Paul Capital has made its first secondary investment leveraging the firm’s São Paulo office opened one year ago.
The firm invested $45 million (€30.4 million) in a portfolio of seven companies owned by Argentine private equity firm Pegasus Capital. Pegasus retains control of each company.
The portfolio is Paul Capital’s first consisting entirely of Latin American assets.
“The underlying companies are in some of the fastest growing sectors in Argentina,” Paul Capital partner Brian Sullivan told PEO.
Of the seven companies, two are in the consumer finance sector. The limited ability to borrow money in Argentina creates a high demand for entrepreneurial consumer finance companies. The remaining five companies are retail-related with growth driven by Argentina’s burgeoning middle class.
Sullivan said the transaction was complex due to the large number of parties involved. Pegasus built the portfolio without a dedicated fund, raising money according to each specific opportunity and with different sets of investors.
Paul Capital expects to exit the investments quickly, Sullivan said. “Generally speaking in the emerging markets, we’d like to have portfolios with shorter durations rather than longer durations only because there’s risks you can’t always account for,” he added.
The partner said that Argentina is out of favor with some investors in Latin America. “While it still has some debt outstanding from the last crisis, [Argentina] is fundamentally a different country is our view,” said Sullivan noting that the country has a trade surplus, a fiscal surplus and is capitalising on the commodity boom. “Granted it is somewhat of a contrarian bet because the rest of the world doesn’t necessarily see it that way.”
Paul Capital closed its ninth private equity secondaries fund on $1.65 billion in May which includes an emerging markets allocation of up to 20 percent. Emerging markets for the firm includes Latin America, Central and Eastern Europe and Asia.
The firm opened offices in São Paulo and Hong Kong to support its emerging markets efforts. The offices were initially pictured as research offices for conducting due diligence but have expanded into sourcing investment opportunities, Sullivan said.
Paul Capital was the first secondaries firm to open an office in Latin America, said New York-based partner David de Weese last year.
“We would not have been able to do a deal like this prior to opening our local office in São Paulo,” said Sullivan. “Just the ability to source the deal, to effectively due diligence the assets, to effectively due diligence the general partner. We would not have had the capabilities to do in the past.”
Paul Capital manages $6.6 billion across three investment platforms: private equity secondaries, healthcare royalty and revenue interests and venture funds of funds. The firm has been in the secondary private equity market for more than fifteen years.