(Reuters) September 19, 2010 – Buyout firm Silver Lake agreed to buy a minority stake in Brazilian Web hosting company Locaweb for an undisclosed sum, to tap explosive growth in the world’s fifth-largest Internet market.

Locaweb currently hosts one in every four sites with the “.com.br” domain root.

Silver Lake’s Silver Lake Sumeru, the private equity fund’s unit that invests in mid-sized technology companies, made the purchase of the undisclosed stake in Sao Paulo-based Locaweb, the company said. Sumeru has about $14 billion of investors’ money in Nasdaq OMX, Avaya, Skype and other technology companies.

Global technology companies are picking acquisition targets in Brazil to take advantage of explosive growth in family income and jobs as well as growing interest in online commerce and mobility solutions.

The number of Web domains is growing at an average pace of 27 percent annually in Brazil, which is Latin America’s largest economy, and there is room for further growth.

“We foresee massive scale gains,” Kyle Ryland, who heads Silver Lake Sumeru, told Reuters in an interview.

Silver Lake is considering more investments in Brazil’s information technology industry, although he declined to elaborate.

“We are certainly looking for other opportunities in the country,” he added.

Locaweb sprouted alongside other software and hardware makers in Brazil in the late 1990s, when entrepreneurs emboldened by the dot-com boom foresaw a surge in demand for technology services.

While some of those companies sank during the Internet bust in the United States, those that survived rode out the rough times well as they ended up gaining market share and expanding their services amid burgeoning demand for IT products.

A handful of companies in the sector have gone public over the past four years, as manufacturers, retailers and raw materials producers see IT as a cheap and efficient way to offset Brazil’s crippling traffic problems, poor infrastructure and burdensome red tape.

Created in 1998, Locaweb has posted annual revenue increases of about 40 percent every year. The company earned 131 million reais ($76 million) from sales last year.

SEEDING MORE CLOUDS

Locaweb plans to use proceeds from the Silver Lake investment to beef up a second data center that it built last year. The investment will also help increase its supply of cloud servers, which let Locaweb customers use the Internet to store information.

The funds could also help fuel growth through acquisitions.

“It is a powerful tool to offer more services to other companies,” Gilberto Mautner, founder and chief executive of Locaweb, said in an interview.

The investment by a private equity fund in a mid-sized company is often followed by a share offering a few years later. In the case of Locaweb, Mautner said such a move is being considered “if market conditions allow.”

In 2007, Locaweb canceled an initial public offering plan. ($1=1.717 reais)

By Aluisio Pereira and Guillermo Parra-Bernal

Visit the Silver Lake site for a full press release.