Albright Capital talks LatAm ventures
March 13, 2018 |
Peter Wernink discusses the private equity firm’s pipeline, hones in on the opportunities in Latin America
Since its establishment in 2005, Albright Capital Partners has injected roughly $640m in more than 40 private investments and distressed credit opportunities.
The firm’s latest fund, SIP IV, closed in May last year with $208m in commitments. Since then, the fund has invested in APR Energy, a portable power solutions provider with presence in Argentina and injected funding into US tower company Innovatel’s Argentine subsidiary.
With a third of SIP IV’s initial capital still to be deployed, Albright Capital is taking a closer look at Latin America.
Managing director Peter Wernink spoke with LatinFinance about the firm’s pipeline and opportunities in Latin America.
LF: Can you describe the firm’s investment strategy?
PW: When Albright Capital started investing in emerging markets (EM) in 2007, the strategy was to look at EM holistically, and look globally for mid-market opportunities that fell outside of traditional private investment buckets. We’re always looking at investments from a risk-reward perspective, not necessarily from an absolute value perspective.
We look at investment opportunities either from a valuation perspective, where you are buying from significant discounts to where other markets are trading, or from a deal structure perspective, where we can get an equity type return without taking common equity risk.
More importantly, we don’t look at investing in EM from purely a global macro perspective along the thinking that, if there’s good growth, then there should be good returns. As a result, some say we’re a contrarian investor in terms of looking at markets where there is more value and less investment activity.
LF: Where does Latin America fit among global opportunities?
PW: For the last 16 months, we’ve been active in Latin America and are looking at several opportunities.
Closing deals remains challenging in terms of convincing the seller that today is the right time to sell.
Structurally, most businesses in Latin America have seen these cycles before, so they’re a bit hesitant to sell or raise capital. That’s certainly the case in Brazil. Because the region has seen a big economic contraction, and companies know if they can ride out the storm they will get a better valuation in 12 months. They’ve learned their lessons from prior times, but there still are opportunities.
LF: Given the region is slowly emerging out of an economic downturn, which countries in Latin America have the highest potential opportunities in the near-term and why?
PW: As a value investor, we will pursue opportunities in sectors and geographies, which have been out of favor, yet have significant upside potential. There are a number of Latin American markets that fit this criteria, Brazil being one, but not the only.
LF: You just closed your Vintage IV fund last year. You still have capital to be deployed. Are there any structured debt or private equity opportunities you are assessing?
PW: There are a number of transactions in due diligence as we speak.
LF: Can you mention geographies?
PW: One of them is in Latin America.
LF: What about the sector and country?
PW: Both of those would give it away. Private investment in EM is relatively new compared to the US and Europe. Exits are very hard, thus our disciplined focus on buying at good value. To do well, you end up looking at strategic investments, such as companies that rank top or second in market share, or companies that deliver a strategic good or service they couldn’t build on their own.
For example, we would not look at a paper company that is number 10 in market share just because it has value. It would be very hard to exit at an attractive return.
LF: Any LatAm exits in the near-term?
PW: At the moment no, only one company in our current portfolio is domiciled in Latin America. The rest are based outside but some have operations in Latin America.
LF: Can you describe that investment?
PW: The company is Innovatel Argentina. It is a structured credit, or you could call it a structured equity investment.
A five-year $45m term facility will provide the company and the management team significant amount of capital and the ability to execute their business plan in Argentina. The structure of the transaction gives us a clear route to exit, we believe.
LF: What was the interest behind the deal? What is your view on capacity and competition in the tower market in Argentina?
PW: We did about a year of due diligence before initial dollars were spent. This was pre-Macri so we had a very strong view of what an investment in the telecom tower space meant vis-a vis the political risks.
With respect to the tower market, because of 16 years under the Kirchner government and the relatively difficult environment for foreign investors, there was not a single third-party tower company in Argentina when we launched the business in 2016.
The cell phone companies were 100% reliant on their own capital to build out their own tower network. For a mobile network operator (MBO), that is incredibly inefficient and as a result, they haven’t been building enough towers relative to the size of their market. We saw an opportunity to come in as an early entrant and provide significant services to the MBOs in terms of building out the towers, allowing for co-location. The market opportunity from what we calculate is significant. Argentina has a cell phone penetration rate of over 100%.
LF: Soon after you made the quasi-equity investment, Macri’s administration introduced a floating exchange rate. Did you implement measures to mitigate this?
PW: Before investing, we had a view where the currency would be if it was floating, and by-and-large, I think the currency has kind of hit our base case devaluation rate.
We were surprised how strong investor demand has been for sovereign debt issuance, and that has probably reduced the devaluation pressure that we initially expected.
Does a floating exchange rate make us nervous? We do a lot of thinking around exchange rate dynamics, but in this case, there are several of our tenants that pay dollars, or peso-linked contracts where you are effectively getting dollars. The freeing up of the exchange rate mitigates some of the risk because we can repatriate cash.
Theoretically, under the Kirchner administration, getting dollars out was much tougher than it is now. The exchange rate might have been more attractive but in practice, if you had a lot of pesos, it was challenging to get it all out.
LF: Does your company invest in infrastructure, beyond companies that develop or operate infrastructure?
PW: We like to look for infrastructure like investments, not necessarily businesses that are sensitive to local government. For example, we would not want an investment where the local government might decide, for whatever reason, to take over the assets.
One good example may be APR Energy, which provides fast-track power. The company is in the US, but legally, it is domiciled in the UK. They have power plants all over the globe, including Argentina. We’ve been active with them since 2009. They provide fast-track power, but these are power generation units we can take out of the country.
From a risk/reward perspective we view this as a compelling way to make a play in the power generation sector.
LF: Have your investments in Latin America consisted more of structured debt than equity deals?
PW: We’ve certainly done some structured debt opportunities and some equity deals. In 2007, there was almost no institutional capital focused on Latin America, because everybody was focused on India and China at the time. However, valuations in Latin America were very attractive, and we saw an opportunity at that point.
LF: In Mexico, you've had one investment to date, helping found Invercap. How did that materialize?
PW: You must understand the afore (Mexico’s pension funds) system, which was established in 1997 and expanded in 2003. I knew the owner and founder of Invercap from the days I worked at Citigroup. So when we started Albright Capital, we started discussions.
Thematically it was very interesting, I would characterize the Invercap investment as a financial infrastructure investment. When you look at those markets, one of the most important criteria for the development of a financial system is having local capital.
The deal was structured equity, with a five- or six-year term. It gave the company flexibility and the investors good returns.
Lots of consideration is given to how you exit the investment. The challenge, for example, with afores is how do you exit a pension fund? There are not that many publicly-traded companies, there are afores that are owned by publicly-traded companies, but there are no pure play pension funds that are public.
LF: In Peru, you invested in Electro Sur Medio, the country’s seventh-largest electric distributor. What sparked this?
PW: The company was in bankruptcy, and the difficulty was getting your head around Peru’s bankruptcy code and process. You were effectively taking court process risk. The process lasted two years and we and group of investors bought the debt. We then converted the debt to equity and ended up owning the company at an extremely attractive valuation.
Lots of things happened in between, but fundamentally we bought the company at a more attractive valuation compared to where comparable Latin American companies were trading at.
You’re in a very attractive region. It’s growing, so we thought if we can get it through bankruptcy, then you can find your strategic buyer. We knew there was enough interest on the other side of the bankruptcy process, but a lot of strategics (investors) have difficulty buying trade credits, senior debt and going through the bankruptcy process.
Peter Wernink is a managing director at Albright Capital Partners. This Q&A is an edited transcript of his comments in an interview with Toni Baini.