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Goldman Sachs Plans Private-Equity Comeback in Brazil

3 September 2012

(Bloomberg) September 3, 2012 – Goldman Sachs Group Inc. (GS), the Wall Street bank that doubled its Brazil headcount in the past two years, is planning a comeback in the nation’s private-equity market and expects returns as high as 35 percent.

“We are looking at some sectors that we think we understand and that need investments,” Alejandro Vollbrechthausen, president of the New York-based company’s Brazil unit, said in an interview in Sao Paulo. Infrastructure, commodities and telecommunications are among the target industries, the 44-year-old banker said.

Goldman Sachs’s last major foray in the Brazil private-equity market ended in 2007, when the bank invested 400 million reais ($196M) of its own capital in Santelisa Vale SA, a sugar-cane processor that later had to restructure its debt. Santelisa was bought in 2009 by Louis Dreyfus Commodities. Goldman Sachs also in 2007 invested in BRA Transportes Aereos Ltda., an airline that went bankrupt.

Now the bank thinks returns could be as high as 35 percent from taking stakes in projects for roads, airports, railroads, ports and other infrastructure, said Paulo Leme, chairman of Goldman Sachs’s Brazil’s unit.

“If Brazil plays it right from the regulatory point of view, with transparency and predictability of the macro environment, and avoids stirring too much uncertainty related to taxes and exchange rates, it is just a natural diffusion of capital moving from low-return to high-return,” Leme, 57, said in a interview. “The most stable, lasting economy is the easiest for foreigners to navigate.”

Government Help

Brazil’s development bank, BNDES, has said it will finance as much as 80 percent of the nation’s 1 trillion reais in infrastructure needs during the next five years as the country prepares to host the 2014 World Cup and 2016 Olympics. Private investors may have to fund 10 percent to 20 percent of the total, according to Denise Pavarina, president of Brazil’s capital-markets association.

“The roads, airports and port concessions in Brazil are attracting a lot of interest from foreign private equity,” said Patrice Etlin, managing partner for Latin America at Advent International Corp., the Boston-based private-equity fund.

Advent acquired a 50 percent stake in Terminal de Conteineres de Paranagua SA in January 2011 in its biggest deal in Brazil and has about $3 billion to invest in the country, Etlin, who is also chairman of the Latin American Venture Capital Association, said in a telephone interview.

International Airport

“Advent has been in the region since 1996 and never left,” he said. The fund participated in a consortium that bid for the license to operate Sao Paulo’s Guarulhos international airport in an auction earlier this year. “We are going to participate in other auctions for sure,” he said.

Warburg Pincus LLC, Hamilton Lane Advisors LLC, Actis LLP, TPG Capital, 3i Group Plc and Carlyle Group LP are among firms that have opened offices in Brazil since 2008.

Blackstone Group LP (BX) acquired a 40 percent stake in Patria Investimentos, a Brazilian private-equity and asset-management company, in 2010, while JPMorgan Chase & Co.’s Highbridge Capital Management unit bought Gavea Investimentos Ltda’s private-equity business in October of that year. Kohlberg Kravis Roberts & Co., the New York-based buyout firm, named former Brazilian Central Bank Governor Henrique Meirelles as a senior adviser in June.

BRIC Investments

“You still have sectors in the BRIC countries where in order to reach equilibrium you need to grow at a much faster pace than the general economy,” Goldman Sachs’s Leme said, referring to Brazil, Russia, India and China. He cited infrastructure as one example.

Total credit has doubled from 25 percent of Brazil’s gross domestic product to 50 percent and has room to grow to about 80 percent, according to Leme. “Mortgages are still underleveraged,” he said.

Goldman Sachs expanded its workforce in Brazil in the past two years from about 150 people to 300.

The firm became a full-service bank in Brazil in late 2009, after two failed attempts to buy local companies. In 1998, Goldman Sachs tried to purchase Banco de Investimentos Garantia SA, which was acquired by Credit Suisse Group AG. Seven years later it sought to purchase Banco Pactual SA, a top investment bank eventually acquired by UBS AG. Pactual was sold back to BTG partners in 2009 and is now Grupo BTG Pactual.

Equity, M&A

Goldman Sachs ranks third among equity underwriters inBrazil this year and seventh for merger advisers as both markets shrink. New Brazilian equity sales declined 53 percent to $5.16 billion this year through August, and M&A transactions dropped 41 percent to $43.3 billion. Still, Goldman Sachs plans to maintain its expanded workforce.

“We don’t feel that we have overstretched or that we’ve built something that we cannot sustain,” Vollbrechthausen said.“We have a diverse portfolio of businesses, so when some businesses start to shrink a little bit others pick up.”

Falling interest rates in Brazil offer Goldman Sachs an opportunity, even as economic growth slows below 4 percent, Leme said. “It is a great opportunity for trading and to develop a business since it is going to be a prolonged cycle of low real interest rates,” he said.

Goldman Sachs will have to navigate the U.S. Volcker rule, which lawmakers passed in 2010 to reduce risks at deposit-taking banks. The restrictions, still being finalized by regulators, will bar banks from proprietary trading and limit how much capital they can dedicate to private-equity firms. The rule, named for former Federal Reserve Chairman Paul Volcker, exempts some activities, including certain public-interest investments and hedging.

Michael DuVally, a spokesman for Goldman Sachs, declined to say how the firm plans to comply with the rule.