Brazil’s fundraising evolution

The private equity industry in Brazil is at a pivotal point…again. While overall prospects look promising, the local fundraising environment needs to improve before homegrown funds can truly break through to the greener side of the fence. By Judy Kuan.

Brazil – along with Chile – is considered the furthest along in Latin America when considering the increasing role taken by local institutional investors in sponsoring private equity funds. However, much room remains for improvement, and more changes are needed before these improvements can become lasting ones.


Chueri: high interest rates hobble local fundraising

Foreign investors “come and go depending on the relative attractiveness of the country, so for us to have a solid industry in Brazil, we need to have the local institutions’ money allocated to private equity on a consistent basis,” says Paulo Chueri, a partner at São Paulo-based private equity firm BPE Investimentos (BPEI, formerly known as Brasilpar) which announced last week the sale of its stake in Brazilian call centre company Mobitel SA, the first Latin American private equity-backed exit of 2006.

According to Chueri, the BPEI story is fairly representative of the experience of most Brazil-based private equity firms over the last decade. The first-time funds raised in the mid-1990s tended to be denominated in dollars. These funds then suffered through the Reais devaluation at the turn of the millennium, achieving IRRs that – while expected to record a respectable 15-20 percent in Reais terms for BPEI – were, in Chueri’s words, “not stellar” when measured in dollar terms, and have left the foreign institutional investors that backed this first generation of funds wary of revisiting the market in the near term.

“While some of [these funds] have been able to raise a second fund in the local market, others have been unable to do so since the Brazilian institutional market for private equity is a small one,” says Chueri. BPEI was one of the groups that was able to raise a Reais-denominated fund – the fully-invested 1999-vintage Fundo Mútuo de Investimentos em Empresas Emergentes (FIRE).

Given that the funds it manages – FIRE and the South American Private Equity Growth Fund, which together have assets with enterprise value totalling more than R$1.5 billion (€537 million, $648 million) – are both in the divestment phase, BPEI is now working to raise a R$250 million export-oriented fund. However, it is by no means the only Brazilian private equity firm that sees the current environment as being favourable for fund raising and therefore faces a number of competitors in the market.

“In the last two years, most funds have been working to raise new funds and get new money to invest,” observes Chueri. “Unfortunately, most of the activity among the local pension funds has been directed toward investments in very small funds in the range of R$30 million to 50 million. We are trying to break through this barrier and convince them that the best returns can be achieved by the type of fund and transaction that we are proposing.”

Brazil is ready for greater allocation of Reais to its domestic private equity industry, which Chueri believes is on the verge of flourishing and needs only the government to bring down interest rates before local pension funds become more aggressive in investing in the asset class.

“Having said that, I have to recognize that five years ago, the assessment was about the same, and it didn’t happen,” admits Chueri. As of yet, it is unclear whether Brazilian private equity has finally reached an inflection point, but local GPs have their fingers crossed that the time for a boom in their industry has finally arrived.