Private Equity & Venture Capital PITCHBOOK Disclaimer: The content presented here was prepared by ABVCAP under the scope of the InBrazil Program. It may be reproduced only with written authorisation from ABVCAP. The InBrazil Private Equity & Venture The Brazilian Private Equity and The Brazilian Trade and Investment Capital Program is a joint initiative Venture Capital Association is a non- Promotion Agency promotes Brazilian between ABVCAP and Apex-Brasil with profit organization that promotes the products and services abroad and the goal of informing and connecting development of private equity, venture attracts foreign investments to strategic international investors with Brazilian fund capital and seed capital in Brazil, by sectors of the Brazilian economy. Apex- managers and portfolio companies. The improving industry conditions and Brasil coordinates actions designed to main goal of the Program is to inform and understandings and also fomenting attract foreign direct investment (FDI) empower the global investor community best practices that are aligned with to Brazil, striving to allocate resources in respect to the Brazilian PEVC international industry standards. in sectors of strategic relevance for ecosystem and its many opportunities. endowing Brazil and its businesses with a keener competitive edge. CONTENTS 1. BACKGROUND FOR BRAZIL 3. NOTABLE SECTORS 1.1 Macro-economic data 3.1 Retail 1.2 Political context 3.2 Health 1.3 Regulatory environment 3.3 Education 2. PRIVATE EQUITY & VENTURE CAPITAL IN BRAZIL 3.4 Fintech 2.1 Main figures 4. CASE STUDIES 2.2 Private equity 4.1 Private equity 2.3 Infrastructure 4.2 Infrastructure 2.4 Venture capital 4.3 Venture capital 2.5 Impact investments 4.4 Impact investments Background for Brazil Among the world’s ten largest Ranking of Latin American economies - GDP - 2018 (US$ trillion) TOP 10 world economies 2018 (US$ trillion) economies, and heading up Latin America, the Brazilian economy is back United States 20.4 on the path to growth. As illustrated in the following pages, its prospects are China 13.6 positive for the next few years. Japan 5.0 MEXICO BRAZIL Germany 4.0 Annual GDP of US$ 1.9 trillion United Kingdom 2.8 212 million inhabitants PERU France 2.8 Urbanisation rate of 84% 2.7 Among the top ten countries receiving foreign India investments in 2018 Italy 2.1 COLOMBIA BRAZIL These are promising times for the Brazilian Brazil 1.9 economy, due to the following set of circumstances: Canada 1.7 - Well-balanced inflation that remains under target; 0 2 4 6 8 10 12 14 16 18 20 22 - Consumption and confidence ratings are Foreign Direct Investment inflows 2018 (US$ billion) uptrending; - Brazil’s capital market has been booming since CHILE United States 226 2017, with the IBOVESPA Index reaching new highs ARGENTINA China 142 and record share volumes; and United Kingdom 122 - More than seven companies attained unicorn Hong Kong 112 status in 2018, appraised at more than US$ 1 billion. 1.5 – 2 trillion Singapore 77 0.5 – 1.5 trillion Spain 70 < 0.5 trillion Netherlands 64 Australia 62 Brazil 59 India 43 0 20 40 60 80 100 120 140 160 180 200 220 240 Source: IBGE; IMF - World Economic Outlook (june 2019) Made with The gradual growth recovery of the GDP growth and inflation rates in Brazil FY15-FY22e (%) Exchange and Selic rates forecast FY12-FY23 (expected) Brazilian economy is reflected in a GDP Growth IPCA context of tight-leashed inflation and lower interest rates that, influenced Exchange Rate Selic Rate 4 16 by credit costs, are helping drive up 10.7 activity and employment levels. 3.5 14 3 12 2.5 10 6.3 With inflation close to target and solidly-rooted 2 8 % expectations, Brazil’s monetary policy is grounded US$/R$ 4.1 4.0 1.5 6 3.8 3.7 on interest rate stability and indications that this 3.7 % 2.9 2.6 2.6 context will continue over the next few years. 2.5 1 4 1.5 1.1 0.5 2 Since december 2017, unemployment rates have 1.1 been dropping, while the employed population 0 0 has expanded by almost two million positions and real incomes have recovered, increasing the actual 2012 2013 2014 2015 2016 2017 2018 2019e 2020e 2021e 2022e 2023e wage mass even more. The jobs market should follow this uptrend. -3.3 -3.5 2015 2016 2017 2018 2019e 2020e 2021e 2022e GDP growth projection by country FY19e (%) Average unemployment rate forecast FY12-FY22 (expected) (%) 12.7 12.2 Japan 1.0 11.5 11.7 11.2 United Kingdom 1.2 10.6 10.2 LATAM 1.4 8.5 Russia 1.6 7.4 % 7.1 Mexico 1.6 6.8 % Brazil 2.1 US 2.3 World 3.3 China 6.3 India 7.3 2012 2013 2014 2015 2016 2017 2018 2019e 2020e 2021e 2022e Source: Brazilian Central Bank; IMF; IBGE In parallel with the economic IPO history on the Brazilian stock exchange FY08 – FY18 Exchange rate forecast FY12 – FY23e (US$/R$) recovery, better capital market Number of IPOs Volume of IPOs - R$ billionV conditions and the prospects of a stable foreign exchange rate, 23.8 all point to a context that is more 20.3 appealing to foreign investors 17.3 3.9 3.8 3.9 3.7 3.7 3.8 seeking assets in Brazil. 3.5 3.3 3.2 11.2 Under a newly-elected government, market optimism 11 11 10 10 2.3 2.2 spread rapidly. A survey released by Bloomberg 1.9 7.5 indicated that Brazil tops the list of the emerging 7.2 6 6 countries from the investor standpoint. Brazilian US$/R$ 4 bonds were recently ranked as equivalent to those of 3.9 3 3 other economies rated as investment grade. 1 1 1 0.7 0.6 0.4 Foreign Exchange Bonds Stocks This positive view of Brazilian papers has been 1 Brazilian real Brazil Brazil expanding among investors, as its Government moves 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2 2012 2013 2014 2015 2016 2017 2018 India ahead with social security reform, which is considered Mexican Peso Indonesia2019e 2020e 2021e 2022e 2023e crucial for shrinking the public deficit. 3 Indonesian Rupiah Mexico Indonesia In 2018, three companies went public on the B3 – 4 Argentinian Peso Argentina China What market investors have their eye on the Interbank and the NotreDame Intermédica and 5 Russian Ruble South Africa South Africa Hapvida medical aid operators – while others (such as Stone and Arco Educação) offered their papers Foreign Exchange Bonds Stocks 6 South African Rand Russia Argentina directly on Wall Street. Through offerings on the 1 Brazilian real Brazil Brazil 7 Polish Zloty Turkey Russia Brazilian stock exchange, companies raised R$ 6.76 billion, while IPOs on the US stock exchange brought in 2 Mexican Peso Indonesia India 8 Indian Rupee China Mexico US$ 4 billion. 3 Indonesian Rupiah Mexico Indonesia 9 Chinese Yuan India South Korea With significant international reserves and a floating 4 Argentinian Peso Argentina China 10 South Korean Won Poland Poland exchange rate, Brazil’s foreign exchange policy has 5 Russian Ruble South Africa South Africa 11 Turkish Lira South Korea Turkey been more foreseeable and stable. The outlook for the Brazilian real against the USD over the medium term is 6 South African Rand Russia Argentina a positive indicator for foreign investors eyeing Brazil. 7 Polish Zloty Turkey Russia 8 In Indianthe developing Rupee economies, shares, currenciesChina and government papersMexico should outstrip their counterparts in the more developed nations during 2019, with Brazil as a favourite choice among investors for these three asset classes, according to a Bloomberg survey of thirty investors in December 2018. 9 Chinese Yuan India South Korea 10 South Korean Won Poland Poland 11 Turkish Lira South Korea Turkey Source: Bloomberg; Brazilian Central Bank; B3 Private capital funds (especially when foreign) are trustworthy sources of Average annual credit lines to companies in Brazil Number of bankruptcies and judicial financing and operational support in FY13-FY18 (# thousand) recoveries in Brazil FY12-FY18 the current context of sparse bank credit, particularly as dry powder is Bankruptcies Decreed Deferred court recoveries limited among local players. 150.4 151.3 144.5 1514 136.4 124.2 120.7 1215 Tightly-strapped bank credit is spurring the search for 1195 alternative sources of corporate funding, opening up a 1,044 928 930 great opportunity for private equity and venture capital 829 90 746 740 721 688 690 funds operating in Brazil. 671 618 70 Furthermore, many companies that were heavily 65 56 58 leveraged during the economic growth years are now 53 55 floundering in the wake of the recession. 2013 41 2014 2015 2016 2017 2018 38 37 2012 2013 2014 2015 2016 2017 2018 The large number of businesses declaring bankruptcy or under court-supervised receivership hint at very Made with favourable prospects for funds investing in promising Fundraising and global investment in Participation of sectors in corporate insolvency FY18 Emerging Markets FY14-FY18 (R$ billion) turnaround possibilities and special situations. 2014 2015 2016 2017 2018 Agriculture 0.5% Fundraising Investments Others 4.6% 90 Industry 9.3% 70 65 Made with Trade 46.1% 56 58 53 55 41 38 37 Services 39.7% 2014 2015 2016 2017 2018 Fundraising Investments Source: Brazilian Central Bank; Serasa Experian; EMPEA; SPC Brazil Made with 40 39 36 36 35 34 32 32 30 30 27 27 26 25 23 23 21 21 22 20 20 19 20 20 18 18 17 17 15 15 15 15 15 15 15 14 13 14 13 12 12 12 12 10 10 10 10 A record number of Brazilian start- 8 8 5 ups reached unicorn status during Rate in% of entrepreneurship according to Brazilian unicorns - 2018 | 2019* 2018, valued at over US$ 1 billion and 2002 2003 2004 business2005 2006 2007 stage2008 -2009 Brazil2010 2011- 20022012 2013- 20172014 2015 2016 2017 attracting attention from local and Stablished enterpreneurs Starter enterpreneurs Total international venture capital funds, whether operating in Brazil or not.