Development Business / February 28, 1997
By Larry Luxner
WASHINGTON -- Latin American and other foreign firms raised more capital in 1996 through American Depositary Receipts (ADRs) than ever before.
American Depositary Receipts are securities that represent shares in an overseas company, and are traded on the New York Stock Exchange or Nasdaq like any other U.S. stocks.
Observers say ADRs bring a number of advantages to companies that offer them, including improved liquidity; a boost in prices and volumes traded; opening of new financing sources and a drop in financing costs; more transparency; an increase in available information, an expanded investor base, and international prestige.
According to Citibank, the dollar value of ADR shares traded on U.S. stock exchanges hit $345 billion -- a 26% jump over 1995 figures -- while the total number of ADR shares traded reached 11 billion, a 10% increase over the year before. ADRs were chief components of some of the world's largest initial public offerings in 1996, including the privatization of Telefónica del Perú and Venezuela's phone monopoly CANTV.
"What a difference a year makes, said Citibank executive Sandra Jaffee. "In 1995, there was a marked decline in new issuance of ADRs out of the emerging markets, primarily a result of widespread price declines after the Mexican peso devaluation. In 1996, the tables turned and emerging companies led the market for new issuance of ADRs."
By year's end, 252 firms from 48 nations had launched ADR programs, including Brazil and Mexico (14 companies each); Venezuela (5); Argentina and Peru (3 each); Bolivia and Chile (2 each) and Ecuador (1). Of the $19.3 billion in new capital raised by ADRs in 1996, according to Citibank, 17% came from Latin America.
That's not surprising, given the region's generally healthy economic performance last year. Latin America ended 1996 with average GDP growth of 3.5% -- a dramatic improvement over the 0.3% growth recorded in 1995 -- and average inflation of onl;y 20%, low by Latin standards. According to the preliminary figures published by the UN's Economic Commission for Latin America and the Caribbean, Chile and Guyana enjoyed South America's highest GDP growth (6.5%), followed by Uruguay (5%), Bolivia (4%), Argentina and Colombia (3.5%), Brazil (3%) and Ecuador, Paraguay and Peru (2%).
"The climate in Latin America and the Andean region in particular is very attractive," says Ginns. "Overall, there is a capital gap -- a wealth of opportunities in need of expansion capital. What the fund can provide is a mid- to longer-term partnership."
Ginns says Peru, a nation of 22 million people, "is like Chile was seven or eight years ago from an investment point-of-view."
The only nation with negative growth was Venezuela (-1.5%), which also reported the highest inflation rate (103%). In Argentina, inflation stayed under 1%, while in Brazil, the CPI rose by only 9%, a rate unheard of in four decades.
The region's new-found prosperity has attracted not only individual investors through ADRs, but also institutional investors thinking in terms of millions -- rather than thousands -- of dollars.
Last month, the Inter-American Investment Corp., the private-sector arm of the IDB Group, signed an advisory accord with AIG-GE Capital Latin American Infrastructure Fund, billed as the largest private equity fund of its kind ever raised in Latin America.
Under the agreement, the IIC will identify, analyze, structure and supervise investments as well as develop country strategies and provide sector information. The 10-year closed-end fund -- established by American International Group, which has a 15% stake, GE Capital Corp. (also with 15%), Corporación Andina de Fomento and 12 other U.S., French and British investors such as insurance companies, banks and university endowments -- will focus on equity and convertible debt investments in promising Latin American and Caribbean infrastructure projects.
The fund, which closed initially at $656 million, aims to raise up to $1 billion for long-term investments. Target sectors include power, telecommunications, transportation, oil, gas, environmental services and water treatment and distribution systems.
"There is such a huge need for development of infrastructure in the region," says IIC economist Jorge Roldán. "This fund comes at the right moment at the right place."
Rahul Desai, assistant director of Emerging Markets Partnership, principal adviser to the fund, says "we'll be targeting investments in the $10-15 million range, with a focus on Argentina, Brazil, Chile, Colombia, Mexico and Peru."
Unrelated to the above fund is a $155 million private-equity fund led by entrepreneur Ginns and Bernard Aronson, former undersecretary for inter-American affairs at the State Department.
This one, known as Newbridge Andean Partners L.P., will invest selectively in promising businesses throughout the five-nation Andean region. The fund closed in November 1996.
"We're interested in making investments of at least $5 million each in existing companies, not start-ups," said Ginns. "We've put together an investment advisory committee of senior regional leaders" to advise the fund, including ex-Argentine Economy Minister Domingo Cavallo and former Colombian Finance Minister Jaime García Parra.
Asked why the fund focuses on the Andean nations, Ginns said "the region has been somewhat of an overlooked story. It includes Colombia, South America's second-most populated country and the only one other than Chile with an investment-grade rating for its sovereigns, and Peru, whose growth rate is among the highest in the world."
Five institutions are co-managing the fund: Banco Industrial in Bolivia; Corporación Financiera de Caldas in Colombia; Banco Pichincha in Ecuador; Grupo Macro in Peru, and Oberto Sosa Asociados in Venezuela.
Other than the Corporación Andino de Fomento, Ginns declined to name individual investors, though he did say "we have a very diverse group of investors" from the United States and Latin America.