Globally, the private-equity industry is
cashed-up and ready to invest. With a herd of firms chasing a small pool of
opportunities in the biggest markets, those assets have become pricey. Now
contrarian investors are looking to put their capital to work in more exotic destinations
like the Caribbean.
The region
offers strong investment opportunities to private-equity investors, but they can be
hard to find, very small or simply hard to crack. At the same time, investors
in the funds themselves may shy away from the prospect of going off the beaten
investment path.
“There is a dearth of
equity capital here,” says Douglas Hewson, a managing partner at Barbados-based
Portland Private Equity, the most high-profile private-equity firm focusing on
the Caribbean. “It is still difficult to get institutional investors.”
Portland Private Equity
was initially set up as a family office, managing the wealth of its Jamaican
founder, Michael Lee-Chin. After several successful investments,
Lee-Chin realized the Caribbean offered enough compelling investment opportunities and launched a dedicated private-equity fund.
It raised $225 million
for its first private-equity fund and $205 million for a second, at first attracting development organizations and eventually US pension funds and
funds-of-funds that wanted to diversify their investments.
Portland Private Equity
invested $65 million in Columbus International, which started out as a
telecommunication services firm in the Bahamas.
The private-equity firm
worked with the founders and the management team to expand Columbus
International’s product offering and geographical reach, before selling it to
Cable and Wireless in a $1.85 billion deal two years ago.
“The countries are small and the deals, in general, are small. With the exception of those large, dominant plays or infrastructure plays it is hard for us to deploy direct investment in the Caribbean region”Patrice Etlin, Advent International | ||
Portland Private Equity
typically invests less than that, between $10 million and $40 million, but
seeks a controlling position even when it makes a minority investment in a
business. Hewson says that for flexible and creative private-equity firms,
there are attractive investment opportunities in Barbados, the Dominican
Republic, Jamaica, and Trinidad and Tobago, but winning over investors has been difficult.
“The region is highly
fragmented, and each country has its own nuances,” says Hewson. “There is also
no growing middle-class thesis that would make it easy for investors to get
their head round to why they should be investing in the Caribbean.”
It is now the most
highly indebted region in the world, with Moody’s warning last year that the
“silent debt crisis” left many of the countries vulnerable to external shocks
and heightened the risk of sovereign defaults.
The Caribbean has
already seen three waves of sovereign defaults. The first wave happened during
the Latin American debt crisis in the 1980s, the second in 2000 and the
third in 2008 among Eastern Caribbean Currency Union member states.
In 12 of the 20
countries in the Caribbean for which data is available, the debt-to-GDP ratio
is higher than 60%, and in four of them it is higher than 100%.
Growth question
Private-equity firms
tend to focus less on macroeconomics than other investors, but high levels of
debt do become a concern when countries are forced to spend larger amounts of
money to service their debt instead of making investments.
Fiona Mackie, the
regional manager for Latin America and the Caribbean at The Economist
Intelligence Unit, says many countries in the Caribbean are still in
“slow growth mode” because they have struggled to fully recover from the global
financial crisis.
“Much of the Caribbean
has got the problem that it is already classified as middle income or upper
middle income, and they have been in that state of development for half a
decade,” says Mackie. “They are already high income, and they do not have that
high-growth story.”
Private-equity firms
that have ventured into emerging markets have so far focused on countries
in Asia, Africa and Latin America that have growing economies and a growing
middle class.
The 10 largest private-equity
funds investing in emerging markets that were closed in the three-year period
through June 2016, the latest for which data is available, all focus on Asia,
with Preqin data showing that private-equity firm KKR raised as much as $6
billion for its second Asia fund.
‘Hard to deploy’
Advent International is
one of the largest private-equity firms worldwide, managing assets of $42
billion and currently deploying the capital it raised for its sixth Latin
America private-equity fund.
It sold its
only investment in the Caribbean, Aeropuertos Dominicanos Siglo XXI in the
Dominican Republic, to VINCI Airports for an undisclosed amount last year. In
the years before that, it helped the airport group increase traffic, launch
a program to reduce energy costs and repave the runway of Las Américas
International Airport.
“The region is highly fragmented and each country has its own nuances. There is also no growing middle class thesis that would make it easy for investors to get their head round to why they should be investing in the Caribbean”
| ||
Advent International
started out in Latin America two decades ago, initially raising $235 million
for its first Latin America fund to invest in businesses that had survived the
rampant inflation in the 1980s and 1990s. Its sixth Latin America fund raised
$2.1 billion for investments in Brazil, Colombia and Mexico, more than any
other private-equity firm investing in the region.
Patrice Etlin, managing
partner at Advent International in São Paulo, says the deal in the Dominican
Republic last year was completed with a “sizable check” but other investments
in the Caribbean are made through businesses elsewhere in the region.
“The countries are small,
and the deals, in general, are small,” says Etlin. “With the exception of those
large, dominant plays or infrastructure plays, it is hard for us to deploy
direct investment in the Caribbean region.” Advent International still has indirect
investments in the region; one is through International Meal Company, a
Brazilian casual-dining business that is developing franchises in Puerto Rico
and Panama.
Globally, private-equity
firms are swimming in cash. They had some $1.4 trillion in capital raised and
waiting to be invested at the end of last year, the highest amount ever
recorded by Preqin. That was up from $1.3 trillion a year earlier and $785.4
billion a decade earlier.
The high cash positions
have encouraged others to look at indirect investments in the Caribbean. KKR
and KSL Capital bought Apple Leisure Group, a US company whose various
subsidiaries offer luxury vacation packages in Mexico and the Caribbean, from
Bain Capital Private Equity at the end of last year for an undisclosed
amount.
Private-equity firm TPG
Capital and the Canada Pension Plan Investment Board made a $500 million
minority investment in Viking Cruises, whose routes include the Caribbean and
North America.
In the Caribbean,
private-equity deals look different. Hewson of Portland Private Equity says the
most compelling businesses are often family-owned or local conglomerates that
need help expanding, restructuring or planning for succession.
Private-equity firms can
also step in where banks, which have traditionally been the main providers of
financial solutions for businesses in the Caribbean, withdrew.
Tighter regulations
aimed to address concerns over tax evasion, money laundering and the financing
of terrorism have made doing business more expensive and led banks to withdraw
from the Caribbean. The IMF warned last year that the retreat by banks created “a significant threat” to the Caribbean.
“The region is still
overlooked and underserved by private-equity firms,” says Hewson. “In some
cases there is also a gap between perception and reality.”
DomRep in focus
CoreCo Private Equity
focuses on investment opportunities created by economic growth and a growing
middle class in Central America, but there is one country in the Caribbean that
is large and diversified enough that it has caught the imagination of the team.
Alexander von der Goltz,
a managing director, says the Dominican Republic has the characteristics the
company is looking for, and CoreCo Private Equity is negotiating with a
consumer goods business in the country, which could become its first-ever
investment in the Caribbean.
“It is hard to get above
the noise in this part of the world when you come from one of the more popular
regions, which right now are really the emerging markets of Africa and Asia,”
says von der Goltz.
Private-equity firms
often look to invest between $50 million and $100 million, or even more, in one
business, but in the Caribbean those deals are found only in large
infrastructure projects or when buying an entire company.
“In Central America and
the Caribbean, it is difficult for large private-equity funds to put capital
effectively and efficiently to work,” says von der Goltz, adding that the due
diligence involved in making a small investment is about the same needed for a
large one.
Private-equity firms
worry not only about how to find businesses but also how to sell them
eventually for a profit. “The buyers tend to be local, and they are not going to
pay inflated prices,” says von der Goltz. “It is hard to create an auction for
deals.”
CoreCo Private Equity
has raised $52 million for its Central America fund, and von der Goltz says
this allows the team to be less concerned with the number of deals, or their
size, and instead focus on making the right deals.
It has five investments
in Central America and von der Goltz expects to close another one or two this
year in addition to the deal in the Dominican Republic. He has no plans to invest anywhere else in the Caribbean, he says, adding that venturing into any
other country would have to be considered carefully.
CoreCo Private Equity
had been negotiating an investment in El Salvador for some time when the
government unexpectedly raised the minimum wage by 15% at the end of last year,
which von der Goltz says shows just how important it is not only to know the
business well but also be prepared for unexpected events.
“That basically means we
have to go back and revise our offer down,” says von der Goltz. “We are
probably going to have to walk away from that deal altogether.”
It is that kind of
unpredictability that worries private-equity firms most. “The reason a lot of
people invest in the region, in Central America and the Caribbean, is because
there is some sort of affinity to the place,” says von der Goltz, who grew up
in Guatemala. “It is easier to make that spark.”
Official push
Private-equity firms in
the Caribbean have been more successful raising capital from development
organizations such as the European Investment Bank, the IMF or the World
Bank.
“The risk spectrum in the Caribbean is huge”Richard Noritake, GBG Group | ||
The private-equity
business model has sometimes been a fit for development organizations,
especially as they are increasingly looking to a more market-based approach to
economic and social development.
René Perez, the regional
representative for the Caribbean at the EIB, which has invested in Portland
Private Equity, among other private-equity funds, says he would like to see
more private-equity firms in the Caribbean.
The EIB and other
development organizations often provide financing for infrastructure projects
and even businesses themselves in the Caribbean, although providing equity
remains rare.
Development
organizations are demanding. Even where the overall objective is to improve the
living conditions — by reducing poverty, creating jobs or making a
positive impact on the environment — such investments are still made with a
corporate mindset.
“Our objectives are more
related to the impact on development in the region … but in order to reach
those objectives it is also important for a project to be financially
sustainable,” says Perez.
Patrick Doyle, a
managing director at MGM Innova Capital, which focuses on energy efficiency and
renewable-energy projects in the Caribbean and elsewhere in Latin America, says
the returns on investment will eventually speak for themselves and attract more
traditional investors.
“We are supposed to be
one of the first funds that does it, that demonstrates that one can make
attractive returns and therefore bring in more traditional private-equity firms
and more private capital,” says Doyle.
Energy efficiency and
renewable-energy projects are a natural fit for development organizations, but
there has so far been little interest from more traditional investors.
With the backing of the
EIB, the Global Environment Fund and the Multilateral Investment Fund, MGM
Innova Capital raised $55 million for its first fund. It has a more ambitious
target of $150 million for its second.
There are other
investors that have taken a different approach. GBG Group, a private
industrial group investing in Haiti, the Dominican Republic, Jamaica and St. Maarten,
is raising capital on a project-specific basis.
Richard Noritake, an
executive vice president for capital markets at GBG Group, says a
differentiated approach is needed because of the varying risk profiles of Caribbean countries.
He points to the island of Hispaniola. “The risk we take in Haiti is so much
more than the risk we take in the Dominican Republic,” says Noritake.
GBG Group is building a
commercial port in the Lafito Industrial Free Zone in Haiti, backed, among
others, by the IFC as well as Haitian investors.
It is also raising
capital for a commercial power plant. But Noritake says experience from
previous projects in Haiti has shown that the country is much more dependent on
development organizations for funding than others in the region.
“It is really a function
of country risk and country appetite,” says Noritake. “The risk spectrum in the
Caribbean is huge.”
The loans that GBG Group
received from development organizations for projects in Haiti were given at a
commercial rate, and Noritake says development organizations expect returns
similar to that of a traditional private-equity fund.
Private-equity firms in
the Caribbean would like to see more commitments from traditional investors,
but Hewson at Portland says bringing development organizations into a project
has its benefits.
“Indebted governments
that are working within a global system are going to treat foreign capital and
foreign investors carefully,” says Hewson. “So a highly indebted country looks
fragile or possible vulnerable from an investor’s perspective, but it might be
safer than one that is in a better position, one that is more likely to want to
do it their own way and stand up to other [foreign investors].”
The Caribbean might also
see increased interest from investors once Cuba becomes open to investments,
although it is unclear what the relationship between the US and Cuba will
look like under the new US administration.
Barack Obama ended more than half a century of hostility two years ago, and relations had been warming, but President Donald Trump has already threatened to roll back the relationship established under his predecessor.
“Cuba is a bit of an
enigma to all of us,” says Noritake. LF