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Brazil Insight

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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 com- pany 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. © 2010 Emerging Markets Private Equity Association 1 EMPEA Insight: Brazil May 2010 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 alterna- tive 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 insti- tutions: 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] 2 © 2010 Emerging Markets Private Equity Association May 2010 EMPEA Insight: Brazil 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 5 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. © 2010 Emerging Markets Private Equity Association 3 EMPEA Insight: Brazil May 2010 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 man- agers, 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.
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