LatinFinance - September/October 2015 - 18

Source: Reuters

well-accustomed to dealing with potential risks, she says.
"I don't mean to be flippant in any way about the seriousness
of what's going on. But it's also part of doing business in emerging
markets," says Ambrose.
"Understanding how to invest in a country and deliver returns,
without being exposed to corruption scandals and corruption in
businesses, is a core skill that emerging markets private equity
investors have to have, by definition."
LAVCA was preparing its half-year figures for Brazilian private
equity activity as this edition of LatinFinance went to press. But
Ambrose says that anecdotal evidence suggest the first six months of
2015 were "absolutely" very strong.
"We have not seen a slowdown in investment opportunity from
local managers or from international firms," says Ambrose. "This
is not speaking so directly to the corruption issue, but the fact that
what's going on has not stopped private equity investors from being

CORPORATES IN QUESTION: Marcelo
Odebrecht, head of Brazilian engineering
firm Odebrecht, was arrested in June as part
of the country's Lava Jato investigation

active in these markets, because they know that now could be a very
interesting time to acquire companies.
"There's been a devaluation, so for anyone investing with dollars
it's positive, and there may be less competition for deals and the
opening up of new opportunities. None of that changes the fact that
the private equity firms will be incredibly diligent in seeking out any
possible corruption in their portfolio companies or opportunities. It
takes a lot of due diligence."
Canada's Pension Plan Investment Board has a $269 billion
global portfolio, of which $7.7 billion is allocated to Latin America.
The board maintains a positive view on Brazil in the longer term.
Although the noise and headlines of the corruption investigation
may depress prices in the short term, they also are worthy of
attention.
"[Lava Jato revelations] shed new light on some of these practices
in some sectors but that's definitely very valuable input to our
investment decision," says CPPIB's Spielmann. "It doesn't change
our medium to long term positive view on Brazil. But it does richen
our judgement on sectors and companies and where to invest."

18 L ATINFINA NCE.COM - September/October 2015

More homework
Investment may continue, but decisions on where to allocate cash
are tougher than ever.
In many cases, firms are stepping up their homework before
committing cash. "Companies more often than before are hiring
specialized firms to do background checks," says Antonio Felix de
Araujo Cintra, a partner at TozziniFreire Advogados and a member
of the Emerging Markets Private Equity Association's legal and
regulatory council. "We see that the procedure for due diligence
has become stricter. We are sent many times to personally interview
management... We have to ask questions to a number of people,
especially whenever one is dealing with state-owned companies, or
when people are looking at buying a company that was a participant
in government bids."
The theme of stricter due diligence is a common one.
Felix says the firm's corporate investigation, corruption and
compliance departments are among its busiest areas: "No-one
knocks on our door today without asking, as a first question: 'how do
I make sure that this company is clean? How do I make sure that I will
not inherit any liabilities here?'"
Paul Hastings' Markus also says that investors are paying
greater attention to due diligence procedures. While processes
vary according to the deal type - a strategic investor looking at an
acquisition will approach things differently to a highly regulated
entity such as a bank considering a loan - the focus on diligence is
increasing, she says.
"We see companies want to be, and are, better prepared going
into a deal. New corporate governance, anti-corruption, anti-money
laundering regulations have been enacted in various jurisdictions
and companies that are seeking outside financing are aware of both
home country and international standards."
Heightened caution
The depth of due diligence varies depending on the type of
transaction, of course. Banks, already highly regulated entities, have
to consider a swath of rules and procedures before they grant loans.
The arrangers on Petrobras' market-stunning bond return in
June were understood to step up their background checks in an
"extensive" two-week window ahead of proceeding with the deal.
"The level of diligence that was done was way higher than what
Petrobras has been doing over the last few years," says a person
familiar with the transaction. "Petrobras agreed to broaden the
scope of the diligence, not only on the business side but also on the
legal side."
Equity investors, private or strategic, may have fewer regulators to
answer to - but being a long-term owner makes caution critical.
"Fund managers that raise capital from third party institutional
investors, like pension funds or endowments and foundations,
or any group, be they Latin American institutional investors or
international institutional investors, cannot put themselves at
any risk of being exposed to an environment of corruption," says

RODOLFO SPIELMANN, CPPIB

"EVEN COMPARED TO BRAZIL'S
PAST EXPERIENCE, THIS IS
DEFINITELY A GAME CHANGER"
http://www.LATINFINANCE.COM
Table of Contents for the Digital Edition of LatinFinance - September/October 2015
