Actis to sell half of XP stake

The emerging market firm has partially exited Brazil’s largest independent brokerage with a sale to General Atlantic. It hopes to unlock further value with a forthcoming IPO.

Actis, the global private equity investor in emerging markets, has completed a partial realisation of its investment in Brazilian brokerage XP Investimentos. The firm has sold half of its stake to American growth investor General Atlantic for R$200 million ($96.10 million; €74.29 million).

XP is Latin America’s largest independent securities brokerage company. An acquisition from Actis’ Emerging Market Fund III, it has US$3.5 billion assets under custody and operates 375 offices in urban and rural areas around Brazil.

The partial exit will unlock significant returns for Actis, which originally invested $58 million in XP. The company has doubled in value since the firm’s 2010 cash injection. The sale’s proceeds will be fully returned to investors, Chu Kong, the partner at Actis who led the deal, told Private Equity International.

XP’s competitive advantage has been in its ability to offer quality financial education to retail investors, according to Kong. It has trained more than 500,000 people in the 11 years since its foundation, and, thanks to a high conversion rate, client numbers have increased two-fold since 2010, he added. XP’s 70,000 active customers now represent close to 10 percent of the market.

Revenues have also grown since XP turned to the “Schwab model”, Kong said, referring to the well known US brokerage and banking company Charles Schwab. XP has managed to expand from a pure equity brokerage to third-party funds and asset management services, which has provided a much more solid base for growth. This diversification drive has allowed XP to ride out volatile equity markets, and it registered a 40 percent growth in Q3 2012. 

The company’s success story is a good example of how private equity firms can hope to tap the growing sophistication of financial services in emerging markets, Martin Escobari, managing director at General Atlantic’s Sao Paulo office, told Private Equity International. “Brazilian real interest rates are down to historic lows, which will induce many more people to consider how to allocate their money.” This offers a huge potential for business intermediation for banks, he added, therefore opening new avenues of expansion for XP.

Kong said that an IPO had been first considered for early 2012, but postponed due the turbulent market climate. The partial sale to General Atlantic allowed the firm to return cash to its investors in the meantime, whilst retaining a stake in the company’s future growth, he said. He expects an IPO to be launched within the next couple of years.

General Atlantic, meanwhile, sees its involvement as for the longer term. The firm’s cash injection will be used to build XP’s brand, develop new products and improve the technology, all of which will take time, Escobari said. He thought an IPO would probably happen in the future, but much further down the line.

The deal is the latest of a series of successful exits by Actis, which started raising its Global Fund IV last year. The fund has a target of $3.5 billion and a hard-cap of $5 billion. Other recent exits have included Umeme, Uganda's electricity distributor; Poulina, a Tunisian conglomerate; and Banque Commerciale du Rwanda, Rwanda’s second largest bank.

The firm completed its spin-out from CDC, the UK development finance institution, by acquiring the remaining 40 percent stake held by the government in April 2012. A 60 percent stake had previously been bought by its management team in 2004.

The government still retains a 10 percent share in future carried interests earned by the firm.