Looking toward Brazil, again

With improving economic and political landscapes in Brazil, private equity investors are setting their sights on the country again, but proceeding with caution.

Better times may be ahead for Brazil.

The worst of the recession seems to have passed and former president Dilma Rousseff’s impeachment is finally complete after a nearly nine-month process. Now, several private equity firms and experts believe it’s a good time to increase activity in the country – others, meanwhile, never left.

Although investment activity in the first half of the year was down compared with the same period a year ago, it has already begun to rebound when compared with the second half of 2015. In the first six months of 2016, private equity firms invested $1.74 billion in Brazil, down from $2.28 billion in the first half of 2015 but almost double the $900 million invested in the second half of last year, according to data from the Latin American Private Equity & Venture Capital Association.

Sao Paulo’s Bovespa Index, which tracks the local exchange, hit a low in January and has since recovered, reaching levels last seen about two years ago, an indication the economy, having hit rock bottom, may now be on the rebound.

While many firms had scaled back their investment in Brazil during its choppier years, others have stuck around and adapted, focusing on finding opportunities fueled by both economic uncertainty and optimism alike.

Noting the later, Rio de Janeiro-based Bozano Investimentos in the last month bought a 30 percent stake in Grupo NRE Educacional, the owner of five higher educational medical institutions and medical education Medcel for about 100 million reais ($31.3 million; €27.5 million). Gávea acquired 29 percent of Grupo São Francisco, a heathcare company.

On the other hand, the devaluation of the real continues to create opportunities for those investing in US dollars, despite the currency having recovered slightly since the beginning of the year. It has even prompted Bozano to raise its first dollar-denominated fund. In March, it began fundraising for Bozano Growth Capital Fund, targeting $300 million.

While firms like Bozano and other Brazil-focused or emerging market-focused private equity firms are in it for the long term and invest in the country regardless of the economic and political outlook, there has clearly been an ebb and flow of large global private equity players over the years following the volatility of the country's gross domestic product growth.

Yearly fundraising totals have gone as high as $8 billion in 2011 and as low as $416 million in 2013, according to data from PEI.

It's true investing in Brazil isn’t for the faint of heart. Uncertainty remains over the direction of the economy and the fate of the country’s government, but valuations, despite having gone down, haven’t done so in a dramatic fashion.

“Not all companies are cheap, but you can find good companies at more attractive valuations than they used to be,” Cate Ambrose, president of LAVCA, told Private Equity International. “But of course, you have to be careful about what you’re acquiring.”

Let’s also not forget that the country is still in a recession and Rouseff’s impeachment is still being questioned by some.

But there's certainly a case to be made for investors to stick with an investment thesis for the long haul and not just retreat when a recession looms and jump back in light of an improved environment. That should apply to strategies focused on emerging markets and Brazil as well.