina

2013**2012*2011201020092008200720062005200420032002200120001999199819971996

-30

-20

-10

0

10%

20

30

40

50

60UruguayBrazilArgentina

20132012201120102009200820072006200520042003200220012000199919981997

2. Southern Cone land prices surgeAverage annual land price per hectare

YoY change

$170mAmount for which Argentinas El Tejar sold out its Uruguayan interests to UAG in February, giving it control over 67,000 additional ha of land in Uruguay


JUNE 2014

RESOURCES AND TRADE3.2 FARMINGS NEW SOUTHERN CONE FRONTIERS

Adecoagro is another investor to have exited recently, selling two of the three farms it initially bought in Uruguay

productive farmland in South America, is another investor to have exited recently, selling two of the three farms it initially bought in Uruguay. New Zealand Farming Systems, the South American dairy unit of Singapore-based Olam International (O32:SES), has also made several sales within their Uruguay land portfolio. In April, the company sold 7,771 ha to local interests for $53.7m. Since 2010, it had bought more than 28,000 ha of land in the states of Florida, Rio Negro and Rocha.

As well as UAG, we have identified eight other local participants who have begun to engage in large-scale intensive agriculture. These groups are adding value to land by increasing productivity on existing farms, or by converting uncultivated pastoral land to produce a variety of crops including wheat, maize, and rice, as well as soyabeans. Some are majority owners of the land they cultivate and closely allied with international players. Others use a leasing model, where they rent land from smaller producers and sell on what is cultivated to national and international trading groups for export. Today theres a

*Part of Los Grobo, Argentina. **Businessman (single investor). ^Part of Ense. ^^Includes Forestal El Arriero (26,000 hectares), Forestal Oro Verde (50,000), Forestal Tekoayhu (50,000), Forestal Tierra Verde (14,000 )Sources: Company websites, Uruguay Ministry of Agricluture, El Observador

Soyabeans

Wheat

Grains

Agriculture

Meat

Corn

Forestry

Dairy

Rice

Olives

NAMEMAP N

O.

HECT

ARES

(000S

)

ACRO

SS TH

E COU

NTRY

WHAT THEY PRODUCE NATIONALITY

Adecoagro

Agronegociosdel Plata*

AGRA

Barraca JorgeWalter Erro

Calix Agro

Ernesto Correa

Fadisol

Forestal AtlnticoSur

Galpern Group

GMO RenewableResourcesHillock CapitalManagement

Kilafen

Montes del Plata

NZ FarmingSystemsRMK TimberlandGroup

Sieraas Calmas^

Union AgriculturalGroup

UPM

Weyerhaeuser

Global ForrestPartners^^Manuel SantosUribelarrea

Brazilian

Uruguayan/Argentine

Uruguayan

Uruguayan

French

Brazilian**

Uruguayan

Chilean

Uruguayan

US

Argentine

Uruguayan

International

Singapore

US

Spanish

Uruguayan

Finnish

US

US Argentine

45

100

20

94

11

100

83

45

15

18

20

30

250

20

38

30

181

200

138

140

55

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

MONTEVIDEO

PORT NUEVA PALMIRA

RIVERA (10, 13, 19)

CERRO LARGO (2, 3, 6, 7, 10, 15, 19)

DURAZNO (1, 5, 11, 15, 17)

FLORES (2, 11, 13)

FLORIDA (11, 4, 7, 17)

LAVALLEJA(7, 14-17)

ROCHA(7, 8, 9, 14-16)

TREINTA Y TRES(4, 7, 8, 11, 15, 19)

CANELONES (3)COLONIA (7, 12, 13, 14, 17)

TACUAREMB (2, 4, 6, 10, 11, 17, 18, 19)

SORIANO(2, 4, 7, 12-14, 17, 18)

RIO NEGRO (2, 10, 11, 13, 17, 18)

SALTO (11)

PAYSANDU (11, 18)

Uruguays agriculture groups consolidate


JUNE 2014


lot of local expertise in the mix, especially when compared to ten years ago, said Pedro Arbeletche, an agronomist at Uruguays Public University.

UAGStarting with a small blueberry farm in the west of Uruguay, UAGs land portfolio has multiplied from a modest 8,000 ha to the 181,000 ha they currently hold after the El Tejar takeover, 31,000 ha of which is leased. UAG was founded in 2007 by Montevideo-born Juan Sartori, now executive chairman, who, having worked in the financial sector in Europe, returned to his home country to focus on buying enough land to acquire the scale needed to achieve efficiencies in the agriculture sector. 85% of UAGs land is dedicated to crop cultivation, but the group also manages livestock and dairy units, selling to food companies such as Conaprole, Marfrig (MRFG3:SAO), and Saman, mostly for the export market. In May last year, the company listed on the Uruguayan stock exchange for $420m.

UAGs main priority is integrating the land they have acquired in order to boost productivity. Weve had five years of very rapid growth, now is the time to consolidate what we own, said Romualdo Varela, the chief executive, in an interview with LatAm Confidential. Although positive about Paraguay, there are no solid plans to move into that market yet. The Uruguayan company for now is sticking to what it knows the local market.

ADPAgronegocios del Plata (better known by its acronym ADP) was established by the Guigou family in 2002. Unlike UAG, the group uses a leasing model, cultivating 75,000 ha of land, 50,000 of which it leases from roughly 100 different smaller producers. The reason why cultivation size varies is because some of the farms produce two crops in a single year, rotating between wheat in the South American winter and soyabeans in summer. 43,000 ha were dedicated to soyabeans during the most recent harvest, 58% of their land portfolio. Since 2004, ADP has partnered with the Grobocopatel family, now Grupo Los Grobo, a firm based in Argentina and run by Gustavo Grobocopatel, known locally as The King of Soya. Los Grobo is the majority shareholder of ADP and also adopts a leasing model across the rest of the Mercosur region. The company does not own a single shovel or acre, instead it leases machinery and land from others. Its focus today is on increasing the productivity of existing farms rather than buying or leasing more land. Economic viability is about large scale cultivation of soyabeans, said Marcos Guigou, ADPs president, in an interview with El Pas, the Uruguayan daily newspaper. This year ADP will produce 200,000 tonnes of soyabeans for export.

BARRACA ERROBarraca Jorge Walter Erro, is the third largest exporter of grains in Uruguay after Cargill and Cereoil Uruguay. It introduced soyabeans to Uruguay in 2001. It produced 14.5% of Uruguays overall grain exports in 2013. The company which was set up to transport grains in the late 1940s also operates as Villa Trigo. Like ADP it has focused on increasing productivity on existing land, partly through the development of new seed varieties. It has an agreement with Donmario Seeds of Argentina, which specialises in genetically modified varieties. In the early 2000s, it cooperated with ADP on some projects, but now works separately, cultivating its own land and partnering with local farmers and cooperatives. Barraca Erro is present in 18 of Uruguays 19 states, across 94,000 ha.

FADISOL AND OTHERS Fadisol is a privately owned wheat and soyabean trader, based in the western state of Colonia. Like Barranca Erro, it partners with local farmers rather than growing on its own or leased land. The group started to farm in Paraguay in 2009 and has funded and managed several projects there.

Galpern Group that purchased 1,769 ha of land from New Zealand Farming Systems this year is a holding company established in Uruguay in the early 2000s with various Uruguayan and Argentine interests. The agricultural arm, known locally as Galfarm,

Of UAGs land is dedicated to crop cultivation, but the group also manages livestock and dairy units

85%


JUNE 2014


currently has 15,000 ha under cultivation in Uruguay. 52% of the Galpern Group belongs to Paycueros, an Uruguayan leather manufacturer based in the Paysand that exports mainly to China. Other shareholders include Ernesto Galpern head of Mercado Libre in Uruguay the number one e-commerce site and E-bays Latin America partner.

Nalmer, based in Young in the northern state of Ro Negro purchased land from New Zealand Farming Systems in the same state where it is based.

Agra Corporation is a partnership between Marcos Marn, a Peruvian-Uruguayan businessman, and Jorge Francomano, an Argentine agronomist. The group manages 20,000 ha of land, on which it produces soyabeans for export. Mr Francomano previously managed over 40,000 ha in Uruguay for the Argentine farming group, MSU Agro. Their company is looking for opportunities to expand and is watching potential withdrawals by Argentine groups. I wouldnt say theres been an outright mass exodus of Argentines from the market, but theres certainly stuff for sale with room to negotiate, said Mr Marn, the companys chief executive.

Hillock Capital Management is a farm management company based in Montevideo. It started life in Argentina as a commodities broker, but expanded into Uruguay in the early 2000s. Backed by wealthy individuals and institutions, the group has bought more than 20,000 ha in nine different states. It grows soyabeans and other crops on 12,000 ha. Theres still a lot of opportunities to convert arable land for crop cultivation, said Martn Otero, its chief executive.

GOVERNMENT POLICYGovernment policies have been generally supportive, although there is some frustration about the poor quality of infrastructure and the slow pace of improvement. On the plus side, Uruguays fiscal and legal framework is more transparent and predictable than that of Argentina and Brazil. There is a flat 25% income tax, and tax breaks on farm machinery and supplies. No sales tax is levied on farm products with the exception of a 1% municipal sales tax on livestock. For smaller farms with annual revenues of less than $238,000, tax is capped at $5,125 per year. In addition, government agricultural policies are arguably conducive to sustainable development. In particular, the government has been keen to promote measures limiting over farming: a soil protection plan has been introduced since 2010 1.5m ha are currently protected and crop rotation became mandatory in 2013. Uruguays official agricultural research unit, Inia, established in 1914, is considered a global innovator in developing new seed varieties and conservation techniques. The government is also keen to ensure agribusiness complies with food sanitation laws, allowing the industry less complicated access to overseas markets. However, Uruguays transport network is seriously deficient and agribusinesses complain that energy costs are expensive. Although logistics are easier than in Argentina, Brazil and Paraguay, farmers criticise that it still typically takes 30 days between harvesting and loading grain on ships. Marcos Guigou told a recent interviewer that energy and transport costs in Uruguay are among the highest in the world. Infrastructure problems are an obstacle.

Ports are a priority: plans are afoot to bring into operation two new deep sea ports at La Coronilla, in Rocha state, and at Fray Bentos in the west of the country, supplementing three existing facilities at Colonia, Montevideo and Nueva Palmira. But according to the ministry of transport, the port of Rocha will not be fully operational in 2025. Railways have suffered from decades of underinvestment. Over half of the countrys rail system has been abandoned since nationalisation in 1952. And roads are heavily congested. A project to revive nearly 1,500 km of railway is in place, but progress has been sluggish. A $74.8m contract for Focem Uno, linking Montevideo with Rivera near the Brazilian border, was awarded to the National Railway Corporation (CFU) in November 2011, but relatively little has so far been done. The winner of a second project, Focem Dos, to rebuild the west coast railway line that runs from Fray Bentos to Salto Grande in Argentina, will be announced in July this year. Carlos Len, head of infrastructure for the national railway association (AFE) told LatAm Confidential that the China Railway Construction Corporation is a potential bidder. Progress has been equally slow in improving Uruguays network of navigable rivers, although ministers claim that investments have been made. Given these failures, Fadisol plans to build a port terminal on the Tacuar River that borders Brazil, in the eastern state of Cerro Largo.

2000-2009

1990-1999

1980-1989

1970-1979

20.1

1.8

-3.9

12.0

HOW LAND PRICES HAVE INCEASED IN URUGUAY Rate of land appreciation (%)

Sources: DIEA, OPYPA, World Bank


JUNE 2014


With opportunities for land acquisition limited at home, a number of Uruguayan-based agribusiness groups have begun to expand into Paraguay

MOVING TO PARAGUAYWith opportunities for land acquisition limited at home, a number of Uruguayan-based agribusiness groups have begun to expand into Paraguay, focusing in particular in the Paraguayan part of the Chaco region. The election in 2013 of the business friendly President Horacio Cartes should help support this trend.

Uruguayans have bought nearly 1.5m ha in the northern Chaco region, according to Jorge Gattini, Paraguays agriculture minister. We have identified a number of Uruguayan groups that have moved into Paraguay. Agra Corporation, which manages 20,000 ha of agricultural land in Uruguay,also currently holds 10,000 ha in Paraguays western region, and UAGs Juan Sartori signalled he is considering some of Paraguays investment options. Everdem (Estudio 3000 S.A), which began buying land in Paraguay in 1999, now raises cattle on 8,000 ha, and is planning to start cultivating grain. For the first time we have a government with a clear plan for our sector and transport infrastructure is a priority; the reconstruction of the Transchaco highway that runs [the 460km] from Asuncin to the Filadelfia [the state capital of the Gran Chaco] has already been approved, said Rodrigo Artagaveyta, director of Everdem. The road is one of the 14 road projects that will be auctioned to the private sector as PPPs in 2014.

Although the Chaco is predominantly cattle-raising country (see map), the land is fertile with roughly 80 particles per million (ppm) of phosphorous, compared to an average of 3ppm in Uruguay and Paraguays Grain Export Association (Capeco), with researchers in the US, is exploring new heat resistant varieties and is carrying out tests in the northern state of Alto Paraguay. However, much of this will take time. The association reckons it could be eight years before commercial scale cultivation can begin. A long-term irrigation plan to redirect fresh water from the Paraguay River to the drier salt water Alto Paraguay region close to the Brazilian and Bolivian border is also in place, but is unlikely to be fully operational before 2030.

CARTES PLANS TO BOOSTS INVESTMENTPresident Horacio Cartes, who took office last August, has been keen to attract private capital to the countrys infrastructure and resource-based industries, in order to improve access to international markets. In an interview with LatAm Confidential, he outlined his infrastructure plans for the country and signalled the governments sup-port for the agriculture industry.

Paraguay is famed for having a simple and low tax rate of 10% across all sectors, with an addition 10% VAT. The cost of production vs other LatAm countries is also low primar-ily due to the countrys cheap and abundant electricity supply, young population (74% of Paraguayans are under 34) and relatively efficient export system. Mr Cartes claims that low production costs give Paraguay a competitive edge and wants to take full advantage. We want to industri-alise the country further. Paraguay is one of the lowest-cost producers in

the region and this has to be main-tained, he said.

Paraguay recently eliminated the 10% export tax on soyabeans, replac-ing it with a value-added tax of 5% on the sale of all agricultural products as of January 1 2014. In addition, if an agricultural product is processed, a 2.5% rebate is offered to exporters, providing an incentive for businesses to locate giving a further incentive to treat raw materials in Paraguay itself. Agribusiness is an established system in Paraguay. We are more competitive than the US in terms of soyabean production at farm level, but the transport and logistics system in place today lets us down, said Jorge Gattini, the agriculture minister.

The government is already going ahead with its plans to invest in its transport infrastructure, follow-ing the approval in October of a new law on PPP. In April, the Ko-rean construction company Ilsung

was awarded the PPP to rebuild the Route 8 highway that runs from Caazap to Yuty in the south-east. Paraguays public works and com-munications ministry plans to auc-tion a further 14 transport projects this year totalling $500m, increasing to over $1bn in 2015. Like Uruguay, making use of the river network is also high on the governments agenda.

The Paraguay River is where we breathe commercially, it needs to be more navigable, Mr Cartes told LatAm Confidential. With 84% of total soyabean exports transported by river, the government plans to dredge the Paraguay River to increase capacity and reduce shipping costs. A bidding date for the PPP project is yet to be confirmed. The river is navigable up through Asuncin for vessels of up to 11 metres draught, but droughts occasionally cause prob-lems. In 2012 importers and exporters lost roughly $250m in potential rev-enues due to interruptions in traffic.


JUNE 2014


Theres still a lot of land. Within the next ten years Id estimate up to 300,000 ha could be cultivated on the western side, said Jos Berea, head of Capeco. Alto Paraguay is what Alto Paran was twenty years ago. The eastern state of Alto Paran, whose capital Ciudad del Este borders Brazil, is where the majority of Brazilian soyabean producers are based today. Sugarcane plantations have also been introduced in Alto Paraguay since 2009 through small-scale farming and local cooperatives and with successful results. Paraguay exported organic sugar to 17 different countries in 2013.

On the eastern border with Brazil, business continues to boom. The agriculture minister estimates that farmers of Brazilian origin cultivate more than 85% of the 3m ha of land currently under soyabeans. However Paraguays relationship with its irmo mais velho (big brother) to the east continues to be an occasional source of tension. O

Sources: Ministry of Communication and Public Works, IIRSA, LatAm Confidential

Apa

Aqidaban

Ypan

Jejui-Guazu

Para

n

Para

guay

Tebicuary

CHACOWEST EAST

WHICH AGROPRODUCERS

ARE BASED THERE?

Arid, less rainfall but haslarge water reserve, theYrenda water reserve, in thestate of Gran Chaco. BordersArgentina and Bolivia

More rainfall, about1mm/km travellingeast. Fertile borderwith Brazil

Mainly cattle

Cattle, exploringsoyabean and organicsugar cultivation inthe north

Mainly Uruguayan andParaguayan producers

Uruguayans andinternationalsexploring

PARAGUAYWESTMAIN INFRASTUCTURE PROJECTS: EASTArid, less rainfallbut has large waterreserve, the Yrendawater reserve, in thestate of Gran Chaco.Borders Argentinaand Bolivia

Evenly distributedrainfall, averageannual rainfall1,500mm comparedto 800mm in theChaco

Cattle, exploringsoyabeancultivation, sugar

Soybean, rice,corn, wheat

3% of total 97% of total

CLIMATE

CLIMATE

SHARE OFPOPULATION

AGRO PROODUCTION

AGRO PROODUCTION

Project: Route 9 Transchaco highwayType: Road refurbishmentBidding date: 2014

Project: Aquaduct in Central ChacoType: Water sanitation project toprovide water for theregion from the River ParaguayWork started: 2013

Project: Southern Line,FiladelfiaType: Road refurbishmentfor accesss roads incentral Chaco regionWork complete: Oct 2014

Project: Route 3,connection with route 5Type: Road refurbishmentBidding date: 2014

Yrenda water reserve

Chaco westChaco east

Paraguay east

Verde

Monte Lindo

Timane

ASUNCIN

1

2 34

1

2

3

4 FILADELFIA

Paraguays uncultivated Chaco region looks set for investment


JUNE 2014

4.0 FINANCEPRIVATE EQUITY SET TO RIDE OUT FUNDING CHALLENGES

So far 2014 has been a challenging year for private equity funds in Latin America. Volatility across some of the regions biggest markets has hurt fundraising, with international investors taking a more cautious approach to emerging markets. Big buyout firms in the region are entering a new cycle of capital raising, but we estimate

that funds will not surpass $9bn this year, and could be lower. This would be higher than in 2013 when $5.5bn was raised, but lower than the 2011 fundraising peak when volumes reached $10.3bn (see chart 1).

Our assessment is based on interviews with 32 private equity and venture capital fund managers, conducted between March 25 and April 30. Among this number were ten international funds, 11 funds headquartered in Brazil, eight in Mexico, two in Peru and one in Chile. We asked interviewees about opportunities in Argentina, Brazil, Chile, Colombia, Mexico and Peru. These markets accounted for 97% of private equity investments in Latin America last year, according to the Latin American Venture Capital Association (Lavca).

Our research points to a slowdown in fundraising for private equity in Latin America, with volumes unlikely to exceed $9bn in 2014, also below the last fundraising cycle in 2011. However, we expect the strong deal flow to continue, reaching at least $9bn in 2014.

Mexico and Peru are seeing increased private equity activity, while Colombia is attracting interest in oil and gas. This year US buyout firms KKR & Co and Bain Capital invested in Brazil for the first time.

Consumer-oriented sectors and infrastructure-related developments in Latin America continue to be at the centre of private equity interest. Healthcare was considered the most promising sector for new investments (15.6% of the sample), followed by consumer retail (10.4%). Oil and gas, energy and logistics also performed strongly, with 9.4% each. Findings are based on our survey of 32 private equity funds.

Sources: Lavca, LatAm Confidential

0

2

4

6$bn

8

10

12InvestmentFundraising

2014E201320122011201020092008

6.44.6

3.6 3.3

8.1 7.2

10.3

6.5 5.6

7.9

5.5

8.9 9.0 9.0

1. The gap widens

Out of 32 fund managers plan to invest between $20m-100m in Latin America in 2014

14


JUNE 2014

Just under 60% of respondents in our survey said that the macroeconomic environment has negatively affected their activities in the region. 18% of the managers we enquired claimed the impact had been significantly negative.

Its more of a challenge to raise emerging market funds today than it was three years ago, said Jim McGuigan of Capital Group, which is looking to raise a seventh fund dedicated to emerging markets in 2015. I think [investors] are being much more selective and may be reducing commitments.

Such concerns have led some private equity firms like GP Investments (GPIV33:SAO) to postpone plans for a new fund. We havent started fundraising yet because its not the best time to be talking about Brazil, noted GP Investments partner Antonio Bonchristiano. According to Mr Bonchristiano, the firm is waiting a few more months until it has more visibility on the economic outlook to launch its next $1bn to $1.5bn Brazil-dedicated fund.

As such, funds entering a new fundraising cycle could face difficulties. LatAm Confidential understands that Brazils Gvea Investimentos is looking to raise more than $1bn, and Advent International is seeking $2bn. Ptria Investimentos hopes to raise between $1.5bn to $2bn, and BTG Pactual (BPAC3:SAO) is planning to capture $1bn in capital. Carlyle Group (CG:Nasdaq) will also raise $1bn for a South America-focused fund. Likewise, a number of Mexican and Peruvian-focused funds that we spoke to said they planned to raise money. Mexicos Wamex is looking to raise $250m for a third fund this year (see chart 2).

Private equity exits have also been affected by volatility on capital markets. Lavca estimates that revenue generated by exits in the region fell 2.6% last year, to $3.7bn. Latin America had no initial public offerings (IPOs) in 1Q14, while issues were down 61% YoY, according to Dealogic, the capital markets data provider. Four planned IPOs two from Brazil and two from Mexico were withdrawn or postponed during the quarter. Brazilian beef producer JBS (JBSS3:SAO) has announced plans to sell shares of its poultry and processed food unit, making it the first IPO in Brazil all year.

Private equity investment has proven more resilient, however. Our research suggests that investment will continue rising to above $9bn in 2014. We attribute this in part to the growth of funds in the Andean region and Mexico, which have until now been relatively under-penetrated by private equity.

Additionally, Brazil, which accounts for about 68% of deal volume in Latin America, is benefiting from new activity by big buyout firms. US private equity firm KKR & Co (KKR:NYSE) announced its first deal in Brazil in April, purchasing a controlling stake of data-centre firm Aceco Ti. In March, US-based Bain Capital signed an agreement to acquire Brazilian health insurance provider Intermdica for over $850m. And the UKs Apax Partners, which opened offices in Brazil in November last year, is looking for investment


0 1 2 3 4No. of respondents

5 6 7 8

Chile

Peru

International

Mexico

Brazil

0

2

4

6

7

Fundraising in 2014 by origin of funds How much funds will you raise in 2014?

0 1 2No. of respondents

3 4

PeruMexicoBrazil

Over $500m

$101m-500m

$20m-100m

Less than $20m

No plans toraise funds

2. The 2014 fundrasing outlook

4.1 FINANCE PRIVATE EQUITY SET TO RIDE OUT FUNDING CHALLENGES

Our research suggests that investment will continue rising to above $9bn in 2014


JUNE 2014

Brazil, which accounts for about 68% of deal volume in Latin America, is benefiting from new activity by big buyout firms

opportunities in the country for a $7.5bn global fund that is already one-third committed.In our survey, fund managers investment outlook was positive, reflecting the continued

strength of the deal flow. Almost 72% of respondents said they are more optimistic about investment opportunities in Latin America over the next 12 months compared to a year ago. Notably, the majority of our sample was focused on the mid-market, reflecting the trend for smaller deals in Latin America. 43.8% of respondents planned to invest between $20m and $100m in the region in 2014, while 34.4% expected to deploy between $101m and $500m.

About 60% of respondents said they expected competition to remain unchanged over the next 12 months compared to the previous 12 months, while just 21.9% expected more competition and 15.6% thought thered be less competition (see chart 3). This minority of respondents believed prices could fall. As Patrick Ledoux, a partner at London-based Actis Capital, told LatAm Confidential, We see more opportunities in Latin America than a year ago: companies valuations are getting cheaper and there is less competition from opportunistic investors.

Consumer-oriented sectors such as healthcare, education and retail continue to drive interest. Elsewhere, new infrastructure developments are creating opportunities in energy and utilities and logistics, and funds are tapping into the regions plentiful oil and gas prospects.

PRIVATE EQUITY TARGETS THE NEW LATIN AMERICAN CONSUMERAlthough consumers across the region are feeling increasingly squeezed, high-growth subsectors in consumer markets such as healthcare, education and retail are more resilient. Healthcare was considered the most promising sector for new investments by participants in our survey, accounting for almost 16% of the sample (see chart 4).

Private healthcare has grown substantially in Latin America over the past decade as higher-earning consumers seek alternatives to inadequate public healthcare services (LC Apr 17 2014, Consumer). Additionally, ageing populations and health problems such as rising obesity in countries like Brazil and Mexico have contributed to higher spending on private healthcare.

Private equity investors have long been keen on the sector, providing significant backing to the Brazilian businesses that have been listed over the last decade.

Carlyle and GP Investments bought stakes in now-listed Brazilian healthcare companies Qualicorp (QUAL3:SAO) and Tempo Assist (TEMP3:SAO), for example. In general we find healthcare very attractive because the Brazilian population is ageing, and the demand for health services and drugs in Brazil is rising well above GDP growth, noted Mr Bonchristiano at GP.

Ptria launched its own medical diagnostics company, Alliar, three years ago with Blackstone Group (BX:NYSE). It has since acquired 65 diagnostic imaging units in Brazil and is growing at annual rate of around 40%, with about $125m in revenues.


0 5 10No. of respondents No. of respondents No. of respondents

How do you feel about investment prospects in Latin America

over the next 12 months?

How is the current macroeconomic scenario affecting your activities

in Latin America?

How is competition in Latin America compared

to a year ago?

15 20 25

Pessimstic

The same

Lessoptimistic

Moreoptimistic

0 3 6 9 12 15

I don't know

Significantpositive impact

Moderatepositive impact

Little or no impact

Moderate negative impact

Signficantnegative impact

0 5 10 15 20

I don't know

Lesscompetition

Similar levelof competition

Morecompetition

3. Greater optimism among private equity houses



JUNE 2014

A close competitor, the listed So Paulo-based Grupo Fleury (FLRY3:SAO), is also the target of private equity interest. Gvea Investimentos is in talks to buy a controlling stake in Fleury and could relinquish its 30% share in competitor, Laboratrio Hermes Pardini, to secure the deal, according to a source close to the firm.

The Mexican private healthcare industry is less developed than Brazil, but it offers significant consolidation opportunities. EMX Capital, a spin off from Carlyle in Mexico, told LatAm Confidential that it is interested in buying diagnostic clinics because there are none that cover the whole country. Alta Growth Capital has also invested in AmeriMed, a hospital group in touristic Cancn, and has a stake in Mexico City-based Medicus Soluciones, a company that provides anaesthetics services to hospitals.

Consumer retail came in second place in our survey, accounting for more than 10% of the sample, with respondents citing mall food franchises, restaurant chains and apparel retailers as attractive.

9.4% chose education as one of the most promising sectors. This is unsurprising given the recent deal flurry in Brazil. Anhanguera Educacional Participaes (AEDU3:SAO) and Kroton Educacional (KROT3:SAO), which recently merged to create the largest listed education company in the region, are both backed by private equity money. Advent International owns 5.8% of the new company (previously it had 10.2% of Kroton), while BlackRock (BRLA:LSE) has 5% of shares, about the same stake it had in Anhanguera before the merger (Update Alert, May 16 2014). Capital Group (LCG:LSE) has also invested in Rio-based business school Imbec, Cartesian Capital Group owns a stake in Ser Educacional (SEER3:SAO) and Actis owns a minority share of Cruzeiro do Sul Educacional.

The education sector in Mexico has similarly started to attract private equity interest. According to Mr Ledoux, Actis is looking to open an office in Mexico City in 2015, with education being a chief focus. The firm is currently in advanced stages of closing a deal with a Mexican company. In Mexico, education, healthcare and consumer are under-penetrated sectors with fantastic room for growth, said Mr Ledoux. The macro index is pretty disappointing so far, but we are long-term investors: we believe that Mexico will be attractive for the next 20-25 years.

Technology also performed strongly in our survey, with 8.3% of our participants regarding it as the most promising. As we reported in our 2012 private equity survey on Brazil tech

FUNDS BY ORIGINNo. of respondents

Brazil

International

Mexico

Peru

Chile

Note: Respondents were asked to choose three optionsSource: LatAm Confidential

0 5 10% of respondents

15 20

OtherReal estate

Other fast-movingconsumer goods

Metals and miningAgribusiness

Food and drinkFinancial services

Construction and transportconcessionaire

TechnologyOil and gas

LogisticsEnergy and utilities

EducationRetail

Healthcare

4. The attraction of healthcare What are the most promising sectors for new investments?



JUNE 2014

investments, venture capital funds from Silicon Valley and Europe have made a series of recent investments in consumer internet start-ups in Brazil (LC Dec 6 2012, Finance). The tech wave is also starting to spread across the region more broadly. According to Lavca, nearly half of all deals in Latin America last year were related to information technology. Kaszek Ventures is a case in point. In February, the Buenos Aires-based venture capital firm raised $135m for a new Latin America technology-focused fund, topping its goal of raising between $80m and $100m. Although at least one fund manager we spoke with complained about the market going quiet, most were optimistic about technologys long-term prospects. Digital activity is increasing regardless of the macroeconomic environment, noted Edson Rigonatti of Astella Investimentos in Brazil. The companies in our portfolio are growing.

INVESTMENT SURGE IN ENERGYSeparately, private equity funds are tapping into opportunities derived from planned spending in transport and energy infrastructure. In our survey, oil and gas, energy and utilities, and logistics tied in third place as some of the most promising sectors for new investment, each accounting for 9.4% of the sample. Many of our interviewees cited investment opportunity ports and pipelines, while cement companies, and engineering and logistics firms were also mentioned.

Oil and gas has also been gaining momentum. 72% of private equity investment in Colombia in 2013 (which saw record investments of $1bn during the year) came from four oil and gas deals, according to Lavca (see chart 5). Our research suggests the trend will continue. In April, Darby Overseas Investments, the private equity arm of Franklin Templeton Investments (FTF:NYSE), spent $385m for a minority stake in a Colombian oil and gas pipeline, while Capital Group purchased a 42.5% stake in Colombian oil company Vetra Energy for $200m late last year. Were very attracted to this business in Colombia because there is a very reliable and stable oil and gas regime, and the government has never broken a contract, noted Mr McGuigan.

Mexican oil and gas is also attracting private equity interest due to energy reform approved in December last year. The legislation has paved the way for the countrys first oil and gas auctions next year (Update Alert, Mar 24 2014), and is opening opportunities in midstream and downstream activities (LC Dec 19 2013, Resources and Trade). Private equity funds in the country could start investing as soon as congress approves enacting legislation of the bill, which is expected later this year.

Brazil is another important oil and gas hub in the region. Yet government policy, in particular the cap on domestic petrol and diesel prices, has hurt national oil company Petrobras (PETR4:SAO) and inhibited development. High-profile casualties such as bankrupt

Source: Lavca

0 5 10%

15 20 25

Other

Timber

Information technology

Telecommunications

Logistics anddistribution

Consumer/retail

Energy

Oil and gas

5. Energy deals dominated in 2013 % of total investments

72%of private equity investment in Colombia in 2013 came from four oil and gas deals



JUNE 2014

supplier Lupatech (LUPA3:SAO), and troubled oil start-ups OGX (OGXP3:SAO) and HRT Participaes (HRTP3:SAO), have made investors more wary.

Valora Investments managed only this month to find a deal in an oil fund it launched almost two years ago (LC Oct 11 2012, Finance). Many companies in our pipeline went bankrupt or were acquired for nothing because they set up their business with unsustainable expectations, noted Paulo Rezende of Valora. That forced us to be extremely cautious. In the end, the So Paulo-based private equity firm opted for a minority stake in BTG-controlled offshore logistics company DSB Servios de leo e Gs for R$150m ($67m). When we analysed different sectors we realised that offshore logistics services have a reasonably stable demand, stability is now the most important point for us, explained Mr Rezende. O

Listening to Isabel Elas speak its hard to remember that much of the world is facing an economic slowdown. Were

constantly surprised at the growth, said Ms Elas, the managing partner of private equity advisory Equitas Partners, from her offices in Lima. The number of deals happening is constant because the markets keep growing, our challenge is to grow as fast as possible.

While Brazil has traditionally absorbed the bulk of private equity capital in Latin America, increasingly private equity interest is expanding to the Pacific Alliance countries, a regional trade bloc formed of Chile, Colombia, Mexico and Peru.

One reason for this is that Chile, Colombia and Peru have the allure of investor-friendly regulation and high growth at a time when other markets are slumping. In the LatAm Confidential survey, four of the 13 funds looking to Colombia said they planned to invest for the first time, while an additional four said they would increase their investments in the country. Similarly in Peru, of the 12 funds that planned to invest over the next year, half intend to increase their investments and four were considering investing for the first time (see chart).

Chile also performed well, though the market was viewed as being more saturated than either

Colombia or Peru. Four of the 12 funds interested in Chile said they could invest in the country for the first time this year. However, none of the funds had intended to increase their investments over the next 12 months, while three of funds looking to Chile said they would maintain a similar level of investment in Chile compared to a year ago.

Although growth has been more lacklustre in Mexico, investors are optimistic about planned reforms to open key sectors of the economy to private investment. It also has the advantage of being the second biggest market in the region after Brazil, and is relatively under-penetrated by private equity. As

one Mexican private equity fund manager put it, in Brazil there is too much capital chasing too few deals, in Mexico there is too little capital chasing too few deals.

Of the funds in our survey that expressed interest in Mexico, ten of the 16 planned to increase their investments, while two said they are looking to invest in Mexico for the first time this year.

The smaller size of these markets makes it unlikely that big buyout firms will abandon Brazil. In fact, nine of the 22 funds with interest in Brazil said they planned to increase investments this year, while three intended to decrease. However, as more markets become popular, Brazil is losing its dominance.

PRIVATE EQUITY HEADS TO THE PACIFIC

Note: 13 respondents expressed an interest in Colombia, 12 respondents expressed an interest in Peru and in Chile, 16 respondents expressed an interest in Mexico and 22 respondents expressed an interest in BrazilSource: LatAm Confidential

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Growing prominence for Pacific Alliance opportunities How will your investments change in the following countries over the next 12 months?



JUNE 2014

5.0 INFRASTRUCTUREBRAZIL UNDERACHIEVES ON WORLD CUP PROJECTS Brazil has failed to deliver on much of its R$26bn World Cup investment programme. A fifth of public transport schemes have been shelved, nine out of 12 airports upgrades are not finished and almost all stadiums have been delivered late and over budget.

Although the country is likely to guarantee security and avoid logistic problems during the event itself, long-term economic benefits stemming from the tournament will be less than expected.

Work on the 2016 Olympic Games has also been slow. One of four main sites is behind schedule.

In spite of the slow start, we are more optimistic about the longer-term build-up of urban transport infrastructure, which we believe will generate significant investment opportunities for suppliers, bus manufacturers and multinational rail manufacturers in particular.

Brazils R$26bn ($11.7bn) 2014 World Cup legacy will be patchy at best. Local organisers in the federal government and in the 12 host cities argue the tournament has served to trigger investment not just in world-class stadiums, but also in top-notch infrastructure and human capital, providing long-term productivity

benefits.But the reality is that a fifth of the planned public transport schemes have not been built

and many others will only be partially operational during the event. A small cluster of privately run airports have undergone major expansion projects, but the vast majority of planned airport upgrades remain unfinished. While the country now has a string of modern stadiums, these were built two-thirds over budget and some of them without services, such as Wi-Fi, that were initially promised.

In this report we assess Brazils performance, the implications for the future of the R$370bn infrastructure investment programme, as well as planned investments in public transport, and the economic impact of the tournament. We also consider the progress on preparations for the 2016 Olympic Games in Rio de Janeiro. Finally, we identify future opportunities in operators, suppliers and financiers.

In order to address these issues, we spoke with federal and local government officials, representatives of local World Cup committees, the head of Brazils Public Olympics Authority (APO), company executives, lawyers, analysts and officials at the powerful Federal Audit Court (TCU). We also visited schemes and met with officials in Recife, Rio de Janeiro and Salvador. These are three cities which historically have invested very little in public transport, but between them are now spending at least R$25.4bn in this area. The three are increasingly turning to the private sector to execute these schemes and they are improving their long-term planning. Finally, we analysed official and company data.

We have also created a database of all major public transport investments post-World Cup in Brazil, which is available online to subscribers as part of our LatAm Confidential Transport Database. This includes data on investment levels, operators and contractors, where available, as well as the rate of progress of the schemes. We will update this on a regular basis.

5.8 14 YEARS IN THE MAKING SALVADORS METRO FINALLY OPENS

5.10 OLYMPICS CONCERNS RISE

5.12 2Q14 INFRASTRUCTURE PROJECT TRACKER

JUNE 2014


JUNE 2014

The amount spent on public transport has dropped by 47%, while that on airports and stadiums has increased by 62% and 61% respectively

INFRASTRUCTURE BRAZIL UNDERACHIEVES ON WORLD CUP PROJECTS5.1

WORLD CUP INVESTMENTSBrazil was officially chosen to host the 2014 Fifa World Cup six and a half years ago, on October 30 2007. The first official Matrix of Responsibilities, a list of officially sanctioned projects agreed between the federal government and the 12 host cities, was published in 2010, with R$22.9bn of investments in stadiums, public transport, airports and ports. Additional amounts totalling about R$2.5bn were subsequently added in telecoms, tourism, and training and equipment for police. Many of the schemes were due to be finished by 2012. Of that total, R$11.6bn was to be invested in public transport, R$5.9bn on airports and just under R$5bn on stadiums (see chart 1). Almost four and a half years on and the total budget remains largely the same at R$26.4bn (85% of it coming from the public sector mainly via loans from public banks). Nevertheless, the amount spent on public transport has dropped by 47%, while that on airports and stadiums has increased by 62% and 61% respectively. Scores of projects have been delayed or shelved altogether.

Public transportA total of R$6.2bn has been invested to date in 40 projects, a fifth fewer than was originally planned (see chart 2). In total, 19 projects were removed as a result of factors we discuss below. Although some of these will still be built, they will

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LatAmConfidential06-2014