Industry Newsroom

Garcia’s Take: Latin America Joins Global Private Credit Fund Craze

By Luis Garcia | March 15 2017, 7:30 a.m. ET

The private credit fundraising boom has made its way to Latin America.

Small and midmarket companies in the region for years have had limited access to financing, particularly bank loans, even in economies that are growing. But private credit investors sense a fresh opportunity as international banks pull back from the region amid stricter capital requirements and local institutions in recession-stricken countries such as Brazil divert more resources to contending with soured loans issued in more ebullient times.

Latin America-focused private credit investors raised $1.4 billion for new funds in 2016, according to statistics compiled by the Emerging Markets Private Equity Association (EMPEA), a trade organization for emerging markets private equity investors. Although last year’s tally represents a modest decline from record levels in 2015, it is still the second highest volume raised for such funds since EMPEA began tracking fundraising data in 2006. The data comprises various credit strategies, including direct lending, distressed debt, mezzanine and special situations.

Locally-based private equity firms said their experience with private equity deals in the region helps them identify attractive targets on the credit side.

“We have gained a lot of expertise by looking at around 100-plus opportunities per year in the past 20 years,” said Roberto Terrazas de la Cerda, a managing director and chief investor relations officer at Nexxus Capital, a private equity firm in Mexico City. “So, we believe that we understand midsize companies in Mexico quite well.”

Nexxus, which has raised five Mexico-focused private equity funds, is targeting $300 million for its first mezzanine vehicle after losing many deal opportunities, because of resistance among business owners to certain aspects of equity investments, Mr. de la Cerda said. If the fund reaches its target, it will become the largest mezzanine fund raised in Mexico on record, according to EMPEA data.

Meanwhile, fund-of-funds manager Spectra Investimentos sees similar opportunities in Brazil. The Sao Paulo firm is targeting 200 million Brazilian reais (about $63.7 million) for its first credit fund and has rounded up an initial 40 million Brazilian reais as of last year. So far, it has deployed nearly 60% of the money raised, said Spectra Partner Ricardo Kanitz. The fund provides credit only to portfolio companies of the private equity firms Spectra invests with, a strategy that allows it to more easily find targets without needing to maintain a heavy sales structure, Mr. Kanitz said. He added the firm seeks to mine a rich vein of “well-managed companies backed by good partner funds.”

Now that Latin American firms have had success in raising credit funds, they must show that they can be equally successful with investing the capital.