The land of the 41% discount

Secondaries Investor: How big is the Latin American secondaries market?

Ricardo Kanitz: Let me divide this question into three subsectors: LP stakes of global managers held by Latin American investors; LP stakes of local funds held by global investors; and LP stakes of local funds held by local investors.

Even though we don’t buy stakes in global managers, we believe the market of Latin Americans selling stakes in global managers totals around $200 million-$500 million per year.

LP stakes of local managers held by international LPs tend to be sold through brokers, either as part of larger portfolios or on an individual basis. From what we’ve seen, this type of transaction moves around $200 million per year.

The local-local trade market is very underdeveloped, yet had a huge boost by the Enfoca deal. Excluding this deal, we estimate local-local represents less than $30 million per year. However, we expect this to be the biggest area of growth in future years.

SI: What are the most attractive countries and what’s driving dealflow there?

RK: I believe that Brazil has by far the best dynamics and most steady dealflow. The main driver for this is the fact many local pension funds have decided to dispose part or the totality of their illiquid assets mainly due to poor performance. After years of discussions regarding potential sales, only recently have these pension funds received the board approvals for the sales. We believe this could represent up to $1 billion in transactions.

The other driver is the focus on tail-end funds. The Brazilian PE market really began picking up in 2005-6. These early vintages are now in their 10-12th year, and both LPs and GPs are starting to consider restructurings as a way to liquidate the remaining assets. We currently see more than 10 funds in this situation in Brazil only.

Mexico could be an area of attention if Andres Manuel Lopez Obrador wins the presidential election. As a left-wing politician, I anticipate there will be fears among international LPs over the long-term prospects for the country, and some secondary dealflow could emerge from this.

SI: What is pricing like?

RK: Deals brokered by international firms have been trading at 10-20 percent discount versus NAV. We’ve closed 26 secondaries acquisitions in the last three years, all proprietary transactions, priced with an average discount of 41 percent.

SI: How competitive is the region and is this changing? Are you seeing new entrants – if so, are they local players or global firms?

RK: It is not very competitive yet for a few reasons. First, the recent economic crisis has scared many international players from taking a serious look at the region. Second, the players that have global mandates tend to be the larger ones who typically would look at deals on the $100 million-plus range. Most of what we’ve seen are stakes between $3 million-$30 million; too small for these players. Lastly, there are very few domestic players with the capability of originating and executing secondary transactions, and we don’t see this changing in the near future.

SI: How has the Enfoca deal changed the attractiveness of the LatAm region?

RK: In my opinion it was an important milestone for the region and could attract more secondary capital in the near future. However, I don’t see it being a game-changer. It was structured by Park Hill and the process was very similar to what you’d find in the US or Europe.

SI: What are the biggest challenges to buying LatAm secondaries stakes? What needs to change for the market to grow?

RK: I believe that market participants, especially pension funds, need to gain greater comfort in selling assets at a discount to NAV. Since it’s a new segment, many still think they could personally be blamed for not abiding to their fiduciary duty when selling at a discount. Moreover, since it has very seldom been done, they still need to create their internal processes to approve and execute these transactions.

Ricardo Kanitz is a founding partner at Spectra Investments. He has more than 10 years of experience in private equity, venture capital, real estate, infrastructure and distressed assets. Prior to Spectra he worked at GP Investments and Global Infrastructure Partners.

What’s your view on emerging markets secondaries? Let us know: adam.l@peimedia.com or adamtuyenle