An unexpected and historic election in Argentina has captured the attention of global investors: running as a center-right, pro-business candidate, Mauricio Macri won a narrow mandate to reinsert Argentina into the global economy following decades of economic mismanagement under Peronist presidents.
Macri has packed his government with finance stars including Economy Minister Alfonso Prat Gray, a JP Morgan veteran who founded asset management firm Tilton Capital, and Mario Quintana, founding partner of Argentine PE firm Grupo Pegasus, as a senior member of the economic team.
The significant representation of Argentine diaspora working in global finance and business has helped spur an immediate reaction of euphoria, with fund managers saying they are open to investing in Argentina. The moment to invest, they say, is now.
Several of LAVCA’s most active member firms are managed by Argentines who are sharing insights with LAVCA on what is to come. Some have even suggested they would consider raising country-dedicated vehicles. Pan-regional players with billions in dry powder are picking through deal opportunities. Stakeholders of the local PE/VC association, ARCAP, are also in discussions to revive the organization.
While the election is great news for the country, the transition from current policies and management style to a modern democracy and economy will be extremely complex. The necessary reforms are likely to generate a negative impact on purchasing power and consumer spending. Businesses are likely to experience declining performance in the initial period and potential recovery in a later phase.
In this context the fundamental question for a PE investor should be: is it better to buy now at a lower multiple on higher earnings or, is it better to pay a higher multiple on reduced earnings later in the cycle? The answer to this question will depend on the industry, the specific target and the scarcity value of certain franchises.
Key sectors that present investment opportunities include:
- energy: with the third largest shale reserves in the world, and great potential for alternative energy;
- technology: Argentina already has a successful track record in this space – Mercadolibre, Globant, Despegar, Satellogic, and others – and a highly educated and entrepreneurial work force;
- retail, consumption, and banking: these sectors have been relatively strong given the consumption incentives of the previous government, but there is an opportunity in the local economy as more people move from poverty to middle class;
- agribusiness and food: with increased productivity and volume;
- real estate
At the same time, Macri has already announced an infrastructure plan with $30 billion needed to boost the country’s ports, trains and other areas, which represent a critical support to export industries such as agribusiness. It is not clear yet whether the $30 billion will be raised through privatizations, public/private partnerships or funded directly by the government.
However, beyond specific sectors there could be an opportunity to invest in “unique assets”, meaning businesses that PE investors usually cannot access because of valuations or competition from strategics. The difference in timing/risk perception could provide an opportunity to buy great brands or franchises that despite the likely decline in earnings will have significant value over time.
On the VC front, Macri had successfully spearheaded new initiatives around entrepreneurship and startup investing during his eight-year tenure as Mayor of Buenos Aires. Mariano Mayer, who led this agenda at the city level, will now head a national effort from within the Production Ministry.
The campaign put forth very specific proposals ranging from tax incentives for the first five years for startups, to simplifying the incorporation of new businesses so this can be completed in just one day.
So what kinds of players are likely to be the first movers in this next phase of Argentine PE/VC? Argentine families or investment pools will lead the way, alongside PE groups with significant local experience, many of which have maintained a presence in the country during the crisis years.
In addition, companies operating in Argentina, both domestic and multinational, have the opportunity to deploy large sums of local currency accumulated while FX restrictions were in place. Hedge funds and other groups targeting public equities are also taking positions.
For most global institutional investors the attitude is wait and see. Some will gain exposure through existing commitments to pan-regional Latin American PE funds – a record $10.4 billion was raised for LatAm PE/VC in 2014, according to LAVCA Data.
The shift in Argentina also represents an opportunity for regional integration: Chile, Colombia, Peru, and Mexico have positioned themselves within the Pacific Alliance as a block of pro-trade, investor friendly markets, and Macri has clearly indicated that he aims to re-align Argentina towards this group. Private equity investors seeking to scale companies and businesses across markets will ultimately help drive this integration.
Cate Ambrose is president and executive director of The Latin American PE/VC Association (LAVCA).
Photo courtesy of LAVCA