Insight BrazilBrazil An Overview of Trends in Select Sectors and Markets May 2008

Country Snapshot razil is leading the resurgence of renewed investor interest in in Latin America, drawing nearly 60% of the private equity capital • Population: 189 million (1.008% Braised for Latin America PE funds in 2007. growth est. 2007) • GDP: US$ 1,295 billion (est. 2007)1 Investment volumes are reaching unprecedented heights—at US$4.7 billion, 2007 volumes were roughly 10 times that of 2005, and double the peak of the 1990s • GDP per capita: US$ 6,842 (est. 2007)1 boom years. Brazilian GPs are also building a solid record of exits, contributing to • Average GDP growth 2001-06: 2.9%1 the explosion in IPO activity in 2006 and 2007. Brazil’s 2007 aggregate exit values • GDP growth 2007 exp.: 4.8% 1 surpassed dollar volumes across the entire region from 2003 to 2005. • Market: 403 funds, With one-third of the region’s population, and roughly half of its land mass, Bra- $165.9B in Private funds (16% of GDP) 2 zil’s prominence in the region’s private equity renaissance is not only a function • GDP World Rank: 10th largest econo- of the market’s size, but also a strong record of sustained growth and improved my (in 2006)1 economic stability. • Other indicators: 2nd largest cell Economic growth in Brazil exceeded expectations at 5.4% in 2007, and is ex- phone market in the world, 42% of population under 20 years old. pected to continue in 2008, with estimates ranging from 4.8% to over 5% . Infla- tion rates are now below 4%, well within the 2.5-6.5% target band of the Bank 1 IMF. 2 ABVCAP. of Brazil. The Brazilian Central Bank’s target interest rate has been on a sustain- able downward trend since the middle of 2005. Long anticipated, Brazil became investment grade at the end of April 2008, when Standard & Poor’s upgraded Brazil’s sovereign debt rating to BBB- from BB+.

Brazil’s reforms in recent years to attract and promote private equity and have borne fruit—53 firms commenced private equity operations in Brazil between 2001 and 2007, and 89 PE/VC firms currently manage 153 funds in Brazil.

PE Funds Raised 2002-2007 (USD Billions)

10 Chile Chile

8 Mexico Mexico

Other 6 Other

Regional Regional 4 Brazil Brazil

2

0 2002 2003 2004 2005 2006 2007 2002- 2007 Source: EMPEA

Emerging Markets Private Equity Association 1 EMPEA Insight

Recent Fundraising Activity

The funds universe in Brazil is in a period of dramatic Players focused on Brazil’s venture capital segment also growth—both in the amount of capital being raised and continue to grow. Silicon Valley investor Draper Fisher Ju- the diversity of funds tapping the market. At the rvetson (DFJ) established a partnership VC firm Fir Capital end of the spectrum, the largest Brazilian fund manager, in 2007 to raise the US$100 million DFJ FIR Brazil II Fund GP Investments, broke the US$1 billion ceiling in the fall (subsequently evolving to include DFJ’s acquisition of a of 2007 with a fourth fund that closed at US$1.3 billion, 12.5% stake in Fir). Other venture investors in the market in more than double the target. GP’s upcoming fifth fund is 2008 include Mercatto Venture Partners, raising a US$100 targeting US$2 billion or more. In April, AIG Investments million food and beverage fund and a US$200 million clean closed on US$692 million for its Special Situations Fund energy fund, and Stratus Investimentos, whose GC II Fund, II—representing a three-fold increase over a US$215 mil- with a goal of US$70 million, will channel expansion capital lion predecessor fund. Brascan, the asset management to technology companies. arm of Banco Brascan, aims to raise at least US$2 billion in Furthering a collaboration begun in 2002 to introduce mezza- 2008 across multiple funds focused on natural resources, nine finance to the region, Stratus Investimentos and Darby infrastructure and real estate. Overseas Investments are raising a $230 million mezzanine Within the middle market, established players with prede- fund targeting the infrastructure sector in Brazil. The fund cessor funds under $100 million are now targeting between is expected to close in the first half of 2008. This will mark US$150 million and US $300 million—among them CRP Darby’s first mezzanine fund dedicated solely to Brazil. Participacoes and Fama Investimentos. The middle market Fund managers in the region are also beginning to raise is also benefiting from an influx of new regional funds, capital through sales of stakes in their management com- including DLJ South American Partners, a joint venture with panies. GP Investments led the way in May 2006 by be- Alternative Investments that closed a US$300 coming the first listed PE firm in Latin America. Fir Capital million Latin America fund in April. UK-based Actis’ Latin is now in the process of raising as much as US$250–300 America Fund III, with a target of US$250 million, is also million through private placement of shares in the manage- expected to invest primarily in middle market buyouts ment company, in addition to the 12.5% stake held by DFJ. in Brazil. Advent International’s 2007 US$1.3 billion Latin Gavea Investimentos received a capital injection from Har- America Private Equity Fund IV will also invest heavily in Brazil. continue on page 3

Sampling of Brazil-Dedicated Funds in the Market in 2008 Darby Overseas and US$ 230 m mezzanine fund focused on infrastructure Stratus Investimentos DGF Investimentos US$ 170 m Terra Viva Fund, renewable energy Fama Investimentos US$ 150 m, mid-cap companies GP Investments US$ 2 b fund primarily focused on Brazil Mercatto Venture Partners US$ 200 m renewable energy venture fund, and US$ 100 m VC fund focused on food & beverage Patria Investimentos US$ 400 m Brazilian Private Equity Fund III, consumer sector focus Stratus Investimentos US$ 300 m buyout fund and US$70 million technology fund Fator Capital (Banco Fator) US$ 230 m, middle market companies, and US$600 million infrastructure fund Kayros Venture Partners US$ 200 m, biofuels production Invest Tech US$ 19 m vc fund

Source: EMPEA

2 Emerging Markets Private Equity Association May 2008

No Interest

Observing vard Management Company’s purchase of a 12.5% stake InvestingLPs Current vs. Expected Future late in 2007. Gavea will use part of the proceeds towards Investment Strategies a new fund being raised in 2008. 2008 vs. 2013

All told, funds focused on Brazil have raised more than Lat-Am ex-Brazil Brazil US$1 billion year-to-date in April 2008. Additionally, at least 10% 6% 11% No Interest 10 funds are raising upwards of US$4.6 billion this year, 21% translating to a potential doubling in capital focused on Bra- 31% Observing zilian opportunities in 2008 relative to the US$2.5 billion 41% Investing 54% raised in 2007. 63% EMPEA’s research confirms that investor interest in Brazil and Latin America has returned. In its 2008 Survey of LP Inter- 63% est in Emering Markets PE, EMPEA found that LP investment 48% in Brazil continues to grow steadily, rising from 5% of LPs 36% actively investing in 2007 to 16% in 2008. Forty-eight percent 16% of LPs surveyed in 2008 plan to invest in Brazil within the next 2008 2013 2008 2013 three to five years, triple the 16% currently investing. Source: EMPEA’s Survey of Limited Partners Interest in Emerging Markets Private Equity, May 2008.

Reports of Interest PriceWaterhouse Coopers report on Brazil’s PE Market in 2007 www.empea.net/research/3rdparty/Brazil_PrivateEquity_PWC_2007.pdf Emerging Markets Private Equity Association PowerPoint presentation on PE in Brazil, April 2008 www.empea.net/research/3rdparty/EMPEA_BrazilPEandIPOMarket_April 2008.pdf Brazilian Private Equity and Venture Capital Association (ABVCAP): www.abvcap.com.br Centro de Estudos em Private Equity, FGV GVcepe: www.cepe.fgvsp.br PriceWaterhouse Coopers study on VC/PE environment in Brazil, April 2008 http://www.abvcap.com.br/UpLoad/Arquivo/BR_PE_FY07_brochure.pdf Monitor Group Study on the Brazilian PE & VC Industry for ABVCAP, June 2007 http://www.abvcap.com.br/UpLoad/Arquivo/StudyBrazilianPEVC.pdf

EMPEA Insight firms active in that particular sector and/or market. Editorial Director: Jen Choi For more information about EMPEA membership, [email protected] please contact Carlos Perry, Chief Operating Officer, at [email protected]. Production Manager: Cristiane Nascimento [email protected] Advertising Opportunities Design: Paras Productions, Inc. Each issue of EMPEA Insight features a single exclusive back page advertisement. Issues-specific placements About us are on a first come, first serve basis. Upcoming issues EMPEA Insight offers readers an overview of the data and include China,Central & Eastern Europe and Russia/CIS, drivers behind investment trends in emerging markets Middle East, India, Latin America, Southeast Asia, Africa, private equity. Each EMPEA Insight profiles funds, deals, Real Estate. For more information about advertising op- and exits in individual countries, regions, and in burgeon- portunities and rates, please contact Cristiane Nascimento ing sectors like real estate and infrastructure, and a list of at [email protected].

Emerging Markets Private Equity Association 3 EMPEA Insight

PE/VC Investments 1999-2007 (USD millions) Investing Trends Value (USD millions) Total private equity investments in Brazil reached US$4.8 billion in 2007, up from only US$ 474 million in 2005. 5000 4748

Fuel production and energy drew the majority of invest- 4000 ment in 2007, nearly 40% of total value. The attractiveness of sugarcane-based ethanol production projects is being 3000 driven by strong demand in Brazil, where 87% of all new light vehicle sales are flex-fuel cars, and by the continuing 2000 rise of global fuel prices. Interest in biofuels production, the 1342 need to feed Brazil’s growing population and Brazil’s grow- 1000 ing role as China’s breadbasket make agribusiness another 456 474 379 281 261 321 sector ripe for deals. In April, GP Investments acquired 120 0 dairy and food manufacturing company Laticinos Morrihos 1999 2000 2001 2002 2003 2004 2005 2006 2007 (Leitbom) for US$237 million, and in February, Argentine Source:Venture Equity – Latin America agricultural producer Grupo Los Grobo agreed to sell a mi- nority stake to Brazilian Investment fund Investimento em 2-3X EBITDA. GP Investments’ US$1 billion acquisition of Participacoes PCP for US$100 million. the Latin American energy assets of Pride International in late Investments continue to be concentrated in the growth/ex- 2007, the largest to date in Latin America, pansion segment, however buyouts are becoming increas- included US$600 million in debt finance. ingly common. As the number of buyout deals increases in Fragmentation within related sectors in Brazil makes bolt- Brazil, so does the use of leveraged finance—by some es- on and roll-up acquisition strategies increasingly attractive. timates, leverage used in Brazil buyouts is currently roughly continue on page 5

Sampling of Recent Investments October 2007 – April 2008 DLJ South American Partners Fispal, trade show promotion company, and EBEC educational company (Nov. 2007) Stratus Investimentos Brazil Timber, amount not disclosed. First investment from Cleantech- Biotech Fund (VCIII) (Mar. 2008) Rio Bravo Investimentos Fleet One Gestao de Frotas, trucking and transportation company, 24% stake (Apr. 2008) GP Investments Laticinos Morrihos (Leitbom), dairy manufacturer, US$ 237 m (Apr. 2008) Global Environment Fund NEOgás do Brasil Gas Natural Comprimido S.A., compressed natural gas distributor, amount not disclosed (Apr. 2008) Gavea Investimentos, Weston Venture to form new Brazilian discount airline, est. US$ 150 m (in process as of Presidio, Companhia Bozano, Apr. 2008) George Soros, David Neeleman (Jet Blue founder) Intel Capital Infoserver, mobile and online security software provider (Dec. 2007) Tarpon Investment Group Arezzo Industria e Comercia S.A., footwear producer and retailer, US$ 44 m for 25% stake (Nov. 2007) Advent International Viena restaurant chain, 100% (Oct. 2007)

Source: EMPEA

4 Emerging Markets Private Equity Association May 2008

According to a study conducted by PriceWaterhouse Coo- food and beverage retailers Grupo RA and La Mansion, pers in February 2008, of the 110 transactions involving and duty-free retailer Brasif. GP Investments is building an private equity firms that were completed in 2007, 57 were integrated human resources company through acquisitions made through private equity portfolio companies. Fund of Grupo Suma, Top Service, and People Domus. Equity managers exploiting the benefits of consolidation plays International and GP Investments are building a portfolio include Advent International, which has been investing in of shopping center developments through their 2006 co- airport-based retail throughout the region, such as Brazilian investment in BR Malls. Exit Trends

The strengthening track record of Brazilian GPs is a critical Number of PE-backed Public Offerings lever in the local industry’s recovery. 25

Trade sales (to strategic or financial sponsors) account for 21 the bulk of exits, roughly two-thirds of the exits in 2007. 20

Among trade sales, transactions with strategic sponsors 16 continue to be the predominant path to exit in Brazil. Re- 15 cent examples include Advent International’s exit from 12 bond provider J Malucelli Seguradora (JMS) in exchange 10 9 for a 10% equity stake in consumer credit bank Parana

Banco. Fund manager Pactual realized a US$12.5 million 5 investment in Qualytextil through a sale to US protective apparel manufacturer Lakeland Industries. In November 0 2007, US-based Acon Investments realized its investment 2004 2005 2006 2007 Source: ABVCAP, Bovespa.

Examples of Successful VC/PE Exits, 2006 - 2007

Net Revenues 2006 Investment Time to exit Estimated IRRs Company (USD million) (USD million) (years) in US$ Equatorial 393 11 2 481% GOL 1746 26 1 242% TOTVS 161 16 <1 199% DASA 308 100 5 40%

IPOs 305 78 9 36% TAM 3374 77 8 26% ALL 793 202 7 22% Localiza 517 49 8 9% Akwan n/a n/a 4 130% Autotrac 122 2.5 7 32%

Trade-Sale Microsiga n/a 7 6 12%

Source: ABVCAP, Bovespa.

Emerging Markets Private Equity Association 5 EMPEA Insight

in Brazilian grocery chain GBarbosa through a sale to Chil- Exits have slowed somewhat in the first quarter of 2008 ean supermarket company Cencosud at 31 times the initial in the wake of global market turbulence, but are expected investment. to recover. The last private equity-backed IPO on the Bove- spa was GP Investment’s December 2007 exit from Tempo Rare during private equity’s early years in Brazil, IPOs have Participacoes, which raised US$253 million. become an attractive exit route. Of the 76 IPOs in Bovespa from 2004 – 2007, 30% were PE/VC-backed companies.

Capital Markets Snapshot

The Sao Paulo Stock Exchange (Bovespa) experienced March 2008, with Ibovespa ending up 44%, compared to rapid growth between 2005 and 2007, due in large part to Hong Kong’s Hang Seng Index, up 25%, and the Mexican the introduction of corporate governance reforms through Bolsa, up only 7% year over year. The MSCI Brazil index the Novo Mercado. The Novo Mercado, initiated in 2004, increased 70% over the same period, while MSCI India and is a classification featuring voluntary corporate governance Mexico rose 30% and 10%, respectively. guidelines that go beyond Brazil Securities Commission’s Despite improvements in economic stability and the depth (CVM) non-binding corporate governance provisions. The of its capital markets, Brazil did not emerge unscathed 156 companies listed on the Novo Mercado at the close of from global market turmoil in the beginning of 2008. After 2007 represented 57% of Bovespa’s total market capital- breakneck growth in the number of new listings in 2007, the ization, 66% of the trading value and 74% of the number of pace of IPOs cooled in the first quarter, with only 3 IPOs and trades in the cash market. follow-ons through April 2008 versus 26 during the same As of April 2008, Brazil’s Bovespa was ranked 10th in the period in 2007. After a 3% drop in March 2008, the Bovespa world in market capitalization, at US$1.4 trillion, and in rallied 6% following the April 30 announcement that Brazil 2007 ranked 5th in the world in capital raised through IPOs had received an investment grade sovereign debt rating at US$28.6 billion. Local indices Ibovespa and MSCI Bra- (BB+) for the first time from Standard & Poor’s. zil outperformed regional peers between March 2007 and

Novo Mercado’s Growth in Listings (as of February 2008)

200

150 NM: Most Advanced

N2: More 100 Advanced N1: Standard Number Companies 50

0 2001 2002 2003 2004 2005 2006 2007 2008* Source: Bovespa. NM = Novo Mercado; N1 and N2 represent optional levels of corporate governance compliance. N1 is the least stringent.

6 Emerging Markets Private Equity Association May 2008

Firms Investing in Brazil

PE Firms Investing in Brazil Most Recent Fund Sector Focus Website Advent International Latin America Private Equity Generalist www.adventinternational.com Fund IV (2007, US$1.3b) AIG Capital Partners AIG Brazil Special Situations Fund II Generalist www.aigprivateequity.com (2008, US$692m) Angra Partners AG Angra Infrastructure Fund Infrastructure www.angrapartners.com.br (2006, US$397m) Artesia Gestao de Recursos Artesia Exclusive II (2007, US$98 m) -- www.artesia.com.br Axxon Group Natixis Mercosul Fund (2001, US$100m) -- www.axxongroup.com.br Banco Pactual Fundo Brasil Energia (2004, US$255m) Energy www..com/1/p/ubslatinamerica.html Banco Santander ASCET I-FIP (2007, US$31m) Generalist www.gruposantander.com BRASOIL FIP (2007, US$31m) Capitania Gestores Ltd. Private Equity Brazil Multi-strategy I Generalist www.capitania.net (2007, US$ 260m) Companhia Riograndense CRP VI Venture (2006, US$28m) Generalist www.crp.com.br de Participaçoes (CRP) Darby Overseas Darby BBVA Latin America Private Equity Agribusiness/ www.darbyoverseas.com Investments Ltd Fund (2005, US$175m) Infrastructure Decisão Gestão de Fundos FIPAC (2006, R$80m) Technology, www.dgf.com.br Investimentos (DGF) Pharma Dynamo Administração Puma II (2004, US$208m) -- www.dynamo.com.br de Recursos Ltda. FIR Capital Partners Fundo Tec II (2007, US$45m); DFJ FIR Technology, www.fircapital.com Brazil Fund II (2007, US$100m) life sciences Gavea Investimentos Fund II (2007, US$840m) Generalist http://www.gaveainvest.com.br/ Governança,e Gestão Governança & Gestão -- www.gginvestimentos.com.br (GG Investimentos) Fund I (2006, US$140m) GP Investments GP Capital Partners IV (2007, US$1.3b) Generalist www.gp.com.br Infinity Infinity Bioenergy Fund I (2006, US$516m) Cleantech www.infinitybio.com.br Intel Capital Intel Capital Brazil Technology Fund Technology www.intelportfolio.com (2006, US$50m) Investidor Profissional Gilbraltar Fundo de Investimento em www.investidorprofissional.com.br Gestão de Recursos Ltda. Participacoes II (2007, US$78 m) Jardim Botânico Partners JBVC I Fund (2007, US$57m) Generalist www.jbpartners.com.br (JB Partners) Mellon Global Rio Agribusiness FIP (2007, US$13m) Agribusiness/ www.mgib.com.br Investments Brazil Polaris Fundo de Investimento em Generalist Participacoes (2007) Mercatto Venture Partners MVP Tech Fund (2002, R$23m) Technology www.mercattorj.com.br Orbe Investimentos Agrotech Venture Capital (2004, US$20m) www.orbeinvestimentos.com Pátria Private Equity Fundo de Terceirização de Serviços Outsourcing www.patriainvestimentos.com.br para o Brasil – FIP (2006) PTZ/Biomass PTZ/Biomass Technology Fund I Cleantech www.ptz.com.br Technology Group (2006, US$63m) Rio Bravo RB Nordeste II (2006, US$46m) Generalist www.riobravo.com.br Southern Cross Group Brazil Southern Cross Latin American Private Generalist www.southerncrossgroup.com Equity Fund III LP (2007, US$751m) Stratus Investimentos Ltda. Stratus Venture Capital Fund III Cleantech www.stratusbr.com (2006, US$31m) Temple Capital Partners Clean Energy Brazil (2006, US$197m) Cleantech www.templecapital.com Vision Brasil Vision Agro Fundo de Investimento www.visionbrasil.com.br em Participações II (2007, US$ 78m) Votorantim Ventures Votorantim New Business (US$300m) IT, Life Sciences www.vventures.com.br

Emerging Markets Private Equity Association 7