By Javier Martin Riva

At the annual M&A Advisor's International Financial Forum in New York in spring 2014, I had the opportunity to share my perspective, in a Stalwarts Roundtable session, on the emergence of the family office, the increasing relevance of the Latin American family offices and their growing impact on the mergers and acquisitions market.

The Emergence of the Enhanced Family Office
A new trend that we have witnessed amongst financial investors over the last decade is the expansion of the family office. A family office is formally defined as a private wealth management advisory firm that serves ultra-high net worth investors. Family offices are different from traditional wealth management shops in that they offer a total outsourced solution to managing the financial and investment side of an affluent individual or family. Unlike private equity firms and hedge funds, who serve a collection of investors, the distinguishing characteristic of a family office is that they are created to satisfy the necessities of only one client.

Historically, high net worth individuals would typically invest their own money through wealth managers, who would then pool the funds under management from other high net worth clients to create equity funds that would execute different strategies and investments over a time horizon of 5 to 7 years. This has been the bread and butter of most of the existing private banks-a very lucrative business.

Recently, however, many of these families realized that by taking the middleman out of the equation, they could avoid paying management fees or the hidden cost of high-commission structured products. Furthermore, this streamlining could eliminate any potential conflict of interests and afford wealthy families access to more opportunities than those offered by their past providers. This approach to investing has resulted in more efficient use of the family office time, a reduction of expenses and the potential for greater return on investment capital.

Michael Blank, CEO of Andbank Miami and a faculty member of the Stalwarts Roundtable, opined on the advent of the "new family office" with the following comment, "The growth of this business has changed the entire private banking model. Banks have had to adapt to this new environment where the client moved from being a passive investor, following the advise of the theoretical experts, to an active player asking for better opportunities tailor made for their own capabilities and risk profile."

Another trend in this market is the recruitment by family offices of best-in-class professionals to manage their investment portfolio and business activities. Experts in legal, compliance, financial markets, trading, risk management, international tax and accounting, are also being complemented by non-financial market services experts for the office's extended business needs including philanthropy and property management. The result is an independent, efficient, transparent and controlled structure that facilitates and enables the office to manage all of it's financial interests including direct investments in companies and privately held businesses. This model is still in its infancy, but is expected to increase as the realizable results are publicized and I expect will continue to have a direct impact on middle market M&A activity across the world.

Mark Silverman, CEO of the Dominican Republic-based Banco del Progreso, also a faculty member participating in the Stalwarts Roundtable, introduced another interesting fact to the discussion when he stated that "big family offices hardly ever use debt to finance their acquisitions." Debt-based financing has waned in popularity of late. Many family offices today use cash exclusively for direct investing or co-investing with peers. The belief is that, with a longer hold commitment, there is no reason to burden an operating entity with excessive debt for the purpose of converting a portion of the investors to cash or to maintain dry powder. Current interest rates, offering extremely low yields, are also encouraging family offices to put their money to work in equities. And this strategy has also resulted in a significant advantage for family offices over private equity buyers, who will typically complement their investment with debt financing contingencies, jeopardizing speed to acquire and compromising flexibility.

In the US alone today, according to www.familyoffice.com, there are over 10,000 family offices. And the SEC has recently identified that there are between 3,000 and 5,000 family offices each holding over $100 million in Assets Under Management (AUM) representing over $1.2 trillion. This capital source has quickly become a significant force in the financing of M&A transactions.

The Latin American Family Office Comes On-Stream
The Latam market family offices have been slower to adapt to the evolving US model of capital management. In part, this is due to the fact that they have largely been focused in their own region, and most have limited their investment to their own country. In fact, most of the biggest Latin American companies still belong to private individuals, very wealthy ones! Key sectors and industries like energy, mining, grains, oil and gas, telecommunications, retail distribution, financial services, construction, raw materials, commodities and steel production are often controlled by families and directly through their family office experts throughout the region.

While there are unique characteristics that distinguish one country market from another, one consistent factor influencing cross border activity is the politics of the community, regional and national governments. However, of late, family offices are discovering that their investment and operational skills are transferable and that a world of opportunities awaits those that have capital, professional resources and a desire to expand their investment network.

One of the most noticeable effects of the family office involvement in Latin American M&A recently, is the increasing value of the transactions after predominance of small-cap deal making in the region. In the first half of 2014, there were over 243 deals, a decline in volume from 309, yet the value was $63 billion vs $39 the year before. Deals over US$ 1bn accounted for 62.5% of the aggregate deal value for the region. In contrast, H1 2013 and H1 2012 saw deals above US$ 1bn have just a 39.6% and 51.9% share, respectively. Of note also, valuations in Latin America have been very attractive compared to other regional markets during this past year.

The current M&A activity places a spotlight on the role of the Latam family offices and the consequent effect of the concentration of capital and cash. Countries such as Brazil, Mexico, Peru, Colombia, and Chile provide an enormous and constant flow of M&A opportunities that traditionally attracted local capital particularly from families who acted like a "small private club of investors. However, an underlying question needs still to be addressed by the local governments to secure and enhance this trend. How will the region in general and countries in particular face the necessary tax adjustments to continue attracting capital and facilitate some burdensome administrative processes?

Another trend, worthy of attention, is the advancement of the Latin American family office to acquire outside of their region. Mark Silverman drew attention in our roundtable session to the fact that currency devaluations, high interest rate environments, high inflation and economic slow down have all opened up the eyes of these avid and savvy investors who are learning how to diversify their investments to manage risk and capitalize on opportunities that previously eluded them. Most recently, we have witnessed many successful M&A transactions structured and coordinated by teams based in Mexico, Brazil, and Colombia with target companies in the United States, Europe and Asia. As is the case with cross border acquirers of any sort, traditional strategic or financial investors, the acquisition of a company outside of the investor's home market requires more complex operating, banking and financing structure to properly manage the business. As they are doing in North America, so too are Latin American family offices staffing up now to ensure that they have the service complement necessary to fully capitalize on the deployment of their significant capital resources.

The Future of the Latin American Family Office in M&A
As the Latin American family offices become more sophisticated in their operation, more comfortable reaching beyond their borders and more recognized for their commitment to performance leadership, they will have an increasingly dramatic impact on mergers and acquisitions volume around the world. Experienced in business creation and expansion, flexible in their strategy to grow and committed to long-term investment, they are proving to be desirable investors, partners and buyers in a global market that treasures all of these attributes.

Javier Martin Riva is the Chief Investment Officer of Brasilinvest International and writes from Miami, Florida.



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