Brazil Insight

Insight Brazil An Overview of Trends in Select Sectors and Markets May 2010

Country Snapshot* razil’s economic performance over the last two years has inspired tre- mendous optimism among investors circling Latin America’s largest 2009 Population: 191.5 million % of Population Under 15 Beconomy for opportunities. While the impact of the global financial cri- Years-old: 28% sis cannot be understated — Brazil’s economy shrank in 2009 for the first time 2010 Nominal GDP: US$1.9 trillion since 1992 — the speed and magnitude of the country’s recovery can already 2009 Real GDP Growth: -0.2% be measured. The International Monetary Fund projects that Brazil’s econ- 2010 Real GDP Growth: 5.5% omy will grow 5.5% in 2010. A testament to investor confidence, credit rating 2009 Average Inflation:4.9% agency Moody's followed the other two rating agencies in upgrading the coun- *All data projected. try’s sovereign debt rating in September 2009. The confidence in Brazil’s future Source: International Monetary Fund, Population Reference Bureau. is echoed by institutional investors. For the second year in a row, Brazil ranked as the second most attractive emerging market for private equity investment in the 2010 EMPEA / Coller Capital Emerging Markets Private Equity Survey.

Brazil’s appeal as an investment destination rests on stable government policies and a rapidly growing middle class, which has grown from 38% of the population in 2003 to 49% in 2010 according to the Getulio Vargas Foundation. An exciting calendar of global sporting events is also accel- erating interest in the market. Brazil was awarded the 2014 FIFA World Cup and the 2016 Summer Olympics. Preparation for these events is inten- sifying investment in Brazil’s infrastructure through government-backed initiatives and private investment. In the energy sector, Brazilian oil company Petrobras uncovered a watershed oil discovery off the coast of Brazil, reported to be the largest in the Americas since 1976, potentially placing Bra- zil as the fifth largest country for proven oil reserves, on par with Kuwait.

The Attractiveness of Emerging Markets/Regions for GP Investment over the Next 12 Months – LP Views

Country / Region Overall Ranking 2010 2009 Change China 1 1 - Brazil 2 2 - India 3 3 - Other Emerging Asia 4 5 +1 Latin America (ex Brazil) 5 6 +1 Central & Eastern Europe (inc Turkey) 6 4 –2 South Africa 7 7 - Africa (ex South Africa) 8 8 - Middle East 9 9 - Russia/CIS 10 10 -

Source: 2010 EMPEA / Coller Capital Emerging Markets Private Equity Survey.

Although the number of active fund managers continues to increase, private equity investment as a percentage of Brazil’s GDP remains low (typically less than 0.5%) compared with the penetration rate in the United States (typically between 1% and 2%). In this environment, competition for deals is still minimal and auctions are rare; however, private equity firms do face competition in the demand for capital from the soaring public markets. Recent peaks in the Bovespa Index, flirting with the levels of the index’s May 2008 high, make the public markets an attractive fundraising venue for companies seeking capital. Private equity investors are forced to communicate their value proposition as an alternative to a public listing to prospective investee companies.

EMPEA Insight Brazil’s private equity market continues to grow despite Editorial Director recent slowdowns in fundraising and investment. In the Jennifer Choi [email protected] past year, a number of domestic financial institutions Writing and Research have launched large, captive funds aimed at domestic Nadiya Satyamurthy [email protected] Harrison Moskowitz [email protected] investment, including 2bCapital, a joint venture between Ted Hickey [email protected] Brazil-based Banco Bradesco and Spain-based Banco Espir- Creative Direction and Production Management ito Santo, and another fund launched by domestic bank Greg Farmer [email protected] Banco Modal. BTG Pactual, the investment bank created by Executive Editor BTG Investments’ acquisition of UBS Pactual from UBS in Carlos Perry [email protected] 2009, is also raising a private equity fund. Advertising Opportunities Each issue of EMPEA Insight provides an opportunity for a single Stepped-up interest from global private equity firms is add- exclusive back page advertisement. For a list of upcoming issues and more information about advertising opportunities and rates, ing to the “buzz” about Brazil. The Carlyle Group made contact Greg Farmer at [email protected]. headlines in December 2009 when the firm’s South Amer- About EMPEA ica buyout team made its first investment in the Brazilian The Emerging Markets Private Equity Association is a non- profit, independent, global industry association that promotes market, acquiring tourism operator CVC Brasil. Another greater understanding of and a more favorable climate for global private equity firm, Warburg Pincus, is reportedly private equity and venture capital investing in the emerging mar- returning to the market. U.S.-based Blackstone Group has kets of Africa, Asia, Europe, Latin America and the Middle East. For more information, visit us on the web at empea.net. expressed interest in Latin America and Brazil, both as an

investment destination and as a source for LP capital. Data and analysis presented in the EMPEA Insight series is derived from EMPEA’s proprietary industry database, FundLink, Some international private equity investors in Bra- made possible with generous support from the following institutions: CDC, DBSA, DEG and FMO. We gratefully acknowledge zil have origins outside of the Americas. South their contributions. Africa-based Standard Bank Private Equity made its first investment in Brazil in December 2009, open- ing a local office in the same year. Many of these global firms are actively building local teams and networks.

Photography credits: Cover | Marcosleal - commons.wikimedia.org Page 2 | Mathieu Bertrand Struck - [email protected]

The fund is targeting US$1.4 billion in total commitments. Fundraising Trends International private equity firm Advent International made Fundraising for Brazil-focused funds fell significantly in headlines with a US$1.65 billion close on its fifth regional 2009 from a peak of US$3.6 billion in 2008 to only US$401 fund (with a Brazil-centric mandate) in April 2010. The million in 2009. The largest known final fund close for the fund is more than 25% larger than its predecessor fund, year was held at US$275 million for TMG Capital’s second with over 50 investors from diverse institutions. While a private equity fund, targeting Brazilian SMEs. In addition, few niche sectors such as renewable energy, infrastructure Brazil’s oldest private equity firm, Companhia de Participa- and real estate have been increasingly common targets for coes (CRP) reportedly held a first close on its seventh fund private equity investors, most firms maintain a generalist in December 2009 after a long fundraising cycle. The firm is sector strategy. targeting US$150 million in commitments for the fund. The Institutional investor interest in the asset class remains trend contrasted 2008, a year which saw three funds, man- high. For the second year in a row, investors ranked Bra- aged by AIG Capital Partners (now PineBridge Investments), zil as the second most attractive emerging market for Gavea Investimentos and Patria Investimentos, reach final private equity investment according to the recently pub- closes at over US$500 million. However, as liquidity con- lished 2010 EMPEA / Coller Capital Emerging Markets straints ease for local LPs and international investor interest Private Equity Survey. Furthermore, 36% of those surveyed gains, one can expect the return of significant capital com- signaled they would either begin or expand investment mitments, signaled by a handful of headline-grabbing in the market over the next 1-2 years. Nearly 20% of LP closes in the first quarter of 2010. respondents signaled they would begin investing in Bra- For example, GP Investments held a second close on GP zil for the first time, suggesting that Brazil may capture Capital Partners V at slightly over US$1 billion in January. more new investors than any other emerging market.

Brazil Private Equity Fundraising and Investment Totals, 2005–2009 (US$B)

6 Funds Raised 5.3 Capital Invested

4 3.6

3.0 3

US$ BillionsUS$ 2.5 2.1 2 1.3 1.0 1 0.5 0.4 0.2 0 2005 2006 2007 2008 2009 Source: EMPEA.

Diversification of Brazilian Investor Base (LPs), Ten Largest Pension Funds in Brazil as of December 2009 Pension Fund Size (R$B) Size (US$B) PREVI 142.5 81.4 PETROS 45.6 26.1 6% 22% FUNCEF 38.7 22.1 FUNDACAO CESP 16.5 9.4 7% VALIA 11.9 6.8 ITAUBANCO 10.6 6.1 7% SISTEL 10.3 5.9 BANESPREV 9.0 5.2 16% 9% CENTRUS 8.6 4.9 FORLUZ 8.1 4.6 Source: ABRAPP, December 2009. 10% While the participation of pension funds has unlocked a 12% 11% massive source of domestic capital for local fund managers, some private equity firms continue to target foreign LPs, citing the lack of an established LP culture

Pension Funds Family Offices among domestic institutions as a deterrent. Domestic insti- Parent Organizations Investment Funds tutional investors are sometimes viewed as reluctant to Others Trusts & Endowments entrust general partners with investment decision-making GP Management Teams Funds of Funds power, and they are known to insist on a seat on funds’ Banks investment committees.

The growing interest of local institutions in domestic Source: GVcepe − Center for Private Equity and Venture Capital Studies private equity has been catalyzed by reduced interest at FGV-EAESP. rates—Brazil’s central bank set the country’s targeted over- Note: Other includes Multilateral Institutions, Insurance Companies, Government and State-Owned companies and Private Companies. night lending rate at an all-time low of 8.75% from August 2009 to April 2010—aimed at stimulating economic recov- Since gaining regulatory approval to invest in the asset class ery. Lower interest rates have prodded these institutions in 2003, domestic pension funds have grown to represent a out of an over-weighted allocation to fixed-income and significant portion of capital committed to domestic private into equities and alternative investments. However, alloca- equity. Pension funds accounted for 22% of the country’s tions may shift with tightening of the country’s monetary investor base in 2009, according to GVcepe−Center for policy. Brazil’s central bank raised interest rates in late-April Private Equity and Venture Capital Studies at FGV-EAESP. 2010, marking the first rate-hike since October 2008. The Public pension funds reported to have recently invested in measure is aimed at curbing inflation, a growing concern the asset class include FAPES - BNDES Pension Fund and Fun- for investors and government officials in Brazil as capital dacao dos Economiarios Federais (FUNCEF). Private pension inflows continue to grow. funds with private equity exposure include Ceres, Petros, Previ and Valia. While Brazilian pension funds received the regulatory green light to invest in certain fund struc- tures targeting investments outside of Brazil in 2009, these institutions have focused on the domestic market to date.

Brazil Private Equity Investments by Sector, 2009 Investment Trends (No. of Investments, US$m) EMPEA tracked US$1 billion in private equity capital invested across 20 deals in the Brazilian market in 2009. This represented a 67% drop from the US$3 billion invested (1, N/A) (4, US$232m) in 2008 and a 44% decline in the number of deals (down from a total of 36). While large-scale investments are tak- (2, US$171m) ing place in the energy and infrastructure sectors, private equity investors continue to focus on the growth of the

Brazilian middle class. (4, US$112m) (3, US$187m) The Carlyle Group is among the investors targeting the consumer opportunity, executing the largest known private equity deal in Brazil last year with a US$250 million (3, N/A) (3, US$291m) investment in CVC Brasil, the largest tour operator in Latin America. Carlyle’s South American team carried out a purchase of the founder’s interest in the company, buying a 63.6% stake. Advent International added to its global education portfolio with a US$140 million investment in Kroton Energy & Natural Resources Banking & Financial Services Educacional through Kroton’s holding company, Pitagoras Infrastructure Services Administracao e Participacao. The deal represents Advent’s Consumer Media & Telecom fifteenth investment in Brazil since it first entered the mar- Industrial & Manufacturing ket in 1997. New market entrant U.S.-based OpenGate Capital entered Brazil’s growing telecommunications mar- Source: EMPEA; n=20 investments. ket with its purchase of Philips Business Communications earlier this year.

Sampling of Recent Investments in Brazil Trans. Value Equity Fund Manager Company Sector (US$m) Trans. Date (%) Education Services Advent International Kroton Educacional 140 Jun-09 50 & Training Artesia Capital Management Community Bank of Manatee Banking 12 Dec-09 60 Axxon Group Mundo Verde Consumer N/A Sep-09 100 BNDES Participacoes, Companhia Artmed Editora Publishing N/A Nov-09 13 de Participacoes (CRP) Mitsubishi Motors do Brasil, BTG Pactual Automotive N/A Mar-10 N/A Suzuki Motors do Brasil Capital International Ibmec Education Services 74 Feb-09 N/A Companhia de Participacoes (CRP) Pisani Industrials & Mfg. N/A Nov-09 N/A Equity International Brazilian Finance & Real Estate Real Estate Finance N/A Dec-09 9 Fir Capital Cyberlynxx IT Services N/A Apr-10 N/A OpenGate Capital Philips Business Communications Telecommunications N/A Mar-10 100 Paladin Realty Partners Inpar Real Estate 28 Mar-10 N/A Rio Bravo Investimentos Multdia Food & Beverage 14 Jan-10 N/A AMG/Sistema de Implante Southern Cross Group Industrials & Mfg. N/A Oct-09 75 Nacional Standard Bank Private Equity Casa do Pao de Queijo Restaurants 41 Dec-09 70 The Carlyle Group CVC Brasil Tourism 250 Dec-09 64

Spotlight: Energy and Infrastructure Brazil’s government recognizes both the immediate and TPG Capital reportedly invested US$30 million in Azul, a long-term need for investment in Brazil’s infrastructure Brazilian airline company eyeing an IPO in the near future. sector. Over the next six years, Brazil will host two major Brazil continues to tap its massive natural resources, both international sporting events that will tax the limits of the biofuels and hydrocarbon, to meet the country’s rapidly country’s transportation and energy capacities. The Lula growing energy demands. Brazil made major investments administration launched the Growth Acceleration Program in the renewable energy sector over the last four decades, (PAC) in 2007, allocating US$240 billion to fund various helping to make the country the world’s most cost-efficient infrastructure needs. Lula proposed a successive plan this producer of ethanol fuel. year that would slate an additional US$872 billion for infrastructure investment, of which US$526 billion would be Private equity continues to play a pivotal role in financ- disbursed between 2011 and 2014. Numerous projects are ing the growth of the ethanol fuel industry. Stratus Group underway in Brazil’s roads, ports, and railway infrastruc- recently helped finance the expansion of sugarcane-based ture. Major projects include a US$18 billion high-speed biochemicals and biofuels producer Amyris Brasil, lead- ing a US$80 million capital injection in the company. The railway between Sao Paulo and Rio de Janeiro, a hydro- investee company will use the funding to build a new electric power station estimated to cost US$11 billion and plant and to deploy newly-developed biotechnology into numerous road projects financed by Brazilian and multilat- its operations. Private equity firms are also targeting other eral development banks. renewable energy sectors. BTG Pactual recently invested Private equity investors are increasingly playing a role in in ERSA, a company which generates electric energy from financing the growth and development of Brazil’s infra- diverse renewable energy resources, such as hydropower, structure. Darby Overseas Investments and Stratus Group wind power and biomass-fired power plants. Private equity secured local capital for a US$245 million mezzanine infra- firm NSG Capital manages a US$235 million energy fund, structure fund in 2008. The fund invested US$30 million in a focused on wind energy investments, and another US$350 holding company of Eletrogoes, which owns a hydropower million infrastructure fund, targeting opportunities in both plant and a biomass-fired thermal power plant in northern the hydrocarbon and renewable energy sectors. Brazil, in mid-2009. In March 2010, domestic private equity Recent oil and gas discoveries have expanded Brazil’s avail- firm BRZ Investimentos took a 20% stake in Elog, the logis- able domestic energy resources. While private equity firms tics arm of roadways concession company EcoRodovias, for seldom seek stakes in oil and gas exploration or conces- approximately US$51 million. Private equity investments sions, some see opportunity in related industries. Private in Brazil’s transportation infrastructure are not limited to equity firm AG Angra recently invested an estimated US$41 the ground. The country ranks fourth globally in the pro- million in Georadar, a company that carries out geological duction of commercial airplanes. In early 2010, U.S.-based surveys for oil and gas exploration.

Sampling of Recent Energy and Infrastructure Investments in Brazil Trans. Value Fund Manager Company Sector (US$m) Trans. Date Equity (%) AG Angra Georadar Services 41 Nov-09 50 BRZ Investimentos ELOG Transportation 51 Jan-10 20 Empresa de Investimento em BTG Pactual Energy & Natural Resources 172 Oct-09 23 Energias Renovaveis (ERSA) Darby Overseas Investments, Eletrogoes Clean Technology 30 Jul-09 N/A Stratus Group Green Capital Investimentos Ultracargo Logistics 46 Mar-10 100 Stratus Group-led consortium Amyris Brasil Clean Technology 80 Dec-09 N/A TPG Capital Azul Aviation 30 Jan-10 10

Brazil IPOs and Follow-on Share Offerings, Exit Trends 2005-March 2010 (US$B)

Private equity-backed exits slowed during the economic 40 40 downturn due to lower valuations and decreased access Follow-on Share Offerings to liquidity. While the BM&F Bovespa stock exchange was 7.2 7.2 IPOs 30 one of the first emerging markets exchanges to dramati- 30 cally decline, it was also one of the first to recover. In 2010, IPOs by private equity-backed companies have included 20 Gavea Investimentos-backed Aliansce, a shopping mall 20 19.9 US$ BillionsUS$ 28.8 19.9 operator, and Axxon Group-backed construction company 28.8 15.0 Mills Estruturas e Servicos de Engenharia, which raised 10 5.5 15.0 10 5.5 US$362 million and US$392 million respectively. While the 1.7 2.5 6.9 1.7 IPO market is recovering, Brazil has held only two private 6.9 5.5 2.52.1 3.9 5.5 3.9 0 2.1 3.9 3.9 equity-backed IPOs of a total of ten as of April 2010, down 0 2005 2006 2007 2008 2009 Mar–10 2005 2006 2007 2008 2009 Mar–10 from the exchange’s 2007 peak level of 64 IPOs. Source: Deloitte (with data from BM&F Bovespa e Comissao de Valores Mobiliários - CVM). Still the primary exit route, several strategic sales occurred in 2009 despite lingering uncertainty in Brazil’s financial markets. Decisao Gestao de Fundos exited its investment Select World Market Indices, 2001-March 2010 in DHC Outsourcing, an internet technology company, 10001000 BSE-500 to a local strategic investor. U.S.-based Great Hill RTS Index Partners made headlines when it sold its 91% interest in 800800 Bovespa Index Sao Paulo-based e-commerce company BuscaPe to multi- SSE Composite Index national media conglomerate Naspers for approximately S&P 500 600600 US$340 million.

Brazil’s secondary private equity market has shown some 400400 movement. Patria Investimentos sold its 70% stake in cof- fee store chain Casa do Pao de Queijo to Standard Bank 200200

Private Equity for an estimated US$41 million in December Index Value (2001 base year=100) 2009. The purchase was made following an auction held at 0 0 20012001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 Mar-10 Mar-10 the BM&F Bovespa stock exchange. Source: World Federation of Exchanges, Bombay Stock Exchange (BSE), Rus- sia Trading System Stock Exchange (RTS), Sao Paulo Stock Exchange (Bovespa), Shanghai Stock Exhange (SSE) and Standard & Poor’s (S&P). Sampling of Recent Exits and PE-backed IPOs in Brazil Exit Equity Amount Stake Fund Manager Company Sector Exit Type Exit Date (US$m) (%) Banking & Advent International CETIP IPO Oct-09 N/A N/A Financial Services Engineering & Axxon Group Mills IPO/Share Sale Apr-10 N/A N/A Construction Decisao Gestao DHC Outsourcing Information Technology Strategic Sale Mar-09 N/A N/A de Fundos (DGF) Gavea Investimentos Aliansce Shopping Centers Consumer IPO Jan-10 N/A N/A GP Investments BR Malls Consumer Share Sale Jan-10 167 7 Great Hill Partners BuscaPe Information Technology Strategic Sale Sep-09 340 91 Patria Investimentos Casa do Pao de Queijo Restaurants Secondary Sale Dec-09 41 70

Sampling of Firms Investing in Brazil Fund Manager(s) Fund Name(s) Fund Focus Geographic Focus 2bCapital (Banco Bradesco, 2bCapital Fund* (Raising; BRL500m, US$277m) Generalist Brazil Banco Espirito Santo) ACON Latin America Opportunities Fund Central America, ACON Investments, LLC Generalist (Raising, US$400m) South America Actis Actis Emerging Markets Fund 3 (2007, US$2.9B) Generalist Emerging Markets Latin American Private Equity Fund IV (2007, US$1.3B); Advent International Generalist Latin America Latin American Private Equity Fund V (2010, US$1.65B) Alothon Group Alothon Fund II (2008, US$80m) Generalist Brazil, Chile Angra Partners Angra Partners II (Raising, US$500m) Generalist Brazil Artesia Capital Management Artesia Capital Management Fund I (2004, US$240m) Generalist Brazil Healthcare & Atlantica Investimentos FIP Atlantica Saude (2009; BRL160m, US$68m) Brazil Life Sciences Banco Modal Fund 1* (Raising; BRL1.8B, US$1.02B) Generalist Brazil BNDES Participacoes Seed Capital Program (2007, US$38m) SMEs Brazil BTG Pactual Brazil Infrastructure Fund FIP (2005; BRL1.1B, Infrastructure and BTG Pactual Brazil US$413m); BTG Pactual Brazil Investment Fund I LP (Raising) Energy; Generalist Burrill & Company Burrill Brazil Fund (Fundraising, US$100m) Biotechnology Brazil Capital International Private Equity CIPEF V (2007, US$2.25B) Generalist Emerging Markets Funds (CIPEF) Brazilian Middle Market Growth Fund (CRP VII) Companhia de Participacoes (CRP) Generalist Brazil (Raising, US$150m) Confrapar Participacoes e Pesquisas HorizonTI (Raising, US$10m) Technology Brazil Darby Overseas Investments, Brazil Mezzanine Infrastructure Fund (BMIF) (2008, Infrastructure Brazil Stratus Group US$245m) Decisao Gestao de Fundos (DGF) FIP Terra Viva Fund (2008, US$150m) Renewable Energy Brazil DLJ South American Partners DLJ South American Partners I (2007, US$300m) Generalist Argentina, Brazil, Chile FIR Capital Partners Fundotec II (2007, US$45m) Technology Brazil Gavea Investimentos GIF II (2007, US$778m); GIF III (2008, US$1.3B) Generalist Brazil Global Emerging Markets (GEM) / Global Emerging Markets (GEM) / Banco Pine Fund* Generalist Brazil Banco Pine SA (Raising, US$250m) Governanca & Gestao Investimentos FIP GG II Fund (2007, US$430m) Generalist Brazil GP Capital Partners IV (2007, US$1.3B); GP Capital Partners V GP Investments Generalist Brazil (Raising, US$1.4B) Green Capital Agrotech Fund (Raising; BRL150m, US$85m); Agribusiness; Energy Green Capital Investimentos Brazil Green Capital Oil & Gas Fund (Raising; BRL500m, US$284m) & Natural Resources Latour Capital do Brasil Fundo Brasil Sustentabilidade (Raising, US$240m) Clean Technology Brazil NSG Capital Administracao FIP NSG Brazil Energia (2008, US$235m); Renewable Energy; Brazil de Recursos FIP NSG Brazil Infrastructure (2007, US$350m) Infrastructure Paladin Realty Partners Paladin Realty Latin America Investors III (2009, US$500m) Real Estate Latin America Brazil Private Equity Fund III (2007, US$700m); Patria Investimentos Generalist; Real Estate Brazil Brazil Real Estate Fund II (Fundraising, US$400m) PineBridge Investments PineBridge Latin America Partners II (2008, US$692m) Generalist Latin America Rio Bravo Nordeste II (2007, US$70m); Rio Bravo Energy I Rio Bravo Investimentos Generalist Brazil (Raising, US$250m) Southern Cross Latin America Fund III (2007, US$751m); Southern Cross Generalist Latin America Southern Cross Latin America Fund IV (Raising) Stratus Group Stratus Capital Partners (Raising, US$300m) Generalist Brazil Teka Capital Teka I (Raising, US$150m–US$250m) Generalist Brazil, Colombia TMG Capital TMG Private Equity Fund II (2009, US$275m) Generalist Brazil Trivella Guarani (Raising, US$100m); Trivella M3 Trivella Investimentos Generalist Brazil (Raising, US$25m) TIBA (Raised, US$550m); ViVA Fund (Raising, US$300m); Agribusiness; Vision Brazil Brazil Brazil Real Estate Opportunities Fund II (Raising, US$500m) Real Estate *Exact fund name unknown