Latin Finance - March 2008 - 40

Brazil private equity PE Shows Signs of Restraint by John Rumsey he biggest international players are arriving, the drip of money from wealth funds is slowly accelerating, local institutional funds are starting to invest and domestic private equity (PE) IPOs have met with success. But the euphoria in Brazilian PE may well be short lived. The amount of PE cash entering Brazil more than trebled last year. An estimated $7 billion in new funds was raised, compared to less than $2 billion in 2006, according to Patrice Etlin, managing director of Advent in São Paulo. That investor interest should be piqued is hardly surprising after four years of sizzling stock market performance, culminating in 2007 with the globe’s second best return, at 74.1% in dollar terms. Brazil has the strongest macroeconomic environment for private equity ever seen, reckons Patrice Ledoux, head of the Brazil office of London-headquartered PE shop ACTIS, with $450 million under management in Brazil. He points to support from international reserves, falling interest rates, as well as a trade and primary surplus. Multiples remain lower than other big emerging markets, and PE inflows are low compared to Asia, which has enjoyed some $30 billion annually, he says. Data from the Emerging Market Private Equity Association supports the view that LatAm is the next hot thing. Its 2007 survey of limited partners found that 64% expect to be investing in Latin America in five years’ time. That is more than double the 31% already investing. The money will be evenly split between Brazil and the rest of the continent. A KPMG poll of 140 private-equity stakeholders released in February shows 42% of participants plan to invest in Brazil over the next two years, compared with 34% in Mexico and 12% in Colombia, the next highest. Some 84% say that Brazil is either favorable (49%) or very favorable (35%) to inbound PE investment. However, only 39% say they expect overall 2008 LatAm fund raising to exceed last year’s level. In the next two to three years, infrastructure deals in communications and distribution channels such as ports, airports, pipelines, water treatment plants and roads comprise the most attractive investment opportunity for private equity, according to 69% of respondents, while 66% of the fund managers polled said energy and natural resources held the most opportunity. Consumer markets was cited by 55% of respondents, financial services was named by 50%, and 35% said they saw the most opportunity in health care in 2008-2010. Much of the new money is already in evidence. In 1996, T Brazilian private equity has been enjoying a fundraising heyday. But optimism will be severely tested by a choppy Bovespa and hostile debt markets. Advent International raised $235 million for its first Latin fund, says Etlin. Last year, it was able to get $1.3 billion for its fourth fund, illustrating the huge interest from institutional investors in the region. The private equity arm of JPMorgan has more than $1 billion in its war chest for Latin America as do Merrill Lynch, UBS Pactual, GP Investments and Gávea with a similar amount each, says Ledoux. Foreign firms are seeing money come in not only as allocation from broader pools, such as global EM and BRIC funds, but also from local fundraising. Darby Overseas Investment, for example, is finalizing a 400 million reais Brazilian Mezzanine Infrastructure fund, with cash raised purely from domestic investors, says Fernando Gentil, head of the firm’s Brazil operations. While foreigners hunt in Brazil, purely local PE firms locally are getting cosy with overseas wealth funds. GP Investments, saw Singaporean wealth fund Temasek invest $100 million, and other Middle East and Asian funds chip in. Temasek is keen to raise investment in the country and will open an office in Brazil. Finally, the US giants who have tiptoed around Brazil are arriving in force. Carlyle hired real estate veteran Eduardo Machado at the beginning of 2007 and has since announced two major agreements in the sector. Blackstone, long rumoured to be scouting for opportunity, finally sealed a deal in December, entering a strategic partnership with Pátria bank. KKR is also said to want to enhance its presence. “These mega firms represent serious competition because they have the clout, relationships and track record with large investors to raise large amounts of money quickly,” says Gentil. Still, one avenue of promising fund raising looks blocked for now. Last year, GP blazed a trail by raising capital through equity markets. And FIR Capital, a venture capital specialist in small and mid-sized companies, submitted a request to sell shares through the Bovespa in January through UBS Pactual. But it remains to be seen just how long that deal will take to place. LF UPDATE For more of this story see www.latinfinance.com > 40 LATINFINANCE March 2008
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Latin Finance - March 2008

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