Is Private Equity Out of Control in Latin America? The Impact of Structures on Private Equity Transactions in Latin America 1988-2007 ROBERTO CHARVEL ROBERTO CHARVEL is a vice president ar Endeavor's Center for High Impact Entrepre- neurship ill New York, NY. roberto.charvel@endeavor.org T here are many reasons why some regions have underdeveloped pri- vate equity markets. The early literature on this topic focused on variables such as GDP growth, GDP per capita, and the depth of the local stock exchanges in order to explain the perfor- mance of the private equity markets.' In the recent past, most of the research on private transactions in general and private equity in particular has focused on the way private transactions are structured as a reaction to the existing legal institutions. This article will build on some of the findings performed on this topic but focuses exclusively on Latin America. There are several factors that should not be overlooked when trying to under- stand the performance of private equity in the region. For example, in Latin America there are particular aspects related to the industrial organization of each country that may inhibit private equity investments (from the existence of monopolies to the continued strengths of family-controlled business groups). This should be addressed in future articles. As referred to above, an important body of literature on private equity has focused on the development of financial markets and thtfir impact on the private equity cycle. Some authors have even proved the impact oí an active stock market on the venture capital cycle.- However, little attention has been paid to specific effects of the actual state of the stock markets in emerging markets. Instead of focusing only on the access to IPOs, some research should be performed regarding the impact of having fewer publicly traded com- panies on the exit of private equity portfolio companies. In other words, does having fewer publicly traded companies limit the exits for the private equity funds? This could be rel- evant in understanding the private equity environment in Latin America. There are other aspects that may impact the private equity cycle and that could be understood as cultural aspects. These prob- ably have a twofold impact. First, an entrepre- neur may perceive the equity of a company in Latin America as an extension of his or her family, which would generate barriers for possible external sources of equity. Second, entrepreneurial financing probably relies more strongly on family and friends than it does in other regions. Entrepreneurs may feel more comfortable relying on personal agree- ments than on legal contracts.* This could have an impact on the performance of private equity firms. As previously explained, this article focuses on the impact of the legal institutional framework on the private equity cycle. In order to do so, it would be wise to review some of the literature on this topic. In the late 1990s, La Porta et al. [1997, 1998] described how the legal origin of a country has an impact on its 80 Is P!).ivArn EQUITY OUT or CONTROL IN LATIN AMERICA? WINTER 2009