As more and more of Latin America’s family-owned companies search for cash, private equity firms are springing up all over the region to offer management resources and capital. But getting money to these companies is not as easy as it seems.
“There is a huge demand for money,” said Fabio Nogueira, director at Dextro Business and Information Consulting in São Paulo. “But not all the money that is available is being applied because businessmen here don’t know how to ask for it.”
Business plans often lack critical information such as market potential and strategic positioning. “Many businesses say ‘I think that the market will do X in the future,’ ” said Nogueria. “But they have no information to support their projections.”
When companies do join together with a private equity firm, the negotiations tend to proceed at a snail’s pace. Patrice Etlin, director of the São Paulo office of global private equity firm Advent International, says that the negotiating process in Latin America lasts at least twice as long as it does in the United States-about six to nine months to close a transaction.
“In the United States, negotiations are much more about numbers. Here the relationship counts much more,” said Etlin. “These companies were created 40 years ago, so you are dealing with sentiment. It is an issue of building trust, and explaining that we are here to improve these companies.”
Tough Terms
Over what issues do talks break down? “We see a lot of proposals where people are trying to rent our money,” said Bo Cutter, managing director for Latin America at E.M. Warburg Pincus. “They say: ‘We will guarantee you a rate of return of 20% or 25% for the next three years, and then we will buy you out.’ It takes a long time to dissuade them of that point of view.”
Private investment firms make investment wagers based on the probability that a company will have a significant upside. Because venture capitalists sometimes lose these bets, they must win on others. A 20% or 25% fixed rate of return, which would be attractive for debt investors, is not sufficient for venture capital funds that often promise their shareholders an overall rate of return of 30% or more.
Family owners also often have an exaggerated sense of the worth of their businesses. The boom in private equity deals before the Asia crisis still resonates in the minds of many businesspeople, who have little understanding of Latin American risk.
Private equity financiers also say that family-owned companies are reluctant to give up ownership rights.”In virtually all of our deals, there is a shareholder agreement that says the following kinds of decisions have to include the votes of Warburg Pincus: significant changes in positions, business plan approval, budget approval, significant changes in financial structure and changes in management,” said Cutter. “Owners really balk at that. We have long debates that are made harder because the issues aren’t black and white.”
The primary reason that negotiations fail, however, is the lack of professionalized management. Family members hold all the positions of power, but it is unclear who is CEO and who is CFO. Financial records either don’t exists or don’t provide separate figures for different divisions. In those situations, financiers say, there are just too many surprises to lay down their money.