PE urged to revamp Brazil screening process

General partners must adapt their screening process to suit Brazil’s slow growth environment, according to a report from Boston Consulting Group.

The Latin American country is expected to grow at approximately 1.8 percent a year from 2017 to 2021, according to data from the Economist Intelligence Unit. This compares with 7.6 percent and 5.2 percent in India and China respectively.

BCG’s Private Equity Strategies for Brazil’s New Economic Reality suggests GPs could still achieve increasing revenues by identifying pockets of growth among particular segments. Food and health are predicted to grow the fastest in Brazil’s consumer market, while infrastructure and agriculture also look promising, according to Euromonitor International.

“What we're trying to do is first select industries where you have a more resilient client base,” Beatriz Amary, private equity director at growth markets investor Actis in São Paulo, told Private Equity International. “Healthcare and education are somewhat more resilient sub-sectors where people may stop buying a new fridge or travelling, but they're not going to stop paying for their private healthcare plan or stop going to university.”

Actis holds an investment in CNA, a Brazil-based English language school. Unlike basic post-secondary education, this sector has suffered due to the discretionary nature of its subject matter, Amary said.

Some markets appear to have emerged unscathed from the crash. Utilities and financial services rose by 19.2 percent and 18.4 percent respectively between 2013-16, while pharmacies, gas stations and pet supply stores also posted strong growth over the period, according to the report.

BCG’s report also proposed GPs shift their approach from screening traditional product categories to a “domain” system, in which the firm analyses mega-trends such as an ageing population or a shift to paperless payments to develop its investment hypothesis. This system could drive firms to look further afield for opportunities and identify markets at earlier stages with lower deal multiples.

Non-core assets from distressed companies with high leverage were identified as another potential opportunity for GPs. Brazil’s short-term interest rate is expected to fall below 10 percent by the end of 2017, which may lead to cheaper debt, the report said.

“It's really making sure you have the right management team [and] you have the right capital structure so that you end up gaining market share when all of your competitors are weakened by the recession,” Amary added. “It's a good time for you to do more M&A, buy companies in distress and make sure that because you have the backing of deeper pockets … you end up gaining market share in a macro environment where things are not as resilient as other sectors may be.”

BCG’s report comes on the back of a two-year recession, and economic and political upheaval in the country. Industrials were hit hardest, with the growth rate dropping from 13.5 percent between 2009-12 to just 0.5 percent between 2013-16, according to the report.

Only one Brazilian-focused fund has closed so far in 2017, according to PEI data. Domestic firm Kaszek ventures held a final close for its third fund on $200 million, with an eye to providing venture capital and growth equity for technology, media and telecommunications.