The private equity business has found the booming Hispanic market. Almost $2 billion of new capital is available for investment, but whether these funds can be deployed successfully remains to be seen.

Tom Castro has raised over $100 million in the private equity market for his most recent radio station venture. Castro is president of Border Media Partners (BMP), a chain of 34 Spanish-language radio stations in Texas. The initial funding for BMP came from Castro and his partner Rafael Garza of RGG Capital in Fort Worth. The company also raised early-stage capital from a pair of wealthy Texan families before signing a $15 million deal with the Darby-BBVA Latin America Fund in 2003. Then, in December of last year, BMP received an additional $75 million from Vestar, a $4 billion private equity fund with offices in New York, Denver, Boston, Paris, and Milan.

From almost nothing a couple of years ago, private equity for the U.S. Hispanic market is booming. In all, PODER has identified almost $2 billion of new capital that is targeting this market. Yet there are challenges: a dearth of companies large and sophisticated enough in which to invest, and a lack of experience and interest from family-run firms in taking on institutional capital. And there is no clear consensus on what the opportunity looks like — all funds plan to invest in companies that serve the Hispanic market, but some also target Hispanic-owned companies; one even defines the opportunity as an extension of the Mexican market.

The term private equity (PE) refers to investment funds that buy and sell businesses. Unlike mutual funds, which buy and sell publicly traded stocks, PE funds invest in privately held companies, either to provide growth capital, or often to buy them outright. While, technically, private equity includes the well-known venture capital firms that invest in start-up companies, often in the technology sector, it is more commonly used to denote buyout funds, those that invest in more mature businesses.

Private equity is becoming ever more popular, reaching a record $300 billion globally in 2004, according to Dealogic. But until recently, PE has not been a significant source of funding in the Hispanic market. As Castro’s case illustrates, this is changing.

Yet Castro is not typical of Hispanic entrepreneurs. Border Media Partners was his fourth start-up, the third one in radio. He has a successful track record in the media business, both as an executive and an investor, and his personal network is far reaching.

Most Hispanic entrepreneurs have trouble raising institutional capital, particularly in the early years of a venture. “Early-stage investments typically come from friends and family, but with the Hispanic market, it’s not that they don’t have friends and family, just that the friends and family don’t usually have money,” says Victor Maruri, co-founder of Hispania Capital, one of the new funds targeting the Hispanic market.

Maruri explains how he first decided to focus on the Hispanic market: “There are two significant demographic shifts taking place in this country: the aging of the population and the Hispanization of the population. There are countless funds focused on the aging, in sectors like health care, bio tech, drugs, even some real estate plays. While there are billions of dollars allocated to this phenomenon, we found virtually nothing allocated to the Hispanic market.”

Border Media’s investors include firms with a Hispanic focus, but also large, blue chip investors who are attracted to the growth numbers of the Hispanic market. Castro explains that “Vestar is not a Latino-owned fund, but it is one of the few big PE firms that has a Latino partner,” in this case, former U.S. Transportation Secretary Federico Peña, a longtime friend of Castro. Of course, any of the hundreds of existing PE funds can invest in a Hispanic market company, and many have. But, until recently, there have been few funds with the Hispanic market as their specific investment objective.
While it may seem an obvious opportunity—large institutional investors such as CalPers and Spanish banking giant BBVA have already jumped into the market—the sector lacks a serious track record.

There are several new funds with size targets in the hundreds of millions of dollars (see table). Most of these funds are first-time players in the Hispanic market and most have not even “closed,” meaning they have yet to raise all the money in their plan, much less to begin investing it. Many of the principals involved are Hispanics, and most have extensive investment experience, but few have actually managed more than a one-off deal in this space. John McIntire y Salazar of the newly founded Nexos Capital Partners claims, “the reality is that nobody has done this yet.”

One of the first to start doing it is Hispania Capital, formed in 2001 by Maruri, who has over 25 years of experience in the financial markets, and Carlos Signoret, who brings private equity experience to the partnership. The fund closed to new investors in March of 2004 with $125 million and has bought companies in hair care, publishing, and a market research firm. The fund’s investors include BankOne, Washington Mutual, Wells Fargo, Prudential Financial, and the U.S. Small Business Administration. While the government is keen to promote minority-owned businesses, and has been since the 1950’s when the SBIC was created, Maruri says, “There is no social agenda here. It just happens that a lot of these companies [are] Hispanic owned.”

Another early entrant is Nogales Investors, founded in 2001 by Luis Nogales, former president of Univison and United Press International. Nogales Investors is currently fundraising for its $200 million Fund II, twice the size of its first fund, which is now fully invested. Nogales invests in companies with a Hispanic affiliation, meaning that the company can be owned by, managed by, or employ Hispanics, or is geared to the Hispanic market. Bastion Capital was perhaps the first private equity fund to invest in the Hispanic market and has recently spawned two offspring. Bastion Capital I closed in 1995 and stopped investing in 1999. According to founder Guillermo Bron, the fund returned an IRR of 35 percent, putting it in the top quartile of its peer group. Perhaps Bastion’s biggest success was its co-investment in Telemundo; the company invested in the roll-up of the television station group and network, which was later sold to NBC for $2.7 billion.

Daniel Villanueva Sr., Bron’s partner in Bastion Capital I, has started RC Fontis in partnership with his son Daniel Jr. and Rustic Canyon Partners, a private equity firm based in Santa Monica, California. The $150 million fund will target companies that market products and services to the U.S. Hispanic market. Daniel Villanueva Jr. is confident about the investment prospects for RC Fontis and is already looking at media and food services companies in Texas, New Mexico, and California. “We can’t even begin to canvas the market; it is that large. You can count on your hands those [companies] that are doing what we are doing. The odds for us are very good—I like them.” Like Hispania, RC Fontis will focus on smaller firms at the lower end of the middle market.

Meanwhile, Bron has joined forces with the partners of ACON Investments, one of the firms involved in Impremedia (owner of El Diario/La Prensa and La Opinion newspapers). They are in the process of raising $300 million for Bastion Capital II, a fund that is expected to close by the end of this year. Even Bastion, despite its dramatic success, doesn’t have a long list of acquisitions in the U.S. Hispanic market, so some skepticism in the face of such a large new pool of capital can be expected. While some analysts have questioned just how large the Hispanic opportunity really is, those working in the sector are more concerned about finding entrepreneurs who are ready, willing, and able to sell.

“You have to pound the pavement, go deep into the Hispanic communities [and] network, to find these companies,” says Eduardo Bohórquez-Barona, another partner in Nexos.

Border Media’s Castro also cautions that private equity isn’t always easy for those receiving it. “Dealing with PE firms is an acquired art; it takes a long time to learn,” he says. “It takes a lot of wisdom, and huge legal bills. Unfortunately, there is not a deep reservoir of experience in the Latino business community in how to do this.”

Recognizing that many Hispanic entrepreneurs may lack the sophistication necessary to deal successfully with PE funds, Castro, as a member of the New America Alliance, along with members of the National Association of Investment Companies, has started the Marathon Club. The group helps entrepreneurs prepare themselves for taking on institutional investors (see sidebar).

Despite the obstacles, fresh money is pouring into this market at an unprecedented rate. And while everyone seems to agree on the attractiveness of the market, there is still no consensus on how to serve it. The new funds’ managers have different views on both the size and the nature of the opportunity.

While some funds are raising as much as $500 million, others believe that the fragmented nature of the Hispanic market requires smaller investments and smaller funds. Bastion Capital II, for example, is targeting transactions of $20 million to $50 million, a strategy similar to that followed by Palladium III, the new $500 million Hispanic fund being raised by Palladium Equity Partners. In fact, according to Bron, Palladium and Bastion are the only serious players in this market: “Palladium and Bastion are in the middle market. There is a market for all of us, but we don’t feel we are competing with the funds at the smaller end of the market.”

Other funds believe that the key to the market is in smaller transactions with smaller companies. “We don’t have any competition,” says Hispania’s Maruri. “Eighty-five percent of PE money resides in funds that are $500 million or bigger. They want to put the money to work in large chunks. The remaining 15 percent tends to be localized funds or highly specialized funds,” he explains.

Maruri is skeptical that the bigger funds will find enough large-scale acquisition targets. “If you’ve got a $500 million fund, just do the numbers; you generally don’t want to invest less than $25 million per deal,” says Maruri. According to him, a $25 million investment implies buying a company with revenues of at least $100 million. “Just look at the Hispanic Business 500—very few companies exceed that level of sales,” he says. According to the 2004 HB 500, only 52 companies sell over $100 million annually.

But McIntire and Bohórquez of Nexos disagree. They think the Hispanic Business list dramatically understates the number of middle market, Hispanic-owned companies. Nexos defines middle market as $15 million to $200 million, a category for which the HB500 lists 247 companies. Yet McIntire and Bohórquez believe there are three or four times that many, explaining that many private firms do not want the attention that comes from such a list and do not volunteer their financial data. “We looked up all the companies that we know of, and none of them was on the list. We think there are easily a thousand [middle market companies] out there,” Bohórquez says.

Nexos Capital Partners is a brand new venture of McIntire y Salazar, an ex Goldman Sachs banker, and Bohórquez-Barona and Joseph J. Vadapalas, both former principals of the private equity firm WestSphere Partners. They are targeting deals somewhere in the lower-middle end of the market, larger than those targeted by players like Hispania but somewhat smaller than Palladium or Bastion. They hope to raise $225 million to invest in eight to 12 deals in the range of $15 million to $30 million each.

Fund managers also disagree about what the Hispanic opportunity really is. For Maruri, it’s about the consumer market: “We invest in companies driven by the Hispanic demographic, those that provide goods and services to that market; we don’t care who owns the company.”

Others see the opportunity more broadly. McIntire explains that Nexos will target three types of investments: Hispanic-owned companies; companies that could be repositioned to serve the Hispanic market; and procurement plays. The latter are Hispanic-owned companies that serve—or, through Nexos’ takeover, could be made to serve—the $90 billion corporate procurement market for minority-owned businesses and the $200 billion government procurement market.

Palladium and Bastion take a similar approach, defining themselves as Hispanic PE firms, as opposed to firms that simply target the Hispanic market.

With yet another approach, Darby Overseas Investment, an international PE firm in Washington D.C., has teamed up with Spain’s BBVA (also the lead investor in Palladium III) for the Darby-BBVA Latin America Fund. Julio Lastre, who runs the fund from Washington, explains that his scope reaches beyond Latin America to include the U.S. Hispanic market: “We decided to [allocate some of] the fund for opportunities in the U.S. along the border, particularly in the Mexican-American market, as an extension of our Mexico strategy.”

Lastre argues that the U.S. Hispanic market is tightly integrated with Mexico, thus the fund’s interest in the Border Media Partners deal. Many trends in the U.S. Hispanic market can be anticipated by observing Latin America. “It’s hard to look at the market without the Latin American perspective,” Lastre says. While he declined to define an exact figure, he explains that the primary focus of his fund is Latin America, so most of the $175 million will not be invested in the U.S.

Would Darby consider a pure U.S. Hispanic fund in the future? Lastre doesn’t dismiss the possibility: “We certainly are talking to our investors about the opportunity.”

Media, consumer products, and financial services seem the most popular sectors for the fund managers with whom we spoke. Until now, the vast majority of Hispanic market PE investments have been in the media sector, and fund managers remain bullish on media. According to Maruri, while it may be too late for radio and television, there is still plenty of opportunity in print media. Hispania has acquired and sold a Spanish-language newspaper, La Raza, as well as investing in yellow page directories in Chicago, Denver, and Phoenix.

Consumer products are another hot sector. In 2004, Hispania acquired SamyCo, the Miami-based hair care company, and is now looking at food companies. “We’d love to do food. There are numerous opportunities out there. We will do one before the year’s end,” says Maruri. Others are equally bullish. Palladium’s advisory board includes Andrew Unanue, former COO of Goya Foods, and Nexos has recruited Gil de Cardenas, former CEO of California cheese producer Cacique, which recently resigned to start a new venture, Don Gilberto Foods, in the processed meat category.

Finally, there is a broad consensus that the opportunity is large in financial services, in particular the mortgage market. “Financial services are an area that will be serving a large part of the population. Financial services, consumer goods, business services, and housing development all fit nationally into the U.S. Hispanic market,” Lastres explains.

Will these new funds be able to successfully deploy the almost $2 billion in equity capital in a market that traditionally has been highly fragmented and dominated by family-run firms, hesitant to relinquish any control? Perhaps. There is no question, however, the flow of investment capital will continue to grow.

“The amount of capital out there for the Latino market has increased dramatically. Wall Street has figured out that the growth in this country is going to come from the Latino market,” BMP’s Castro says.

According to David Rubenstein, founder and managing director of The Carlyle Group, one of the world’s leading private equity firms with over $24.8 billion, the U.S. Hispanic opportunity is significant, but still not a priority for Carlyle. “It is a niche market, but it is more than a small niche. If there was a good deal, we would probably invest alongside someone.”

Rubenstein is not the only one who might be interested. Maruri of Hispania says he gets at least one phone call per week from PE funds that want to get involved in the Hispanic market. “The top line is compelling,” he says, “The problem is, if you want to do a pure play, with a few exceptions like radio or television, the opportunities are, by definition, pretty small.” Lastres of Darby agrees. “I don’t know if it fully merits a specialized fund,” he says.

And with all the new capital chasing a finite number of middle market Hispanic companies, Maruri believes “the cost of capital will obviously go down,” meaning owners will eventually get better terms and PE funds will have to pay higher prices, putting a damper on returns.

Tom Castro is more concerned with the sell side. “There are sufficient business opportunities for all of the [PE] capital, and much more,” he claims. “The trick is, can the business people, the entrepreneurs, and the capital work out a relationship that works for both sides. In a family-owned business, where the family has worked 20 or 30 years to build a company, bringing in a partner, someone sitting at the table along side the family, takes some getting used to.”

Yolanda Sanchez contributed to this report.



Need Cash?

PODER has identified nearly $2 billion in new capital in funds being raised for the U.S. Hispanic market by these private equity firms.

Bastion Capital II
Fund Size: $300 million
Status: In fundraising, expected close December 2005
Target Deals: $20M-$50M per transaction, focus on U.S. Hispanic market
Locations: Los Angeles, New York
Principals: Guillermo Bron, founding partner Bastion I; principals of ACON Investment partners

Darby-BBVA Latin America Fund
Fund Size: $175 million (less than half in U.S.)
Status: Closed April 2005
Target Deals: $15M-$40M per transaction, with focus on Latin America. Also investing in U.S. Hispanic in companies with linkages to Mexico
Investments to Date: Border Media Partners
Location: Washington, Mexico, Sao Paulo
General Partners: Darby Overseas Investment, BBVA
Fund Manager: Julio Lastres

Hispania Capital Partners
Fund Size: $125 million
Status: Closed 03/2004, currently investing
Target Deals: $5M-$10M per transaction, focus on U.S. Hispanic market
Investments to date: PrensAmerica Corporation (publisher of La Raza), Samy Companies, Hispanic Yellow Pages of America, Inc.
Location: Chicago
Principals: Victor Maruri and Carlos Signoret

Nexos Private Equity Growth Fund
Fund Size: $225 million
Status: In fundraising, expected close in late 2005
Target Deals: $10m-$25 m per transaction, focus on U.S. Hispanic market and Hispanic owned companies
Locations: New York, Los Angeles
Principals: John McIntire, ex Goldman Sachs; Eduardo Bohórquez and Joseph Vadapalas, founding partners WestSphere Capital; Justo Frías, former CEO Gigante USA

Nogales Investors – Fund II
Fund Size: $200 million
Status: In fundraising, projected close November 2005
Target Deals: $5M-$20M per transaction, focus on companies with Hispanic affiliation (owned, market, management or employment)
Location: Los Angeles
Principal: Luis G. Nogales, former president of Univison and United Press International

Palladium III
Fund Size: $500 million
Status: In fundraising, over $290 million committed, expected close in 2005
Target Deals: $15M-$50M per transaction, focus on U.S. Hispanic market and Hispanic owned companies
Location: New York
Principals: Palladium founders Marcos Rodriquez, Alex Ventosa, Peter Joseph; David Perez ex General Atlantic Partners

Pinto America Growth Fund
Fund Size: $75 million
Status: First closing of $50 million expected by June, final closing in third quarter 2005 Target Deals: $5M-$10M per transaction, focus on leading sub-regional companies in the Hispanic market
Location: Houston
Principals: Rodrigo Amaré, Richard Vaughan, and Guido Caranti, formerly of Zephyr Management

RC Fontis
Fund Size: $150 million
Status: In fundraising, expected close May 2005
Target Deals: $5M-$10M per transaction, focused on U.S. Hispanic market, primarily in the Southwest.
Location: Los Angeles
Principals: Daniel Villanueva Sr., ex Bastion Capital; Daniel Villanueva Jr.; Rustic Canyon Partners


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