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* Drop in fundraising is natural part of industry cycle
* Latin America buyouts reached $7.9 billion last year
* Venture capital shows remarkable increase in activity
By Guillermo Parra-Bernal
SAO PAULO, March 5 (Reuters) - Buyout and venture capital firms spent $7.9 billion purchasing companies in Latin America last year after heavy fundraising during the prior two years gave them enough capital to buy targets in the consumer, financial and education sectors, according to a private-equity association
Investment by private equity and venture capital funds rose 21 percent from 2011, hitting a five-year high, the New York-based Latin American Private Equity and Venture Capital Association said on Tuesday. Last year, there were a total 237 takeovers led by private equity investors, marking a 37 percent increase from 2011.
Momentum is building in Mexico, Colombia, Chile and Peru, where there is less competition than in Brazil. Some Brazilian firms are even expanding into those countries to take advantage of an improving legal and market environment for buyouts, as well as accelerating economic growth.
While fundraising fell sharply last year from a record $10.3 billion in 2011, most buyout firms refocused on investing their money. Rather than underscoring a change in appetite to commit capital to the region, the decrease in fundraising signals that private-equity activity in the region is deepening and, more importantly, maturing.
"This shift is the big story. It's a natural part of the cycle in private-equity and venture capital," Cate Ambrose, president of the group, which is known as LAVCA, said in a telephone interview from New York. "What we need to see from now is more exits. What matters is that investors in the private-equity business can sell at a good price so the cycle continues."
Exits, when buyout firms cash in gains in the companies, returned to 2010 levels, LAVCA added. Exits at private-equity and venture capital funds raised $3.8 billion in 44 deals last year, driven by robust mergers and acquisitions in Latin America.
Concerns about a flagging economy and a state cap on investment returns in certain sectors dragged M&A activity in Brazil down to a three-year low last year, but bankers have expressed confidence a revival is brewing.
For most of last year, President Dilma Rousseff put pressure on banks, telecommunications companies and power utilities to lower rates for consumers, sparking fears that she was imposing caps on financial returns in those sectors. Those worries should fade as economic growth gains momentum this year, bankers say.
As has been the rule for years, Brazil was the largest recipient of buyout investments in Latin America, accounting for 72 percent of the total invested and 62 percent of all the deals, LAVCA said. In 2011, about 50 percent of buyouts took place in that country, where 64 percent of the region's capital commitments where invested.
Takeovers of consumer-related companies represented 40 percent of total investments in the region last year, LAVCA said. Retail attracted $2.2 billion, with the rest coming from financial services, food and restaurant services, education and healthcare. Information technology deals measured in U.S. dollars more than doubled from 2011, LAVCA added.
According to Ambrose, feeble growth in Brazil has helped tame the value of potential takeover targets, which "has been good for private equity." She pointed out that Mexico is increasingly luring funds, but there are not enough experienced players in the industry, as opposed to Brazil. In Mexico, the total number of deals was on par with 2011, but the amount of U.S. dollars committed rose 50 percent over 2011.
In recent years, jobs and wages across Latin America have surged, allowing millions of people to join the emerging middle class that is now buying everything from cars and homes to plane tickets and beauty-related products.
Last year, buyout and venture capital firms raised $5.6 billion in 42 transactions. Managers targeted fund sizes under $500 million, a welcome sign of diversification as more players enter the market, Ambrose added.
She said a notable development last year was an expansion of venture capital into IT companies in Brazil and other markets. Global and Latin American venture capital firms raised new funds, bought start-ups and sought exits with relative success.
"Valuation of start-ups has gone up a lot since many U.S. players started entering Brazil," Ambrose said.
Mexico saw a significant increase in deals and the amount of capital committed. Companies in Latin America's second-biggest economy completed 21 deals worth $456 million, an increase of 117 percent when compared with 2010, the group said.
Other regional markets saw increases in deals or the amount of capital invested, including Argentina, Colombia and Peru, the statement added.