Latin Finance - March/April 2012 - 20

brazil private equity

In Brazil, General Atlantic is focused on consumer growth plays in the areas of heath, technology, and derivative plays on resources, matching its global focus. That interest in the middle-class growth story in Brazil is hardly unusual, and is still being pursued by an army of PE firms, with global shops hiring locals to target such sectors. “The consumer is still the most important theme in Brazil,” says Fernando Marques Oliveira, head of LatAm at H.I.G. Capital. H.I.G. was due to officially open its first office in the region in March, hiring Oliveira from General Atlantic to work in Rio de Janeiro. It will focus on areas including health care, education, retail, information technology, and business services. So far, however, managers are largely unconcerned about the attention the sector is receiving, or the potential dangers of higher debt burdens among Brazilian consumers. Credit growth is starting to hit a ceiling, with bad debt levels increasing, but “it is not a big issue yet,” Etlin says. “The C class is over-levered, but you still see full employment. If they lose jobs, this would create a spiral effect.”

expectations could go up, says Marcelo di Lorenzo, head of 3i Brazil, the unit of the European-based shop that set up operations in Brazil last year. “But it is not as strong as in the higher-ticket deals. The companies soon realize that they should get a discount to the market multiples.”

“We are moving toward a period of price adjustment and we expect to see the value reduction we’ve seen in the public markets migrate to private transactions,” Etlin says. “It hasn’t happened yet, so as a result we are currently seeing much less investment activity in private deals.”

One Eye Abroad

Over $10bn in PE money available for Brazil: Etlin

Lorenzo still considers valuations reasonable, and echoes those finding More broadly, the large amounts of plenty of space in the middle market, money chasing a relatively small universe noting the “enormous” numbers of of opportunities does have the potential companies doing very well in Brazil. to impact valuations, though some The abundance of opportunities can managers feel it will be a while before this still absorb the demand coming from PE happens. Indeed, some say it may soon be shops. a good time to buy, as lower valuations in 3i focuses on business services and the public market last year spill over into the consumer sector in Brazil, and has the private arena. about 25 deals in the pipeline. About “There is too much capital coming 10% involve auctions, and about 50% to Brazil, especially among the big firms tend to be exclusive negotiations, focusing on the same large cap deals, with the remainder having one or two and there are a limited amount of them,” interested parties. says Oliveira. “They are on the radar not “Valuations have moved up in general, only of private equity, but the investment more so in the top end of the market than bankers. You can end up with auctions at the smaller end,” says Bruneau at 57 that inflate prices.” Stars. “But in the last three to six months Still it is thought that more sustained there has been a general slowdown in growth would be needed to push up Brazil. Our feeling is that valuations valuations in the long term. At this should come down a little bit.” point managers still consider them to be More reasonable valuations mean this reasonable after they fell a bit during the is a good moment for Advent to go into second half of 2011. acquisition mode, after being a seller in “In the middle market, the the overheating cycle, Etlin says.

Reasonable Multiples

Escobari also sees opportunity as Brazilians and other LatAm companies expand internationally. Co-investments, such as the one General Atlantic made in Colombia’s Suramericana during its purchase of ING’s Latin American assets, should become more common. “As Latin American companies internationalize, I hope to see more of them relying on private equity to help them with the issues of becoming global,” Escobari says. “There will be more deals [like this]. That is something we think we can be very helpful on.” With the likely emphasis on buying, mangers are not so concerned about the poor performance of the Bovespa and the poor track record of recent IPOs, and still hold out hope for a better year ahead. “I’m optimistic the IPO market will open this year,” Escobari says. “There are a lot of high-quality companies that have filed already.” Concerns are largely focused abroad. Though Brazil is fairly insulated, big hiccups in Europe and Asia would have ripple affects in many sectors, including those linked to consumer demand. Oliveira points to Asian growth as the other big indicator to watch. He doesn’t yet see signs of deceleration. At the same time, continued problems in Europe could create opportunities for LatAm PE, as European companies are forced to sell quality assets, as was the case with ING. As long as the troubles aren’t too deep, they can make EM allocation all the more attractive. “If you look at what policy makers globally are doing with interest rates, people need to allocate even more to emerging markets to make returns work,” Oliveira says. “I would say that there will be even more capital available to economies like Brazil, which has many years of growth to come.” LF

20 LatinFinance

March/April 2012
Latin Finance - March/April 2012

Table of Contents for the Digital Edition of Latin Finance - March/April 2012
