Private equity in Argentina: market and regulatory overview

A Q&A guide to private equity law in Argentina.

This Q&A is part of the PLC multi-jurisdictional guide to private equity. It gives a structured overview of the key practical issues including, the level of activity and recent trends in the market; investment incentives for institutional and private investors; the mechanics involved in establishing a private equity fund; equity and debt finance issues in a private equity transaction; issues surrounding buyouts and the relationship between the portfolio company's managers and the private equity funds; management incentives; and exit routes from investments. Details on national private equity and venture capital associations are also included.

To compare answers across multiple jurisdictions, visit the Private Equity Country Q&A tool. The Q&A is part of the PLC multi-jurisdictional guide to private equity law. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateequity-mjg

Contents

Market overview

1. How do private equity funds typically obtain their funding?

Most private equity funds operating in Argentina typically obtain their funding from foreign investors, including a broad variety of foreign institutional investors, pension funds, banks, hedge funds, multilateral institutions and individuals. Some private equity funds incorporated abroad but managed by Argentine managers obtain funding from local family offices, private individuals and some investment companies. Local banks, insurance companies and government agencies do not normally invest in private equity funds and there are currently no regulations to promote or provide incentives for this.

 
2. What are the current major trends in the private equity market?

During the past year deal volume has decreased due to the slowdown in the Argentine economy and uncertainty regarding economic policy over the next few years. The nationalisation by the government of the oil and gas company, YPF, created concerns about the possibility of future nationalisations in sectors including utilities, oil and gas, mining and infrastructure. In spite of this, the Argentine economy still benefits from high commodity prices, GDP growth, an educated workforce and its strong entrepreneurial community. There are attractive opportunities in medium-size companies with growth potential and an established product or market that need funds to expand operations, develop new products or acquire related businesses (that is, mid-market companies in growing sectors with low entry pricing).

 
3. What has been the level of private equity activity in recent years?

Fundraising

Fundraising by private equity funds operating in Argentina has traditionally been carried out abroad and so was affected by decreased general levels of fundraising by private equity funds operating in emerging markets. Some fundraising is done through local family offices and high net-worth individuals or local investment companies. This local fundraising has remained stable in recent years.

Investment

Investment levels have remained steady in established companies, particularly in sectors such as agribusiness, consumer credit, retail, manufacturing and commodities, and export-oriented businesses. In areas such as real estate, energy and utilities, levels of investment have deteriorated recently. Early stage and start-up businesses also saw a diminished level of activity because local angel and seed investors withdrew from the market. However, a few start-up companies with high potential were able to attract foreign venture capital funds in early stage financing rounds.

Transactions

There was a stable flow of transactions in sectors such as agribusiness, consumer credit, retail, telecommunications, manufacturing and export-oriented businesses. Foreign private equity funds continue to invest in the IT and online gaming sectors. In areas such as real estate, energy and utilities there were fewer transactions. Recently, many transactions have been put on hold or renegotiated. However, a decline in asset values and a willingness to sell by owners may result in attractive opportunities for fund managers.

Exits

In recent years, there has been a moderate level of exit activity by private equity funds. Most exits were made through sale to a strategic investor or to another private equity fund. In this period, almost no exits took place through an initial public offering (IPO) (due to the underdeveloped local capital market, among other things).

 

Reform

4. Are there any proposals for regulatory or other reforms affecting private equity in your jurisdiction?

Private equity is not strictly regulated in Argentina and lacks a specific regulatory framework. Activities of private equity funds are still governed by general rules governing companies and mergers and acquisitions. No specific investment vehicles or other structures are in place to incentivise or facilitate private equity investments.

 

Tax incentive schemes

5. What tax incentive schemes exist to encourage investment in unlisted companies? At whom are the schemes directed? What conditions must be met?

Incentive schemes

There are no specific tax incentive schemes for investment in privately held companies. Companies are subject to a flat tax rate of 35%. Dividends distributed by local companies are not subject to withholding tax in Argentina, unless these dividends exceed the company's previously taxed accumulated income. Sales of shares by individuals, (regardless of country of residence), and non residents are currently exempt from income tax. However, the income tax exemption for capital gains is likely to be abrogated by a bill that may be submitted to the Argentine Congress for approval in the near future.

At whom directed

The dividends exemption is directed at all investors, local and foreign, individuals and legal entities. The capital gains exemption is directed at foreign investors or Argentine individuals.

Conditions

Investors must not be resident in a listed tax haven.

 

Fund structuring

6. What legal structure(s) are most commonly used as a vehicle for private equity funds in your jurisdiction?

Generally, a foreign limited partnership (managed by a general partner) is used. These partnerships usually create offshore special purpose vehicles (corporations) in certain jurisdictions that have double taxation treaties with Argentina through which the investment is made into Argentina (the Argentine government has recently terminated treaties with Austria, Spain and Chile, see Question 7, Foreign investors).

 
7. Are these structures taxed, tax exempt or fiscally transparent for domestic and foreign investors?

Foreign investors

For foreign investors, this structure is tax exempt. Dividends and capital gains are not taxed in Argentina and holding shares is tax exempt.

Foreign companies in all jurisdictions are currently exempt from capital gains tax on the sale of shares. Investment vehicles are often in Spain, Chile or, to a lesser degree, Switzerland, because the tax treaties with these countries granted an exemption from personal assets tax (that is, an annual tax on equity held by individuals and foreign entities). However, these treaties were terminated in the first half of 2012.

It is likely that the future structures will be similar, but more dependent on the domestic legislation governing the special purpose vehicles.

Local investors

For local investors a simple holding structure is used since dividends are exempt from income tax. Capital gains, however, are exempt only if the seller is a natural person (this exemption is likely to be repealed soon).

 
8. What (if any) structures commonly used for private equity funds in other jurisdictions are regarded in your jurisdiction as not being tax transparent (in so far as they invest in companies in your jurisdiction)? What parallel domestic structures are typically used in these circumstances?

Tax transparency is not an issue for foreign investors. Argentina only considers tax transparency for Argentine residents' investments outside Argentina. It may disallow a treaty benefit if the foreign beneficiary is not a true resident of the treaty country.

 

Investment objectives

9. What are the most common investment objectives of private equity funds?

As privately held companies (including investment made by private equity funds) are subject to limited reporting obligations, it is difficult to estimate the average life of funds and rates of return.

 

Fund regulation and licensing

10. Do a private equity fund's promoter, principals and manager require licences?

If a private equity fund intends to publicly offer an investment in the fund in Argentina, it must have a licence. Most private equity funds are created offshore and the fund's promoter, principals and manager will not require a licence unless they plan to make a public offering of the funds securities or partnership interests in Argentina.

 
11. Are private equity funds regulated as investment companies or otherwise and, if so, what are the consequences? Are there any exemptions?

There is no specific investment company regulation in Argentina. If a private equity fund intends to raise funds in Argentina through a public offering, it needs to register with the Argentine Securities Commission (Comisión Nacional de Valores) (CNV) as a registered issuer, either as a corporation (sociedad anónima) or as a financial trust (fideicomiso financiero). As yet, no private equity funds have been created locally using these structures. Some local conglomerates (holding companies) that are listed and organised as corporations resemble a private equity fund, but no locally formed funds have offered securities to the public in Argentina.

 
12. Are there any restrictions on investors in private equity funds?

There are no restrictions on investors.

 
13. Are there any statutory or other limits on maximum or minimum investment periods, amounts or transfers of investments in private equity funds?

If a local private equity fund is formed as a financial trust it has a maximum duration of 30 years.

 

Investor protection

14. How is the relationship between the investor and the fund governed? What protections do investors in the fund typically seek?

Generally, protections are negotiated in the limited partnership agreement governed by foreign law. Therefore, the relationship between the investor and the fund is subject to international standard rules and the protections sought are generally the same as those found in international agreements or transactions, namely:

  • Protections regarding potential conflict of interests (outside activities, investment guidelines, investment opportunities and related-party transactions).

  • Rules on indemnification of general partners.

  • Management fees and expenses.

  • Changes in general partners (withdrawal, removal and buyout of the general partner's interest).

 

Interests in portfolio companies

15. What forms of equity and debt interest are commonly taken by a private equity fund in a portfolio company? What are the relative advantages and disadvantages of each? Are there any restrictions on the issue or transfer of shares by law?

Common forms

A private equity fund usually takes equity interest in the portfolio company. Generally, this interest is common shares (acciones ordinarias) but can also be preferred stock (acciones preferidas) or quotas (cuotas) in a limited liability company (sociedad de responsabilidad limitada). Debt interest is used less commonly, although some transactions use mezzanine debt and convertible debt.

Advantages and disadvantages

While interest under a debt has the advantage of being tax deductible, the current Argentine Central Bank foreign exchange regulations contemplate several conditions and requirements for financing by local companies. Loans to local companies must be reported to the Argentine Central Bank, and are subject to certain minimum repayment terms. In certain circumstances, 30% of the loan proceeds must also be held in a mandatory non-interest bearing deposit account for one year.

However, in a bankruptcy proceeding, debt holders have preference over equity holders.

Restrictions

There are no restrictions on the transfer of shares by law, except in regulated industries such as banks, insurance companies and utilities where the approval of the regulatory authority is necessary to transfer the control or a relevant number of shares.

 

Buyouts

16. Is it common for buyouts of private companies to take place by auction? If so, which legislation and rules apply?

It is not common to require an auction subject to formal rules, but it is common to have private bidding procedures set out by the seller or the investment bank or financial advisor advising the seller. The rules of these procedures are entirely contractual and predetermined in the invitation letters that formalise the process.

 
17. Are buyouts of listed companies (public to private transactions) common? If so, which legislation and rules apply?

These transactions are not common in Argentina. However, there are "going private" transactions, when a listed company is subject to total or quasi control by a controlling shareholder (95% or more of its shares are held by the controlling shareholder). These transactions are subject to Argentine Decree No. 677 and the rules of the Argentine Securities Commission.

Principal documentation

18. What are the principal documents produced in a buyout?

Buyer protection

19. What forms of contractual buyer protection do private equity funds commonly request from sellers and/or management?

Generally, protections are negotiated with documents drafted according to international standards and subject to foreign laws. The transaction documents generally include:

  • A share purchase agreement (under which the buyer obtains ample representations and warranties coupled with appropriate indemnities, which may or may not be subject to time limitations, baskets and caps; it also includes conditions for closing that depend on the type of deal, industry and regulatory requirements).

  • Escrow agreement (typically, escrows are between 10% to 20% of the purchase price).

  • Shareholders agreement (which includes customary protections for minority shareholders, standard corporate governance provisions, restrictions on transfer of shares, dividend policy, deadlock remedies, and so on).

The transaction document may also include agreements with key managers (including labour agreements and non-compete arrangements) and option agreements.

 
20. What non-contractual duties do the portfolio company managers owe and to whom?

Under Argentine companies law managers have a duty of loyalty and diligence (owed to the shareholders, the company and, under certain circumstances, to the creditors of the company). The scope of this duty is not entirely clear under the companies law, but authors and case law have helped to define the scope.

Managers must:

  • Act bona fide in what they believe to be the best interests of the company.

  • Exercise their powers for the purpose for which such powers were conferred and not for an alien purpose.

  • Exercise their powers with discretion.

  • Not place themselves in a position of conflict of interest without the consent of the company's shareholders.

  • Exercise a reasonable degree of care and diligence in the exercise of their powers and the discharge of their duties.

According to Argentine companies law, managers can be held liable if the following occur:

  • Violations of law or bye-laws, provided such violations cause damage or loss.

  • Any other damage caused by fraud, abuse of authority or gross negligence.

Regulations do not expressly recognise the "business judgement rule" as a standard of liability. However, Argentine courts rarely impose liability on managers simply for bad judgement, and tend to abstain from reviewing the substantive merits of a director's conduct.

In addition to the duties mentioned above, managers of public traded companies are also subject to the following duties:

  • Duty of loyalty.

  • Duty of confidentiality.

  • Duty to inform.

Given that MBOs are not common in Argentina, these duties have not been extensively tested in the courts in an MBO scenario.

 
21. What terms of employment are typically imposed on management by the private equity investor in an MBO?

Employment terms and conditions are not publicly available and are generally kept confidential.

 
22. What measures are commonly used to give a private equity fund a level of management control over the activities of the portfolio company? Are such protections more likely to be given in the shareholders' agreement or company bye-laws?

The protections are included both in the shareholders' agreement and the bye-laws of the company (to the extent permissible). Management control over the activities of the portfolio company is usually achieved through:

  • Board representation.

  • Veto rights at the board and shareholders level.

  • Appointment of auditors and/or corporate counsel.

  • Appointment of key personnel.

  • Reporting duties.

 

Debt financing

23. What percentage of finance is typically provided by debt and what form does that debt financing usually take?

Given the limited access to companies' information, it is difficult to measure the percentages represented by each type of debt. Due to the existing foreign exchange regulations and the local financial market situation, companies tend to change the sources of financing on a regular basis, depending on the conditions at any particular time. Financing may include, short-, medium- and long-term loans (generally, secured bonds issued in the local market in local currency). Exporters rely heavily on trade/export facilities (both from local and foreign financial institutions). Multilateral agencies have also been present and active in the market in the past few years.

Lender protection

24. What forms of protection do debt providers typically use to protect their investments?

Security

Typically, a security package includes:

  • Pledges of shares.

  • Pledges of assets (fixed or movable).

  • Mortgages (subject to higher costs).

  • Fiduciary assignments (as collateral) of receivables.

  • Fiduciary assignments (as collateral) of other rights.

  • Promissory notes issued under Argentine law.

  • Guarantees from holding or controlling shareholders.

Contractual and structural mechanisms

Loan agreements are drafted following international market practices and, therefore include, among other things:

  • Representations and warranties.

  • Covenants (including restrictive covenants).

  • Events of default and remedies.

  • Prepayment events.

  • Choice of foreign laws and courts.

Financial assistance

25. Are there rules preventing a company from giving financial assistance for the purpose of assisting a purchase of shares in the company? If so, how does this affect the ability of a target company in a buyout to give security to lenders? Are there exemptions and, if so, which are most commonly used in the context of private equity transactions?

Rules

There are no specific regulations on leveraged buyouts in Argentina, therefore general rules apply. In principle, this type of financial assistance is allowed under Argentine law. However, in some cases local courts have ruled that these transactions can be challenged in bankruptcy or company reorganisation proceedings as they may be deemed detrimental to the rights of company creditors if:

  • The company's bye-laws do not expressly include within its corporate purpose the carrying out of these types of transactions.

  • The company does not receive fair consideration.

Insolvent liquidation

26. What is the order of priority on insolvent liquidation?

In Argentina, priorities can only be created by law. The debtor cannot create priorities in favour of any creditor.

The order of priority is as follows:

  • Secured creditors.

  • Creditors of the bankrupt estate, which include:

    • credits for court and expenses related to the maintenance, conservation and liquidation of the assets; and

    • credits for obligations assumed by the debtor against third parties (with the court's prior approval) during the reorganisation or bankruptcy proceeding.

  • Creditors with a general priority.

  • Unsecured creditors.

  • Subordinated creditors.

Secured creditors are those with rights to specific assets and can only collect from the proceeds of those underlying assets.

The following credits have special priority in the proceeds of the assets indicated in each case:

  • Construction, improvement or maintenance expenses of a given asset, on that asset during the time it is in the custody of the bankrupt debtor for whose account those expenses were incurred.

  • Credits for compensation owed to workers for six months and those arising from:

    • indemnifications for work accidents;

    • years of service or dismissal;

    • omission of advance notice or contributions to unemployment funds; and

    • interest on all of the above for a period of two years as from the due date, over the goods, raw material and equipment owned by debtor, which form part of the facilities where the worker has rendered his services, or that are used in the business of such facilities.

  • Taxes applicable to certain assets.

  • Credits secured with a mortgage, pledge, warrant, debentures or negotiable obligations with special or floating security.

  • The amount owed to the retainer for retaining a certain asset as of the date of bankruptcy declaration.

  • Credits provided by the Navigation Law, the Aviation Code, the Law of Financial Entities and the Insurance Law.

Creditors with a general priority can only collect on 50% of the proceeds of the assets once creditors with a special priority, creditors of the bankrupt estate and the capital owed for compensations and salaries has been paid. The other 50% is divided pro-rata with unsecured creditors.

Unsecured creditors collect on the balance after secured creditors, creditors of the bankrupt estate and creditors with a general preference, and before subordinated creditors.

Subordinated creditors are paid as agreed by the other creditors and debtor.

Equity appreciation

27. Can a debt holder achieve equity appreciation through conversion features such as rights, warrants or options?

Local laws allow for a debt holder achieve equity appreciation through conversion features such as rights, warrants or options.

 

Portfolio company management

28. What management incentives are most commonly used to encourage portfolio company management to produce healthy income returns and facilitate a successful exit from a private equity transaction?

Local laws allow almost any type of incentive. Share options are commonly used although not expressly regulated. Bonus payments based on performance (payable in cash or in kind) are also frequently used.

 
29. Are any tax reliefs or incentives available to portfolio company managers investing in their company?

There are no such tax reliefs or incentives available to portfolio company managers.

 
30. Are there any restrictions on dividends, interest payments and other payments by a portfolio company to its investors?

The only limitation on dividends, interest payments and other payments is that, if payments are made under a transaction that qualifies as a related-party transaction, this must be entered into on an arm's length basis.

 

Exit strategies

31. What forms of exit are typically used to realise a private equity fund's investment in a successful company? What are the relative advantages and disadvantages of each?

Forms of exit

Usually, exits are carried out through trade sales. IPOs are less common due to the underdeveloped nature of the Argentine capital market (which was also affected by the nationalisation of pension funds in 2008). Argentina's stock exchange is relatively small and most trades are made on debt instruments.

 
32. What forms of exit are typically used to end the private equity fund's investment in an unsuccessful/distressed company? What are the relative advantages and disadvantages of each?

Forms of exit

The most typical form of exit is a trade sale to a strategic investor. The sale may eventually be carried out in an auction.

 

Private equity/venture capital association

LAVCA (Latin America Venture Capital Association)

W www.lavca.org

Status. LAVCA is a non-governmental organisation.

Membership. Paid.

Principal activities. Seminars, reports and online articles.

Published guidelines. See www.lavca.org.

Information sources. See www.lavca.org.



Contributor details

Diego Serrano Redonnet

PAGBAM Abogados

T +54 11 4114 3026
F +54 11 4114 3001
E dsr@pagbam.com.ar
W www.pagbam.com.ar

Qualified. Argentina; US, New York

Areas of practice. Corporate finance; private equity and venture capital; M&A; capital markets; lending and project finance.

Recent transactions

  • Representing DLJ South American Partners in the acquisition of a stake in Ediciones Santillana in Spain, Argentina, Brazil, Mexico and other Latin American countries including Panama, El Salvador, Guatemala, Peru and Chile.
  • Advising a Spanish private equity fund in the structuring of a new fund to carry out investments in Argentina.

Fernando Zoppi

PAGBAM Abogados

T +54 11 4114 3053
F +54 11 4114 3001
E fz@pagbam.com.ar
W www.pagbam.com.ar

Qualified. Argentina

Areas of practice. Private equity and venture capital; M&A; lending and project finance.

Recent transactions

  • Representing DLJ South American Partners in the acquisition of a stake in Ediciones Santillana in Spain, Argentina, Brazil, Mexico and other Latin American countries including Panama, El Salvador, Guatemala, Peru and Chile.
  • Advising a Brazilian private equity fund in the acquisition of a natural gas compressor manufacturer company in Argentina.
  • Representing a US-based private equity fund in the acquisition and subsequent sale of electricity companies operating in different provinces in Argentina.

Maximiliano Batista

PAGBAM Abogados

T +54 11 4114 3054
F +54 11 4114 3001
E mab@pagbam.com.ar
W www.pagbam.com.ar

Qualified. Argentina; US, New York

Areas of practice. Taxation.


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