Private equity deals are best judged on the returns they give to the investors on exiting the company. By that measure, the sale of Peruvian home improvement retailer Maestro by local private equity firm Enfoca performs exceptionally well.
Indeed, the returns were so strong that Peru’s local pension funds have showcased the deal to support their bid to continue participating in private equity. Close to half of the Maestro investment originated from local pension funds, through Enfoca’s funds.
Maestro was Enfoca’s first investment and has been its first exit. It bought a 20% stake in 2008, and increased that to 100% over the next four years.
In September, Chilean retailer Falabella paid $492 million for 100% of the equity and also took on $200 in outstanding bonds. That price was just over 16 times earnings and represented a total transaction value of $719 million.
Bank of America Merrill Lynch and Morgan Stanley were the financial advisers. Cleary Gottlieb and Payet, Rey, Cauvi, Pérez, Mur advised the seller and Linklaters and Estudio Grau advised the buyer.
The investment produced a weighted average return of more than three times, says Jesús Zamora, Enfoca’s co-founder and chief executive. “It gives a lot of credibility to the asset class,” he says. “This is a landmark deal for the private equity business, especially for emerging markets, and even more so for the Andean region.”
Local management may have helped. Zamora, for example, was previously in a senior role at Banco de Crédito del Perú, the country’s biggest bank. Enfoca gave the company the capital to grow and also altered its strategy and its brand identity.
Maestro had six stores when Enfoca first bought in, and 31 when it sold out. “We changed the chip in the company,” says Zamora.
Under Enfoca, the company switched from a focus on the wealthiest part of society toward Peru’s new mass affluent class. The business started off as a Peruvian franchise of US retailer Ace Hardware but switched to big-box retailing similar to Home Depot in the US.
“We wanted to make the firm cater to the middle market in a modern big-box format, focused on home improvement,” says Zamora.
The change in strategy meant changing pricing, products, the brand, layouts of the stores, and suppliers. Chinese goods supplied less than 5% of the company’s needs in 2008, for example. That figure had risen to 33% by 2014.
The company also formed a credit card joint venture alongside the Peruvian unit of Scotiabank. All this made it attractive to Falabella, which has a home improvement business operating across Latin America under the Sodimac brand, as well as its own consumer credit business.
After this deal, Zamora is confident about Enfoca’s ability to make more exits successfully, despite the fall in metal prices and the wider downturn in the Peruvian economy. He says this deal shows that Peru “merits private equity capital”.
“Peru is fortunate to have a large amount of local and international capital available, as well as lots of good investment opportunities, particularly in retail, because so few corporate players are active in the consumer sector,” he says. LF