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LAVCA in the News

Burgeoning Brazil

2 December 2010

Capital is flooding into Latin America with Brazil firmly at the centre of the action

By Graham Winfrey
Private Equity International

December 2, 2010 – Simply stated, Latin America is proving to be one of the most attractive regions for emerging market private equity investment in the world today. Brazil’s expanding middle class and macroeconomic stability in the wake of the economic crisis make it an ideal region in which to invest and private equity opportunities abound in the less penetrated countries such as Mexico, Peru, Colombia and Chile.

According to data from the Latin American Venture Capital Association (LAVCA), investments in the region in the first half of 2010 reached $3.8 billion, surpassing the $3.3 billion put to work in all of 2009. Total funds raised for Latin America during the first six months of the year reached nearly $3.1 billion, putting 2010 on a similar track to the recordbreaking year of 2008, when $6.8 billion was raised.

In May, global mid-market firm Advent International closed its fifth Latin America-focused fund on $1.65 billion, taking the title for the region’s largest ever private equity fund. The distinction did not last long, however, as Buenos Aires-based Southern Cross broke the record again in September by closing its fourth buyout fund on $1.68 billion.

Notable deals struck in 2010 include The Carlyle Group’s first ever investment in Brazil, a $250 million investment for a majority stake in tour and travel company CVC Brasil, and London-based Apax Partners’ Brazilian debut, a $1 billion transaction for a 54 percent stake in IT company, Tivit. Energy investment giant First Reserve also invested $500 million in Brazil-based Barra Energia, an independent exploration and production company. Emerging markets specialist Actis also made its Brazilian debut with a $58 million investment in supermarket operator Companhia Sulamericana de Distribuição.

The surge of investment activity is certainly welcome to Brazil’s growing economy – the 10th largest in the world – but the question on many investors’ mind is: are things heating up too fast?

Alvaro Goncalves, founding partner of Sao Paulo-based mid-market firm Stratus Group, doesn’t think so.

While there has been a sharp rise in interest from global firms such as Apax and Carlyle, the majority of Brazil’s businesses lie in the mid-market, under the radar of private equity’s largest players.

“There are some high profile deals being closed, but the overall activity is still 60 percent of what it was in the late ‘90s,” Goncalves says. “Overheating is when people start to make mistakes, backing things they shouldn’t, and I don’t see that at all here at this point. The middle market is still severely underserved.”

Stratus’ most recent deal came in June when it invested $40 million in Unnafibras, a producer of recycled polyester fibres used by the textile, automotive parts and furniture industries. The firm’s approach to tackling the mid-market is spread across three platforms: growth capital, buyouts and specialised funds, with growth capital injections ranging between $5 million and $15 million and control deals between $30 million and $50 million. Among the firm’s specialist fund offerings is infrastructure investment, a huge theme with a number of large global players entering Brazil.

“[Infrastructure] will be one big play that I think will be a major trend across the region,” says Guido Padovano, head of the Latin America alternative investments team at PineBridge Investments.

Padovano has been involved in investing in Latin America since 1985, and considers the main strategies in the region to be in sectors such as agribusiness and mining, and in internal consumption-driven investments such as retail, healthcare, business services and non-banking financials. “I think this will continue to be the major investment thesis for private equity for the next five to 10 years in a country like Brazil,” he says.

President and executive director of LAVCA Cate Ambrose notes that two major investment themes in recent years have been domestic demand and export-driven investment. “Recently, I’ve seen more deals in the technology space and in business process outsourcing,” she says. One such investment came in September, when Silver Lake Sumeru, the mid-market affiliate of Silver Lake Partners, acquired a minority stake in Brazilian computing company Locaweb. The company provides webhosting, email accounts, e-commerce platforms and other services and hosts approximately 24 percent of all web sites in Brazil.

As a result of Brazil’s healthy banking industry and growing middle class, consumer credit has been expanding steadily in most markets for the past several years. “I’m always looking at consumption, the level of consumer credit and consumer credit availability,” Padovano says. “All of those drivers are looking very, very positive.”

As is the case with all private equity firms investing in emerging markets, establishing a local presence is crucial for originating good deals and managing local operations. In the past year, a number of firms have been racing to open offices in Brazil, partner with a Brazilian firm or upgrade their existing Brazilian headquarters.

Madrid-based Mercapital announced the opening of its Sao Paulo office in September, as well as plans to open another office in Latin America before the end of the year. That same month, The Blackstone Group purchased a 40 percent stake in Sao Paulo-based Patria Investments, one of Brazil’s largest private equity and asset management firms, for $200 million. Patria closed its third dedicated private equity fund on $700 million in 2008 and currently has over $5 billion in assets under management. Warburg Pincus put the finishing touches on a new Sao Paolo office in March, after having first established a presence in the country in 1998.

The rush to get to Brazil has made it difficult for firms looking to set up shop there, however. 3i Group, for example, is currently exploring opportunities in the region and, as chairman Bob Stefanowski told delegates at the Emerging Markets Private Equity Forum in London in November, the group is currently considering a number of factors, such as whether the right local team can be recruited and whether it is “too late”.

LAVCA’s Ambrose concurs that “there is an influx of global private equity firms looking to establish a presence in Brazil, and this is creating a bottleneck in terms of staffing local offices.”

Emerging markets-focused Aureos Capital is a mid-market private equity firm that invests in Mexico, Peru, Colombia and Central America. The firm closed its first Latin American fund on $184 million in August 2009 and makes investments of between $2 million and $10 million in small- to medium-sized businesses.

“We provide a diversified complimentary Latin America play to investors who already have a significant Brazilian exposure,” says regional managing partner Erik Peterson. The firm’s top three invested sectors are TMT, financial services and services. “The investment opportunities that we’ve seen and where we’ve been building our portfolio in Latin America are focused mainly on the growing middle class and local consumption plays,” Peterson says. The firm also has a Central America Growth Fund, from which it invested in Costa Rican outdoor advertising company Publimovil Costa Rica.

DLJ South American Partners, which closed its debut fund on $300 million in 2006, focuses primarily on Argentina, Chile and Brazil. In May, the firm led an investor group in a $370 million investment for a 25 percent stake in Grupo Santillana de Ediciones, a publisher of educational text books in Latin America and Spain.

While the Latin American private equity market may not be overheating, according to local players, it is certainly increasingly popular with firms looking to take advantage of the region’s sound economics and growth projections.