Country of the near future

A lower interest rate in Brazil means unprecedented opportunity for private equity, reports David Snow.

A trip to Brazil today will leave a visitor buzzing with excitement, and this isn’t simply due to the potent cafezinhos that one is served at each business meeting.

During my own trip to Sao Paulo last week, I was struck by a sense of tremendous momentum that was not nearly as evident during a similar trip two years ago.

Because every Brazilian financial executive is passionate about macroeconomics, each meeting began with the recitation of a set of facts that, taken together, painted a compelling picture of a country at the cusp of major growth. Central to this macroeconomic plotline are interest rates, which have fallen to game-changing levels in Brazil and set in motion opportunities for private equity and other alternative assets that haven’t existed over the short history of the asset class here. As recently as 2003, interest rates were above 25 percent. They now hover near 8.75 percent – still fairly high by US standards, but for Brazil this represents a bargain basement.

David Snow

Among the major consequences of a lower interest rate are the wandering eyes of the major pension funds here. For years, Brazilian pensions met obligations almost solely through investments in government bonds. Why take any equity risk when one could earn fat double-digit returns in fixed income? Now with yields having fallen back to earth, these pensions need to put money in public equity, and this is expected to fuel a surge in demand for local stocks, of which Brazil currently has comparatively few, given the size of its economy. This spells exit opportunities for the right financial sponsor-backed companies.

Brazilian pensions are also eyeing local private equity, and GPs in the country are scrambling to show that private equity can help medium-sized companies prepare for public listings and sales to international corporations.

Low interest rates also mean that Brazilian consumers have more credit. For example, middle-class Brazilians can now secure mortgages whereas once many had to horde their money over years to afford their own homes. And the ranks of the middle-class and lower middle-class have grown dramatically thanks in part to a successful government programme aimed at lifting families out of poverty. One estimate has it that a population the size of Canada has emerged from poverty in Brazil over the past decade. These new consumers will in turn begin spending their new-found money and fueling further growth.

Watch out for a major private equity firm to shortly announce a big deal in Brazil – and then expect more to follow. Brazilian GPs believe this sort of activity will accelerate over many years to come, and it’s not hard to understand why.

The upcoming December/January issue of Private Equity International magazine will include a roundtable interview with four seasoned private equity executives, who discuss the major trends in the local private equity market.