Theory & Market Data

1. FINANCING THROUGH PRIVATE EQUITY FIRMS 


Private Equity Funds Type of Investments

Among the Private Equity market there are different types of investment assets:
 

  • MBO (Management Buy-Out): acquisition of a company along with its management team
  • MBI (Management Buy-In): acquisition of a company with an external management team
  • Capital Raise Operations: for market or product expansion, acquisitions, etc.
  • Buy and Build Processes: process for company consolidations
  • Investment in companies interested in having an institutional investor prior to the public listing of their shares in a stock exchange. 
  • Venture Capital: investment in companies with high risk profiles due to the fact that they are start ups or newly formed companies.

 

Why Private Equity Funds as a financing alternative?

 

a) Private Equity Funds rebirth and increase of their investments in emerging markets

During 2007, Private Equity Funds  worldwide assigned resources to more than 900 companies, for a record amount of $US 686 billion, representing an increase on investments of this type of 30% and 50% compared to 2006 and 2005 respectively. 

In Latin America during 2008 new Private Equity Funds were created with equity resources totaling US$ 6,4 billion. 

 

Higher investments in emerging markets

During the period from 1993 to 2004, Private Equity Funds invested US$ 17 billion in emerging markets through 158 Funds. 

During 2005-2007, funds raised for investments in emerging markets reached an amount of more than US$ 118 billion compared to US$ 13 billion during the three precedent years. 

 

Private Equity in Latin America

During 2007, around US$ 4 billon were raised by Private Equity Funds to be invested in Latin America.

Capital raise for Private Equity Funds in Latin America grew 66% in 2007 with respect to 2006.

During 2008, Private Equity Funds invested in Latin America a total of US$4.5 billion.

 

 

b) Economic stability in Latin America as well as a proper regulatory environment for the development of the Private Equity and Venture Capital industry

 

Gross Domestic Product increase: In Latin America the GDP annual growth rate has been superior to 4.5%.   

 

International reserves level in months: Latin American countries have maintained important international reserve levels (Colombia 7 months, Peru 13.3 months).   

 

Inflation growth rate: Macroeconomic stability in the region has been traduced in inflation growth rates lower than 8%.

 

Exchange rate fluctuation: During 2005-2007, devaluation rates for Latin American currencies were inferior to 10% and only in 2008 because of the worldwide financial crisis it reached 15%.  

 

Regulatory environment improvement: Latin American countries have improved several legal aspects, including those for the creation of PE/VC funds, for the protection of minority shareholders rights, for the development of public markets and exit strategies, for corporate government requirements, corruption, entrepreneurship, and others.  

 

 

c) Private Equity in Latin America as an alternative to the limited sources of financing

 

Conventional debt lines are limited for Latin American companies: In Colombia, only 39.9% of the small companies and 51.6% of the medium companies have access to long term loans.  

 

Access to public listing in a local stock exchange is restricted for small and medium companies: Public companies listed in local stock exchanges have high market cap’s reflecting that financing through shareholders equity is limited for small and medium companies.    

 

Public debt market is limited for small and medium companies: Issuance of public debt is available for big companies, especially those that belong to the financial sector.

 

 

The amount of mergers and acquisitions in the region is not representative: The few operations that take place generally involve big companies.

 

 

2. FINANCING THROUGH PUBLIC LISTING OF THE COMPANY IN THE US OTC 

Process in which a company purchases control of a public non operative enterprise (Shell) and merges into it becoming a publicly traded company in its own right. This process is accompanied by a simultaneous capital raise that takes place with a private offer of the company’s shares (known as PIPE or Private Investment in Public Entity). The company’s public listing initially takes place in the US OTC Market and within the 2 consecutive years to the initial listing, the company may be upgraded to the NASDAQ.    

 

a) Evolution in the regulation of reverse mergers and growth of this market 

 

b) Underdevelopment of the different financial local markets

  • Underdevelopment of the regional corporate debt market.
  • Company’s size, tributary legislation, promotion of governmental debt. 
  • Underdevelopment of Latin America’s capital market.
  • Latin America represents 30% of the world’s GDP and only 11% of the world’s stock market capitalization.
     


c) Advantages of Being a Public Company

  • Higher valuation for public companies  
  • Less dilution
  • Capital available for acquisitions, strategic partnerships, etc, and to finance growth strategies.
  • Payment mechanism for key employees
  • Higher trust and transparency of the shareholders due to NASDAQ and SEC’s regulations.