Photo by Gabriel de Andrade Fernandes by Photo BrazilAn Overview of Trends in Select Sectors and Markets June 2009 Country Snapshot razil continues to dominate Latin America’s private equity scene, drawing over 80% of the region’s fundraising capital and 40% of its investment dollars in 2009 Population: 194 million* 2008. The country’s large domestic market, diverse economic base and abun- B % of Population Under 15 Years-old: 28% dant natural resources have attracted private equity investors who continue to see Brazil 2009 GDP: US$1.3 billion* as home to a number of highly attractive investment opportunities in the midst of the 2009 GDP Growth: -1.3%* current global economic crisis. Over half of all Brazilians are earning an income that 2010 GDP Growth: 2.2%* places them in the middle-class bracket, which has translated into growing consumer Foreign Exchange Reserves as of May 2009: purchasing power, rising retail demand and increasing infrastructure needs. In addition, US$190 billion Brazil has recently achieved investment-grade status from two of the three leading rating *Projected. agencies, further supporting investor confidence. Source: International Monetary Fund, Population The Brazilian economy was hard hit in the last quarter of 2008 due to slumped com- Reference Bureau. modity prices and low industrial production. Contracting 3.6% in comparison to the prior quarter, 2008 year-end represented the biggest decline in Brazil’s GDP since 1996. In the first quarter of 2009, Brazil’s GDP showed signs of improvement, shrinking by just 0.8%. The International Monetary Fund (IMF) projects that Brazil’s real GDP will fall by 1.3% for the remainder of this year before returning to growth in 2010. However, in con- trast to the past, investors are not fleeing the country in reaction to the economic down- turn. Investor attitude is different today because Brazil is now better prepared to handle the current crisis with manageable public-sector debt, substantial foreign reserves and continued on page 2 Brazil Private Equity Fundraising and Investment, 2005–2008 (US$B) 5 $4.7 Investment $4.0 Fundraising 4 3 $2.7 $2.5 $2.1 US$ Billions 2 $1.3 1 $0.5 $0.2 0 2005 2006 2007 2008 Source: EMPEA. Note: 2008 totals reflect updates to data as of May 30, 2009. © 2009 Emerging Markets Private Equity Association 1 EMPEA Insight: Brazil June 2009 Limited Partners’ EM PE Investment Strategy Plans over the Next 1–2 Years 100% No Plans to Invest Stop Investing 80% Brazil is expected to attract Decrease Investing the largest net increase in new PE investors of any 60% Stay the Same emerging market in the Begin Investing next 1-2 years. 40% Expand Investment 17% plan to increase exposure to Brazil 20% 11% plan to start investing in Brazil 0% LatAm (ex Brazil) China India Russia/CIS Brazil Source: EMPEA/Coller Capital Emerging Markets Private Equity Survey 2009. inflation that has been relatively under control over the last sev- ly US$9 billion in committed capital. Furthermore, EMPEA’s eral years. Most importantly, Brazil’s markets remain largely fundraising statistics do not include the numerous Latin Ameri- internal. Although the country has been expanding its business can- or BRIC-focused funds that have targeted a significant per- relationships with the U.S., Europe and Asia, trade still repre- centage of their allocations to Brazil. sents less than one quarter of Brazil’s GDP, thus sheltering the Brazilian asset management company Gávea Investimentos country from greater financial contagion. took the lead in terms of fundraising activity in 2008, closing its The 2009 EMPEA/Coller Capital Emerging Markets Private Eq- third private equity fund in August at US$1.3 billion, and is cur- uity Survey revealed that Brazil is likely to see the largest net in- rently rumored to be contemplating the launch of a fourth fund. crease among its emerging market peers in new investors over continued on page 3 the next two years, with 17% of current emerging market private equity investors planning to increase their exposure to the coun- EMPEA Insight try and an additional 11% looking to invest in Brazil for the first time. The Brazilian government has demonstrated its desire to Editorial Director Jennifer Choi [email protected] attract private equity investment by working with both local and Writing and Research Nadiya Satyamurthy satyamurthyn@empea. global investors on several initiatives to improve the country’s net, Holly Freedman [email protected], Harrison Moskowitz [email protected] legal and regulatory framework. These actions have enticed a Production Manager Cristiane Nascimento [email protected] growing number of local pension funds to commit to the asset class. This availability of local capital, both from pensions and Advertising Opportunities banking institutions, is further enabling the Brazilian private eq- EMPEA Insight offers readers an overview of the data and drivers behind investment trends in emerging markets private equity. uity industry to better weather the financial storm than many of Each issue of EMPEA Insight provides an opportunity for a single its emerging market counterparts. exclusive back page advertisement. Issue-specific placements are on a first come, first served basis. For a list of upcoming issues Fundraising Trends and more information about advertising opportunities and rates, contact Cristiane Nascimento at [email protected]. Brazil-dedicated fundraising increased to US$4 billion in 2008 About EMPEA from US$2.5 billion in the prior year, signaling that investors The Emerging Markets Private Equity Association is a broad-based continue to see Brazil as an attractive investment destination, membership organization founded in 2004 that focuses on the particularly in comparison to other emerging and industrialized emerging private equity markets of Africa, Asia, CEE, Russia/CIS, markets. Over the last four years, Brazil has raised approximate- Latin America, and the Middle East. 2 © 2009 Emerging Markets Private Equity Association June 2009 EMPEA Insight: Brazil Private Equity Investment in Latin America, 2004–2008 (US$B) 25 Central America 20 Caribbean Andean 15 US$ Billions Argentina 10 Mexico Brazil Chile 5 US$9B 45% Regional 0 Brazil 2004 2005 2006 2007 2008 2004-2008 Source: EMPEA, VELA. Private equity veteran GP Investments held a first close of its GP US$675 million fund for infrastructure, health and education in- Capital Partners V (GPCP5) fund at approximately US$884 mil- vestments in Brazil through its partnership with Pátria, while the lion in July 2008 and is targeting a second close with total com- Carlyle Group and Brazil’s largest publicly-owned bank Banco mitments of over US$2 billion in 2009. Additionally, both São do Brasil are rumored to be forming a joint venture to launch a Paulo-based alternative investment firm Pátria Investments and US$450 million fund targeting investments in Brazilian compa- global private equity firm AIG Capital Partners (part of AIG Invest- nies. Banco do Brasil Investimentos has also teamed up with ments) held significant closes at US$700 million each. In April Portugal’s Banif to launch a US$344 million private equity fund 2008, AIG closed its AIG Brazil Special Situations Fund (BSSF) aimed at minority stake investments in Brazil. II focusing on a variety of sectors including agriculture, natural A number of funds have recently sprung up seeking to capitalize resources and manufacturing, while Pátria closed its Pátria Bra- on Brazil’s growing renewable energy sector. DGF Investimentos zilian Private Equity Fund III, focused on the country’s consumer held a final close on its third private equity fund at approximately and infrastructure sectors in the second half of the year. US$150 million, with investors largely comprising local pension Several funds in the US$100 million–US$300 million range, funds and multilateral agencies. Its Terra Viva Fund is seeking many of which focus on small and mid-size businesses in Brazil, opportunities in local sugar and ethanol enterprises. Brazilian also achieved successful closings in 2008. São Paulo-based fund manager Mercatto Investimentos has partnered with UK- FAMA Investimentos closed its first private equity fund with based EEA Fund Management to raise a US$300 million Tagus US$110 million in total commitments at the end of 2008. TMG Clean Energy Fund dedicated to Latin America’s renewable Capital, also head-quartered in São Paulo, held a first close at energy sector with a primary focus on Brazil. Additionally, the US$200 million for its second fund, with all of the capital raised Brazilian National Bank for Social and Economic Development from foreign investors. (BNDES) announced the creation of a US$150 million - US$250 million Fundo Brasil Sustentabilidade, which will seek invest- Joint ventures are increasingly common in Brazil’s private equity ment opportunities focused on environmental sustainability, in- landscape. In September 2008, Darby Overseas Investments, cluding ethanol-based projects. BNDES has also created a fund the private equity arm of Franklin Templeton Investments, and of funds that will invest up to a total of approximately R$1.5 bil- Brazilian private equity firm Stratus Group closed their joint ven- lion in several private equity and venture capital funds, initially ture Brazil Mezzanine Infrastructure Fund with approximately targeting those that are focused on agribusiness and ethanol US$236 million in committed capital raised from mostly do- and biomass generation. mestic investors. Blackstone Group is reportedly establishing a continued on page 4 © 2009 Emerging Markets Private Equity Association 3 EMPEA Insight: Brazil June 2009 Since Brazil’s most recent wave of private equity took off in Private Equity Investments in Brazil by Sector, 2006, many funds with significant accumulated dry powder from 2008 (US$B) large closes in 2007 and 2008 are currently seeking investment Infrastructure ($0.2) opportunities.