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VENTURE EQUITY LATIN AMERICA

February 2012 Volume XI, Number 3

ISSN: 1936-248X

In This Issue
INTERVIEW Roundtable Discussion on Innovation and VC/PE Development in Latin America 1 Burrill & Co. Sees Opportunity in Heathcare, Biotechnology and Biofuels in Latin America FINANCE Dont Believe the Hype: Brazil IPOs Face Hard Year M&A BTG Pactual Buys Chiles Celfin In Latam Push BONDS Petrobras Completes Largest Brazil Bond Deal EQUITIES Brazil Share Sales Seen Recovering After 2011 Slump 7

Roundtable Discussion on Innovation and VC/PE Development in Latin America

The Americas Society and Council of the Americas, which works with leading international companies to navigate public policy challenges and further business interests in the Americas, recently hosted a private member roundtable in Miami on the VC/PE landscape in the region and opportunities for corporate venturing. There is a lot of positive energy in Latin America today. We believe that entrepreneurship and innovation are critical to long term growth and employment in the region, says Susan Segal, President and CEO. The four panelists also spoke to VELA in a roundtable discussion:

Moderator: Alyson Sheehan (Thomson Reuters) Participants: Adriana Cisneros, Vice Chairman, Cisneros Group of Companies Matthew Cole, Managing Partner, North Bay Equity Partners
See Roundtable Discussion on page 10

ROUND UP Itau to Spend $6.81 Billion to Take Redecard Private; Inter-American Development Bank Fuels Impact Investing in Latin America; Gerdau Plans Sale of 40 Pct of Mining Unit; 9 PE COMPETITION First Ever Wharton Latin America Private Equity Competition Turnout

Dont Believe the Hype: Brazil IPOs Face Hard Year

By Guillermo Parra-Bernal (Reuters) Brazils once-hyped market for initial public offerings may not recover as swiftly as some bankers have been expecting, as an unpredictable economy and the risk of overpriced deals scare investors away. The hurdles facing tourism company Brasil Travel Turismo, which withdrew its IPO plan this month, and the Brazilian unit of Norways Seadrill, which is reworking the terms of its offering, provide a chilling prelude to a market that many only recently thought was set for a hot year. Seen for most of the last decade as a symbol of Brazils buoyant
See Dont Believe the Hype on page 2

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Finance
Dont Believe the Hype
Continued from page 1 capital markets, IPOs have languished in the past two years as prices sank for many names that went public. While most markets have gradually recovered from the global financial crisis of 2008, IPOs remain out of favor. The trend underscores how investors in Brazil are still reluctant to take on risky bets like IPOs, the mechanism that small and sometimes inexperienced companies use to raise capital. Instead, investors are more willing to pour money into existing equity and bonds, where it is easier to assess risks. Why bother betting on a company you have never heard of when you have so many other good names trading on the stock exchange? said Frederico Misnik, who helps oversee more than $40 million in assets at Humait Investimentos in So Paulo. Last year, investors drove the benchmark Bovespa index down 18 percent. Only 11 initial public offerings were completed in 2011, with eight pricing at the bottom or below the suggested price range, data by Ernst & Young showed. That is a sharp drop from 2007, when more than 70 companies went public, and seven of every 10 deals priced within the suggested range. In fact, Brazilian companies raised more funds through IPOs between 2006 and 2008 than they did in the two preceding decades. Foreigners on the Sidelines Foreign investors, traditionally the biggest buyers of local IPOs because of their strong shareholding culture, snapped up more than three-fourths of such deals in 2006-2008, hoping the newly listed companies would deliver stellar profits. But they are slowly moving to the sidelines as the perceived quality of stock market debutants slipped. Foreign investors take of local IPOs fell to 56 percent last year, and analysts expect that percentage to keep falling. A more conservative mood has overtaken markets, and you can be sure that many IPOs will be challenged, said Paulo Dortas, an Ernst & Young partner who specializes in Brazilian IPOs. Investors wont abide by a price or a structure that doesnt reflect the return they are aiming for. Investors have also balked at what they deem as timid government efforts to combat inflation, which reached seven-year highs during 2011. The central bank began cutting interest rates in August, after five consecutive increases. Efforts to stem massive gains in Brazils currency, the real, led President Dilma Rousseffs administration to raise taxes on some financial transactions, making it more expensive for foreigners invest in Brazil. The economic scenario has not been supportive of IPOs, either, Dortas said.

Venture Equity Latin America Published by WorldTrade Executive, A Part of Thomson Reuters P.O. Box 761 2250 Main St. Suite 100 Concord, MA 01742 Tel: 1-978-287-0301 Fax: 1-978-287-0302
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Venture Equity Latin America is published 20 times a year by WorldTrade Executive, a part of Thomson Reuters. Venture Equity Latin America is a trademark of Thomson Reuters. Subscriptions are $1495.00 per year. Entire contents copyright 2012 by Thomson Reuters/WorldTrade Executive. Reprinting, transferring or forwarding contents, in whole, or in part, is a violation of federal and international copyright laws. To order or for questions, please call (978) 287-0301 and ask for Subscriber Services.

February 2012

Venture Equity Latin America

Finance
Bond Bonanza The lethargy afflicting IPOs in Brazil contrasts with record foreign inflows into the Bovespa and a frenzy of Brazilian corporate bond sales abroad this year. A record $7.2 billion of foreign money flowed into the Bovespa in January. Investors bought $15 billion worth of corporate debt sales by Brazilian firms in the year through this month. Yet, some industry leaders are still betting big on IPOs. Edemir Pinto, chief executive officer of financial exchange operator BM&FBovespa, expects up to 40 Brazilian IPOs to price this year, almost double the combined 22 transactions of 2010 and 2011. Ernst & Youngs Dortas, in contrast, sees no more than 20 IPOs this year. Investors will use their clout to push suggested price tags towards a level they consider fair, he said. Bankers at Ita BBA and BTG Pactual, the two largest Brazilian investment banks, remain hopeful that activity will bounce back as the year progresses. Bond sales are leading the recovery, but I am sure that equity follow-ons will resume soon, and eventually IPOs will get their chance, Sandy Severino, the head of BTG Pactuals global bond underwriting team, said in a phone interview from New York. Jos Olympio Pereira, co-head of investment banking at Credit Suisse Group in So Paulo, said in December that companies could assuage investor concerns by scaling down their fundraising goals. In the case of Brasil Travel, that strategy did not work. Credit Suisse was one of the four banks handling its IPO. Nightlong Efforts The collapse of the Brasil Travel deal, which originally was to raise 1.45 billion reais ($842 million), signals that investors will keep shunning companies with great ambitions but an insufficient track record, poor earnings visibility or vulnerability to a downturn, Humaits Misnik said. Brasil Travel, the product of 35 mergers over the past year, remains an unknown for many investors. Market sources told Reuters this month that bankers considered cutting the IPOs suggested price to 850 reais a share and allowing existing shareholders to buy up to 50 percent of the deal, up from an initial 15 percent threshold. The company first cut the price to 1,000 reais from a range of 1,250 reais to 1,650 reais on the day the IPO was set to price. The next day, Brasil Travel asked regulators to cancel the request to become a publicly listed company. What people want right now are plain vanilla deals, and companies with stories they know instead of these obscure stories, a Brazil-based banker told International Financing Review on the condition of anonymity. Seadrills Seabras deal could attract a lot of interest, should the company resolve its contractual problems with state-run oil giant Petrobras, Misnik said. Unlike Brasil Travel, Seadrill is a well-known company with an established track record. This month, Brazilian meatpacker JBS announced plans to list its Vigor dairy unit on the So Paulo Stock Exchange. The 95-year-old company might be more likely to entice investors like Misnik back to the IPO market. Reporting by By Guillermo Parra-Bernal. Additional reporting by Joan Magee in New York; Editing by Todd Benson and Lisa Von Ahn.

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M&A
BTG Pactual Buys Chiles Celfin In Latam Push
By Guillermo Parra-Bernal and Aluisio Alves (Reuters) BTG Pactual, the Brazilian securities firm owned by billionaire financier Andre Esteves, is buying Chilean rival Celfin Capital for about $600 million as it seeks to win more investment banking and capital market advisory business in South America. a group of investors led by sovereign wealth funds late in 2010, a low payout ratio and swelling trading and dealmaking profits, have beefed up cash holdings, Esteves said. We have enough capital for acquisitions, he said, without elaborating. Esteves spoke besides senior partner Prsio Arida, a Brazilian economist credited with helping the government tame hyperinflation in the mid-1990s. A source with direct knowledge of the transaction told Reuters that BTG Pactual agreed to pay $600 million for all of Celfin, which would value the stock portion of the deal at about $355 million. The deal valued BTG Pactual shares at about three times book value, said the source, who is not allowed to speak publicly on the matter. Based on such numbers, the Celfin deal would value BTG Pactual at about $14.8 billion, almost 50 percent more than the $10 billion valuation it got in December 2010, when investors led by buyout firm JC Flowers & Co, the two largest Asian sovereign wealth funds and the largest Middle Eastern sovereign wealth fund, bought 18.6 percent of BTG Pactual. Banking Prodigy Esteves, a mathematician who started as a computer technician at now-defunct Banco Pactual at age 21 before rising through the ranks to become its managing partner, sold the firm to UBS AG in May 2006 for about $3.1 billion. He and some partners bought back Pactual for about $2.5 billion in 2009 and formed BTG Pactual. Esteves, alongside senior partners and some of BTG Pactuals 1,300 employees, will own 80 percent of the firm after the Celfin deal. Forbes Magazine calculates Esteves net worth at about $3 billion. He and his partners have long considered an initial public offering to bulk up the banks capital, but postponed the plans because of volatility in global markets. Last December, he said an IPO was still possible in the medium term, without elaborating. Venture Equity Latin America

The global agenda for Latin America is gaining relevance in terms of investment inflows, and our goal is to become regional leaders, Esteves told reporters at the banks headquarters in So Paulos financial district.

Under the terms of the deal, Esteves and his partners will pay $245 million in cash and give Celfins owners a 2.4 percent stake in BTG Pactual. The takeover makes BTG Pactual the largest independent investment bank in Latin America, further extending its reach into fastgrowing economies like Chile, Peru and Colombia. Since it was formed it 2009, BTG Pactual has been on a deal-making frenzy in Brazil and abroad as Esteves, a 43-year-old financial wunderkind, strives to turn the firm into the largest investment bank in emerging markets by the end of the decade. The global agenda for Latin America is gaining relevance in terms of investment inflows, and our goal is to become regional leaders, Esteves told reporters at the banks headquarters in So Paulos financial district. BTG Pactual and Esteves himself have become a symbol of Brazils growing economic might, competing neckand-neck with big global investment banks in a region with bustling capital markets and booming demand for wealth management services. The bank has the financial muscle to undertake bigger takeovers going forward as a $1.8 billion stake sale to  February 2012

M&A
At the news conference, Esteves said BTG Pactual is growing regionally because a flatter and more integrated world is demanding regional banks to gain a global character. The ability of BTG Pactual to lure more investment inflows into Latin America will depend on us building up a strong regional franchise with global reach, he said. The deal, which has been in the works since at least August, may give BTG Pactual the proximity it needs to win investment-banking and capital markets advisory mandates in Peru, Colombia and Chile - thanks to Celfins contacts with companies and governments there, Arida said. Top Brazil M&A Advisor The purchase still requires regulatory approval. Once the deal is completed, Celfins 15 main shareholders will become BTG Pactual partners. With Celfin, BTG Pactual will have 129 billion reais ($75 billion) in assets under management and handle about 49 billion reais for wealthy investors. In 2011, BTG Pactual topped merger and acquisitions advisory rankings in Brazil for the second year in a row, as its focus on retail and other fast-growing segments resulted in $24.05 billion worth of announced deals, according to Thomson Reuters data. The firm advised on 52 deals last year. About $78.64 billion worth of deals were announced in Brazil last year, down from $120.61 billion in 2010, while the number of agreements rose to 745 from 698. BTG Pactuals investment-banking unit helped the controlling shareholders of brewer Schincariol sell a 50.45 percent stake to Japans Kirin Holdings for $2.5 billion. The bank also advised Italian-Argentine giant Techint Group on its $2.9 billion purchase of a 27.7 percent voting stake in Brazilian steelmaker Usiminas. Reporting by By Guillermo Parra-Bernal and Aluisio Alves. Additional reporting by Cesar Bianconi and Brad Haynes; Editing by Todd Benson, Lisa Von Ahn and Tim Dobbyn.

Bonds

Petrobras Completes Largest Brazil Bond Deal

By Guillermo Parra-Bernal (Reuters) Brazils state-controlled oil company Petrobras sold $7 billion of dollar-denominated bonds of different maturities this month, in the countrys largest-ever corporate debt offering. The Rio de Janeiro-based company sold $1.25 billion of new three-year bonds yielding 3.051 percent, and $1.75 billion of new five-year bonds at a yield of 3.628 percent, sources with direct knowledge of the deal told Reuters. Petrobras also sold $2.75 billion and $1.25 billion of its existing notes due in 2021 and 2041, respectively, said the sources, who declined to speak publicly on the plan. Petrobras will pay interest of 4.796 percent and 5.935 percent for both reopenings, respectively. Brazilian companies, taking advantage of a glut of cash and strong demand for emerging market debt among international investors, have sold about $13 billion in global bonds since the start of the year. The nations three largest listed banks and mining giant Vale also sold debt over the past month. Yields for the existing bonds were trading slightly below the price guidance, indicating that buyers could profit if bond prices gained in future sessions. Bond prices, which trade inversely to yields, gain when risk perceptions over the issuer ease. It was a cost-effective strategy, much cheaper than coming up with a new issue, said Alfredo Viegas, a director for emerging markets strategy with Greenwich, Connecticut-based broker Knight Capital. Proceeds from the debt sale will be used to fund Petrobras $224.7 billion, five-year investment plan - the largest in the oil industry globally. The plan aims to tap
See Brazil Bond Deal on page 6

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Bonds
Brazil Bond Deal
Continued from page 5 some of the worlds largest deep-sea oil deposits and almost triple production by the end of the decade. The senior unsecured notes will likely be rated A3, the seventh-highest investment-grade rank, by Moodys Investors Service. Largest-Ever Brazil Debt Sale Petrobras sale last year of $6 billion in notes was the largest-ever in Brazil at the time. The company raised about $10 billion from bond investors last year, including a sale of notes denominated in British pounds. Investors placed firm bids worth more than $25 billion, in what one of the sources said was a gigantic book for a Latin American corporate issue. Venezuelas stateoil company PDVSA sold $7.5 billion of 10-, 20- and 30-year debt in April 2007, in what is still the regions largest debt sale in global markets. Petrobras funding plans are usually seen as a proxy for corporate lending trends in Brazil. The company will borrow about $47 billion from banks, investors and state development banks by the end of 2014. About $29 billion of that will go to repay existing and maturing debt, with the remainder going toward the companys investment plan, executives said last year. The investment-banking units of Banco do Brasil, Itau Unibanco Holding, JPMorgan Chase & Co, Morgan Stanley & Co and Banco Santander are managing the deal for Petrobras. Reporting by Guillermo Parra-Bernal. Editing by James Dalgleish.

Equities
Brazil Share Sales Seen Recovering After 2011 Slump
By Guillermo Parra-Bernal (Reuters) Brazilian stock sales, which took their steepest-ever plunge in 2011, will recover this year as risk-taking gains traction and Europes debt crisis shows signs of easing, the group representing the local investmentbanking industry said this month. Investors who for most of 2011 piled up cash to cushion themselves from the deterioration of Europes fiscal woes might snap up emerging market stocks and bonds this year, said Alberto Kiraly, a vice president at industry group Anbima. Their return will be gradual, he noted, adding that pricey offerings may fail to lure their attention. Companies in Brazil raised 18.98 billion reais ($10.3 billion) from the sale of new and existing shares in the domestic market last year, 87 percent less than in 2010, Anbima said in a report this month.  February 2012 The mainstream perception is that Brazilian equities are cheap and that growth is at least taking place here - in a world that is barely expanding, Kiraly said. But investors will be selective and price-sensitive. Their return wont be hasty. Initial public offerings and follow-on share sales tumbled not only because of concern over Europe, but also as domestic policy uncertainty crippled demand for equities. Throughout the year, domestic and foreign investors also balked at timid government efforts to combat inflation, which reached seven-year highs during 2011. The central bank began cutting interest rates in August, after five consecutive hikes. The August cut, which was not expected by any of the Venture Equity Latin America

Equities
20 analysts surveyed by Reuters, kept investors wary of unpredictable policy moves. Foreign investors participated in 56 percent of equity sales in Brazil, down from an average 70 percent for most of the past decade. The share of foreign investor participation in IPOs and similar deals should show some improvement, depending on external market conditions, Kiraly said. The amount of capital raised from stock sales is the lowest since Anbima started gathering data for the indicator in 2006. In contrast, sales of fixed-income instruments such as bonds, notes and asset-backed securities rose to a record 93.68 billion reais. Private placements, or sales agreed to by the issuer with a single investor or investment group, accounted for 85 percent of bond sales in the domestic debt market, Anbima noted. Reporting by Guillermo Parra-Bernal. Editing by Matthew Lewis.

Interview

Burrill & Co. Sees Opportunity in Heathcare, Biotechnology and Biofuels in Latin America
By Dan Weil

Burrill & Co., a San Francisco-based private equity/ venture capital fund manager that focuses on life sciences, has just completed the $125 million first close of its initial fund in Latin America: Burrill Brazil Fund I. Burrill, which opened a Rio de Janeiro office in 2009, plans to ultimately grow the fund to $200 million. The first capital infusion includes contributions from Brazilian investors, two major pharmaceutical and biotechnology companies and two major multilateral agencies in the region. The firm also has plans for a $40 million fund focusing on Chile. It hopes to close on that by June 30, says Joao Paulo Poiares Baptista, Burrills Managing Director for Latin America. Baptista recently took time to chat with VELA about Burrills activity. Heres what he had to say. VELA: What does the market look like for life sciences private equity and venture capital in Latin America? What we have found after two years of working hard here is that the opportunities are slightly different from what you would find in the U.S. Thats true for Brazil and Chile. In the U.S., the focus is on drug discovery, cell therapies and digital health. In Latin America we

are finding more interesting opportunities in healthcare delivery and healthcare services, not so much in drug discovery. Theres very interesting science and innovation here, but its still at the level of basic research, not so much applied research beyond an early stage. So weve developed a strategy to deal with those opportunities. VELA: What kind of things are you looking at in Brazil? Hospitals and clinics are one thing. One clinic area is service for chronic disease management, such as diabetes and heart problems. That reduces the cost of the disease for health insurance plans. Another area is preventive medicine check-ups with follow-ups. Were looking at some biotechnology at a basic level and biofuels too. Brazil is one of the worlds leaders in biofuels. The level of investment in this area is very high. Our fund is very small. We plan to make investments of $10 million-$15 million. So were looking for breakthrough technology. We have found a couple interesting opportunities, but its early. We also have found opportunities in the U.S. for a technology that doesnt make much sense in Brazil.
See Opportunity in Latin America on page 8

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Interview
Opportunity in Latin America
Continued from page 7 VELA: You like to invest as part of a syndicate. Hows the search for partners going? Two years ago, we were skeptical about finding co-investors. But we are finding a number of Brazilian funds and LPs that are interested. We have been contacted by U.S. funds that are starting to look at Latin America. People want to be part of the explosive economic growth and explosive growth of the middle class in Latin America. VELA: Is there a strong scientific community in Brazil? Yes. Many people there trained outside Brazil with Ph.ds in the U.S. or Europe. The issue is resources. You cant compare Brazil to the U.S. and some European countries. Its still far from that. But the government is offering support and investing more money in this infrastructure research programs. Thats helping researchers and institutions connect with the market. Biotechnology is a key priority for this government. VELA: Are you able to find many entrepreneurs involved in life sciences? Entrepreneurs, yes, but management, not as much. Thats an issue. VELA: How does the sophistication of life scientists in Brazil compare with that of those in the U.S.? In terms of technical knowledge, very well; in terms of knowing the market, not so well. In terms of knowledge of whats happening worldwide, there are some shortcomings. They know the science itself, but how it is being utilized elsewhere is the issue. VELA: Do you plan to eventually invest beyond Brazil and Chile? Yes, first we are focusing on Brazil and then Chile. But already we are talking to government-related investors in Colombia. That country is growing very fast, stabilizing after the violence of previous years and modernizing its laws and regulatory environment. What happened in Brazil over the last 10-15 years is that it realized the importance of venture capital and specifically life sciences. Now governments in other countries are putting together programs to support fund managers like us. Peru and Colombia are the best. VELA: What are the biggest obstacles for your operations in Brazil? The bureaucracy is tough. You have to know how to handle it. Brazil has a very good business environment, but its interest rates are still too high. That means no leverage is possible. Also, the tax structure is very complicated. Its expensive to deal with it. Venture Equity Latin America

The bureaucracy is tough. You have to know how to handle it. Brazil has a very good business environment, but its interest rates are still too high. That means no leverage is possible.

That expanding middle class creates huge demand for quality health service. The private sector isnt ready to provide this yet. So there are huge opportunities if you have a proper strategy to get to market. VELA: How do you see your investments developing over time? Brazil is reacting fast, so things will evolve quickly. There are great opportunities for us. We can introduce services with top quality and innovation. At hospitals we can bring new treatments for cancer from other parts of the world. Getting people from universities and research centers to go from basic research to applied research and to then find a way to get to market is the key. It just takes a small push. Its about getting people to think a different way and establishing a global network. VELA: When will you start doing deals? We will probably do two within the next three to four months. Our goal is for a minimum of two deals per year and up to four. We have a very interesting pipeline.  February 2012

Round Up
Round Up
Itau to Spend $6.81 Billion to Take Redecard Private Itau Unibanco, Brazils largest private-sector lender, plans to spend as much as 11.77 billion reais ($6.81 billion) to buy out Redecard, protecting the card payment processors position in an increasingly competitive industry, according to Reuters. Itau Unibanco plans to buy the 49.99 percent of Redecard it does not already own in a first step taking the company private, according to a securities filing this month. The lender will offer 35 reais for each of the 336.39 million Redecard shares that currently trade on the Sao Paulo Stock Exchange. Redecard shares have surged 84 percent in the past 12 months, mainly after a yearlong restructuring plan helped bolster revenue, cut costs and stem market share losses to larger rival Cielo and smaller competitors. The buyout would probably help Redecard face growing competition in the $400 billion-a-year card payment processing industry. Some analysts have voiced concerns that the entry of more competitors could drive fees down and eat away at market share. Cielo and Redecard together control more than 80 percent of the market. Itau Unibancos announcement came less than a week after Redecard posted a bigger-than-expected 31 percent jump in fourth-quarter profit, to 456.94 million reais. Nine analysts polled by Reuters had forecast 402.2 million reais, on average. Redecard Chief Executive Officer Claudio Yamaguti, who has been at the helm of the company for the past year, said this month that it would more than double capital spending to 500 million reais this year to win more customers and improve operational efficiency. By Guillermo Parra-Bernal and Alberto Alerigi Inter-American Development Bank Fuels Impact Investing in Latin America Over the past 18 months, the Inter-American Development Bank (IDB) has mobilized approximately $110 million in resources from these investors into the region through its loan syndication program and by co-lending to finance projects that will improve housing conditions for low-income populations, benefit female entrepreneurs, help small farmers become more productive and improve rural communities, according to IDBs official website. In 2010, the IDB closed Paraguays first-ever internationally syndicated loan without carrying political risk or other guarantees, by providing a $40 million A/B loan to Banco Continental to help fund lending to small and medium-sized business, an official news release states. Also in 2010, the IDB disbursed its first local currency syndicated B Loan in Peru and completed a syndication with the longest tenor ever registered for a financial institution in Ecuador. In 2011, partnering with impact investors allowed the IDB to close its first syndication in Honduras and the first-ever subordinated debt syndication in Ecuador. Since 2010, the IDB has closed 10 transactions with a dozen impact investors including Blue Orchard, Oikocredit, Incofin, responsibility, Deutsche Bank Social Finance and the Calvert Foundation, according to the news release. Seventy percent of these syndications have been in small and vulnerable countries including Ecuador, El Salvador, Honduras and Paraguay. In these deals, the IDB has acted as sole bookrunner and lead arranger and invested $146 million of its own resources, according to IDB. Gerdau Plans Sale of 40 Pct of Mining Unit Gerdau SA, the worlds second-biggest maker of long steel products, plans to sell 40 percent of its mining unit for about $2.5 billion, Bloomberg News reported, citing a source familiar with the matter. The Porto Alegre, Brazil-based steelmaker hired Goldman Sachs Group Inc to manage the transaction, Bloomberg reported, citing the source. The report said Chinese and Japanese firms could be interested in buying the stake. Gerdau declined to comment on the Bloomberg story, citing a quiet period before the release of fourth-quarter earnings. An external public relations executive working for Goldman said the bank would not comment. Efforts to reach a spokeswoman at Goldman Sachs media office in New York were unsuccessful. Gerdau has for the past year sought to sell a stake in the unit, which has about 3 billion tonnes of iron ore deposits, to either raise more money to develop it or
See Round Up on page 10

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Round Up
Round Up
Continued from page 9 bring in a partner with greater expertise in handling ore mines. The steelmaker, which also uses scrap as the main ingredient for its steel, has yet to reach selfsufficiency in iron ore. Shares of Gerdau posted their biggest jump since late October, gaining 4.5 percent in Sao Paulo trading. By Guillermo Parra-Bernal and Alberto Alerigi

Interview
Roundtable Discussion
Continued from page 1 Faquiry Diaz Cala, President & CEO, Tres Mares Group John Price, Managing Director, Americas Market Intelligence Finally, what you need is a regulatory and business environment that is supportive of new ideas, and that does not punish failure, which is conducive to risk-taking. VELA: Do you have any view of which Latin countries possess the healthiest VC ecosystems right now? Matt: Just going by the numbers, Brazil represents roughly 40-50 percent of regional GDP but attracts over 75 percent of PE capital. In terms of VC investment going to Latin America, it is probably attracting close to 90 percent. So, Brazil is 4 to 5 times healthier than any other country in the region in terms of investment dollars on a GDP-weighted basis. Brazil is certainly booming due to the fact that there is local innovation; a very large and growing technology market; general agreement about maintaining a more transparent regulatory environment; and a risktaking culture, which encourages entrepreneurs to build companies without the fear of failure. The rest of the region is catching up, but in my view Brazil is still way ahead. VELA: VELA has reported that Latin Americas VC ecosystem needs to have a continuum of angel investors, seed capital, early VC, growth capital and PE. Are there presently any weak links in this continuum, and how will this impact VC in the future? Faquiry: The ecosystem needs to have strong continuity. One concern is that we are seeing a great number of angel investors and even incubators but a significant lack of early stage growth capital, those $5-10 million checks. There is great opportunity for certain venture capitalists in this space, because they Venture Equity Latin America

One concern is that we are seeing a great number of angel investors and even incubators but a significant lack of early stage growth capital, those $5-10 million checks. For entrepreneurs and start-ups coming out of the incubators and accelerators, who have proof of concept, a viable product and are ready to grow, finding that $5-10 million growth capital investment is tough. And that obviously hinders the complete VC ecosystem. Faquiry Diaz Cala

VELA: What constitutes a healthy VC ecosystem? Matt: In Latin America, like everywhere else, a healthy VC ecosystem starts with innovation and proprietary technology. Another important ingredient is strong entrepreneurs building scalable businesses that generate healthy returns on capital for investors. Then, a third important ingredient is investors, who are willing to take risk on young companies and understand the ins and outs of growing businesses. 10 February 2012

Interview
get to play where there are not a lot of competitors. But for entrepreneurs and start-ups coming out of the incubators and accelerators, who have proof of concept, a viable product and are ready to grow, finding that $5-10 million growth capital investment is tough. And that obviously hinders the complete VC ecosystem. Adriana: I think that there is a third element to this. While Angel investors and seed capital are a very important part of the VC ecosystem in Latin America, many of the companies in Latin America are still run by family enterprises. Transcations are often executed with business groups that know each other. Security is always a concern and plays a major factor in many or most Latin countries to this day. This fact will lead to the development of a unique VC modelin Latin America, which is something that we have to be watchful of. I will be curious to see how this aspect of VC in the region pans out in the next few years. John: To add to Adrianas point, you will find in Latin America that there are angel investors, seed capital and early VC they are just not called by those names. They are the monies of friends and families who believe in your project. That is all well and good if you have access to those people, but if you do not if you come from a part of society that has difficulty gaining access to those people then thats where things break down. Therefore, a lot of or most innovation comes out of a smaller segment of society than it would in a more liquid and structured market like the U.S.s. VELA: Are there official angel networks in place in the region that could help larger segments of society gain access to capital? Faquiry: There are several angel networks in place or in the process of being built. Panama has recently seeing a very focused angel network, they have funded a couple of companies. Mexico has some angel networks at times affiliated with very early stage capital. There are a certain number of angel networks composed of people with cash, but who may not necessarily have start-up experience. Its a two-fold situation: on the one hand, they are wealthy angels, who are getting together and putting their money into start-ups that they know through their network (so, getting to Johns point, the best ideas may not necessarily be the ones that are getting funded); and on the other hand, there are angels in such places as Argentina, Brazil and some others, who have had exits in the Latin American Web 1.0. Lets call them Latam Super Angels who are now coming back to put money into new projects. In this case you have very smart money going into very good deals. While its become cool to be an angel investor in the region, you need a lot more of them in the VC ecosystem to take companies to the next level of development. VELA: What are the pros and cons of the current VC phenomenon taking place in the region, where local entrepreneurs import and locally adapt proven business models from developed economies?

You will find in Latin America that there are angel investors, seed capital and early VC they are just not called by those names. They are the monies of friends and families who believe in your project. John Price

John: That has actually been the standard business model of innovation and new product development in Latin America going back as far as any of us can remember: from technology to sneakers to jewelry, the norm has been to import what works in more fashionable markets like Europe, the U.S., Japan and Korea. If anything, Latin America is now stable and affluent enough collectively to warrant unique product development for the region on its own or as the first stop of global emerging market roll-out. VELA: How might a Latin American start-up gain competitive advantage if they import a business model? Matt: We have found that the best entrepreneurs in the region have a very good understanding of the nuances of local markets. They are able to develop and adapt not only technologies but more importantly business models, which are tailor-made for those markets, which is very difficult for multinational companies (MNCs) to do. More and more MNCs are
See Roundtable Discussion on page 12

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Continued from page 11 arranging themselves around product and service delivery rather than geographical lines. Therefore, it is becoming increasingly difficult for MNCs to customize products for every single market or, in certain cases, cities within a market. The great entrepreneurial companies that we see are those that have a combination of a technology that has been VELA: Why are natural resources, mining services and agribusiness considered good industries for VC development in Latin America? Are there others? Matt: In all three of those sectors, Latin America is a global player. The region is home to a quarter of the worlds arable land, about 30 to 40 percent of total mining investment and a big chunk of new oil and gas investment, as well. So, the money is there. The scale is there. Latin America is home to some sizeable homegrown public and private capital. There are some serious companies that operate in all of those spaces, that have money, and that can develop specific approaches, methodologies and technologies around exploration. Adriana: Something to add to that is that Latin America now has a very important and big client China who has growing influence in these three sectors. The demand is there, and players in these sectors in Latin America are very much aware that they have to evolve their companies very quickly if they are going to supply the Chinese with all the resources that they are going to need. VELA: What are some bottlenecks to entrepreneurial innovation in Latin America? Faquiry: To me, fear of failure is the biggest hinder for a start-up activity. Once Latin Americans get past that, they will be free to swing for the fences, but while cultural misgivings exist about what might happen if they fail, there is going to be a significant bottleneck. John: Part of that fear of failure is due to the fact that the risks for both the entrepreneur and the early financiers are pretty high. Boiled down to one factor, the legal environment is feared by most to be too easily manipulated by those with more money. So if an entrepreneur has a great idea and takes it to someone who might be a useful finance partner or strategic partner, his fear is that that person will steal his idea, and that his ability to take the conflict to court is either going to be beyond his financial means or just impossible. Therefore, the person with the idea might not have the confidence to go looking for support. Instead, he might take his idea to Silicon Valley or another Venture Equity Latin America

I actually think Latin Americans have a pretty high level of resilience that makes them ideal entrepreneurs. The most significant bottlenecks that I identify are probably regulation, access to technology, talent and funding sources. Adriana Cisneros

adapted and in many cases improved upon and/or proprietary; that have that technology delivered in a business model, which is directly customized for the local market; and that have a business that is scalable, either in a large country like Brazil or across borders in Spanish-speaking Latin America, to create the type of potential exit value where investors and entrepreneurs can generate very high returns on capital. I believe that the tropicalization of venture capital investing is the most exciting thing happening in Latin America today. Adriana: A very advantageous position to play in this whole game is to have the entrepreneur based in Brazil, Colombia or Peru as well as an arm of the operation in the U.S. I have seen very successful business models where the creative arm is coming out of Latin America and the financial arm is coming out of the U.S. And it appears to be a very businesshealthy relationship to have right now because of the position of Silicon Valley and emerging countries like Brazil. I am seeing that trend more and more. Faquiry: We are basically saying that pan-regional metoo business models, rather than country-specific me too models, have much more legs to them. 12 February 2012

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environment where he will be better protected. Adriana: I actually think Latin Americans have a pretty high level of resilience that makes them ideal entrepreneurs. The most significant bottlenecks that I identify are probably regulation, access to technology, talent and funding sources. The technological aspect is particularly important. The reality is that we do not have enough engineers in Latin America. Some countries are doing something to address this. Brazil just launched a government program through which it plans to send 300,000 students who want to study engineering to technical schools in the U.S. and abroad. The government has created large incentives for them so that they return to Brazil to work as engineers. Some countries, like Argentina, have a significant number of engineers available. Other countries, like Venezuela, have none. This educationaldisparity is something that should be addressed. If there were a real push for a massivedevelopment of technical schools to the region, it would guarantee that Latin America would continue to grow as a healthy VC environment. VELA: Why do MNCs have a key role to play in the VC space in Latin America? Matt: Entrepreneurs should look for MNCs to build their businesses around. My theory is that all successful early-stage companies are built on the backs of large companies. Microsoft was built on the back of IBM; Google was built on the back of Yahoo; Facebook was built on the back of the Harvard University student database. Small companies should look for opportunities to partner with large companies in order to help large companies innovate, to provide critical outsourcing services that MNCs are not able or interested in doing themselves, and to bootstrap their businesses, using the resources and/or the capital of MNCs, in an environment where VC is scarce. On the other side of the fence, MNCs in Latin America need to do more to support the VC ecosystem. It is very difficult to convince a large company in Latin America to take a risk on a small, promising technology for a variety of different reasons. However, MNCs have an opportunity to learn new tricks by being more open to partnering, creating pilot programs and in other ways supporting emerging companies. John: From the MNCs point of view, Latin America is increasingly becoming a market that is competitive enough that they have to innovate. They cannot just import a product that works in other markets without either adapting or tropicalizing it or, even better, developing a new product. The competition is not coming solely from other traditional global competitors; it is coming from Latin American companies, which are better than global firms at understanding the local markets. Unfortunately, MNCs are reluctant to take on risk over a span of 10 or 15 years, which is what innovation requires, and so they are struggling to find the right formula. There are different methods for, on the one hand, isolating an MNC from some of the risks of innovation but, on the other hand, still retaining ultimate control of the output of that innovative process. Those kinds of

Entrepreneurs should look for MNCs to build their businesses around. My theory is that all successful earlystage companies are built on the backs of large companies. Matthew Cole

legal structures and formulas are only just beginning to emerge in Latin America, and there is a real need for that emergence from both sides: the entrepreneur needs the certainty of a strategic exit partner, and the MNCs need a way to innovate within Latin America. So, this is an exciting new frontier. A d r i a n a : T h e re a re t w o w a y s o f l o o k i n g at this. One, is trying to understand that the world of Latin America is changing very quickly, and that the way to innovate has evolved. That is lesson number one. Then, it is important to understand the expanding ecosystem of innovation through incubators in Latin America. Incubators offer a very interesting exercise for both parties. For VCs, its a neat opportunity to have a dialogue with a big corporation to see what buttons they want to push. But more and more, as these models of business are developing, MNCs are also looking to bring a model of strategic incubator into their companies. This is something that we are doing at Cisneros, as well.VELA: What kinds of entrepreneurial innovations are taking place that serve the Base of the Pyramid (BoP) in Latin America? Faquiry: We are seeing quite a bit of activity taking place with financial services and the delivery of February 2012 13

See Roundtable Discussion on page 14

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Roundtable Discussion
Continued from page 13 financial services via mobile devices at the BoP. This space will probably grow as savings products continue to grow along with consumers ability to store money with more efficiency. Ultimately, microloans and credit products that are geared towards the masses will emerge, and once you have that, the overall level of poverty in the region will diminish significantly. the way that business is owned and conducted in the region. Many family-owned businesses would probably say that they have always been operating with a VC mentality, just with a longer time horizon. In general, family-owned businesses tend to project thirty years forward, and for some of the VC world that is actually a good thing, because we have the stomach to wait things out . We dont have to be as impatient; we see the value in having a longer time horizon. I think that the mentality of family-owned businesses is always going to be a nice compliment to the VC environment as it develops. John: Sometimes, taking an idea from concept to market requires a level of stubbornness that a manager in a publicly traded company simply cannot commandeer, and that only the top leaders of a family owned enterprise have both the time and the ability to push through without there being too much questioning. Often, that leads to the ruin of a family-owned company, but it can also lead to innovative break-throughs. VELA: What is happening in the VC ecosystems of Argentina, Chile and Colombia? Faquiry: Chile is interesting because we are beginning to see the creation of a start-up culture through the governments Start-up Chile program. Chileans need the local funds to be willing to take risk and bring those companies to the next level. Colombia is doing things right. There is talk that President Santos may initiate a government-sponsored program akin to Start-up Chile. In addition, the Colombian pension funds have significant amounts of money; if they start putting that money to work in venture deals, we are going to have a very favorable environment overall in Colombia. Adriana: I agree. I too am a big believer in Colombia and Peru.. People have to really pay attention to what is going on there, and the appetite to invest in those countries should be something that we foster. VELA: What factors will allow Latin American start-ups to achieve successful exits? Faquiry: The U.S. market for exits needs to stay strong. At the end of the day, if the start-up market in the U.S. slows down, we are going to see a significant slow-down in Latin America, just like we saw at the Venture Equity Latin America

Regardless of the VC ecosystem in Latin America, families still play a very dominant role in the way that business is owned and conducted in the region. Adriana Cisneros

Adriana: I agree: that is the one of the most interesting sector to be looking at right now. John: Latin America, with the exception of Chile, is still a very under-banked region of the world, especially at the BoP. There is a significant number of very bankable clients there that own assets but that are just not banked, and the reason for that is twofold. First off, the brick and mortar infrastructure of banks leaves them very concentrated in the upper and middle class neighborhoods of big cities. Secondly, the hierarchical culture of banks, where bankers and bank managers tend to come from the upper echelon of Latin American society, creates a disconnect when trying to service the working poor. So, historically it has been non-traditional lenders that have walked into the BoP space: retailers, telephone companies, and even now telephone-based lending vehicles. These are the companies that are better at reaching the masses, and adding financial services to their core of business is easy to do. It is definitely the most exciting area of BoP commerce and where you are going to see more and more development. VELA: What is the role of family-owned companies in the development of Latin Americas VC ecosystem? Adriana: Regardless of the VC ecosystem in Latin America, families still play a very dominant role in 1 February 2012

Interview
end of the 1990s. We have to be very careful that we do not get seduced too much by our own story that this time is different in Latin America. VELA: What are some factors that allow ventures to evolve into sustainable businesses in the long term? John: The biggest one is a reliable source of revenue, i.e. that MNC or large Latin American group that is a natural buyer of your services or products. A lot of times, Latin American entrepreneurs are afraid to speak to the big Grupos in their own country, because they know how much power they can wield in political and judicial spheres. They actually feel more comfortable selling their services or seeking financing from an international company, but that is not sustainable in the long run, because Latin America will continue to be volatile for the foreseeable future and thus MNCs will continue to be fickle investors in Latin America. So, the key to a more sound system is developing trust between small and big companies inside Latin America. VELA: Are there any technologies unique to Latin America? Faquiry: We have not seen proprietary technologies coming out of Latin America, but we do have unique business models revolving around the service sector and geared towards the bottom of the pyramid. Matt: We have seen a lot of innovative companies coming out of Brazil in the agribusiness sector that have developed new technologies (not always proprietary but new technologies) regarding production processes,

We have not seen proprietary technologies coming out of Latin America, but we do have unique business models revolving around the service sector and geared towards the bottom of the pyramid. Faquiry Diaz Cala

as well as crop testing and certification. We have seen a number of very interesting companies in the software sector, particularly banking software, coming out of Argentina and Uruguay. We have seen a cluster of businesses around the mining services sector coming out of Chile. Global venture capitalists are looking to Latin America perhaps not for outright innovation but certainly for very important product development and mousetraps, and that is part of why the capital is now flowing to the region.

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PE Competition
First Ever Wharton Latin America Private Equity Competition Turnout
By Alyson Sheehan In an effort to position itself as a leading business school within the private equity industry in Latin America, the Wharton School of the University of Pennsylvania held its first ever Latin America Private Equity Competition on February 4th at Huntsman Hall on the Philadelphia campus, according to the Wharton Journal. The participants of the competition were MBA candidates from leading business schools around the country, including Chicago Booth, MIT-Sloan, Kellogg, Columbia GSB, London Business School, Harvard Business School, and Wharton itself. The participants were asked to present original and actionable investment ideas in Latin America to a fictitious investment committee, i.e. a team of judges, the Wharton Journal continues. The competition was judged by representatives from top private equity firms in the region, including ACON Investments, Mesoamerica Partners, Amzak Capital, North Bay Equity and General Atlantic, as well as the Inter-American Investment Corporation, the President of the Latin America Venture Capital Association, and Wharton Professor of Finance, Stephen Sammut. The two-round tournament began with each team of MBA candidates showcasing their investment idea to the judges. Two teams were then selected from the first round to move on to the second one, where they were then given an original case to analyze and prepare within a 90 minute timeframe. The original case designed by the judges revolved around a distressed salmon producer in Chile, according to the Wharton Journal. A Wharton team and a Kellogg team were selected to participate in the second phase of the competition. In the end, it was the Wharton team, composed of Henry Heinerscheid (WG 13), Abel Osorio (WG 12), Juan Gonzalez-Goicoechea (WG 12), and Jose Luiz Gonzalez Pastor (WG 12), who won. The team presented the idea of a buyout of a Peruvian car battery manufacturer in phase one; in phase two, they proposed a strategy of acquiring the debt of the salmon producers company to then access equity through a bankruptcy. Their combined levels of qualitative and quantitative analyses in both rounds led to a first prize check worth $2,000.

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