Big in Brazil

According to a new survey conducted by the Fundacao Getulio Vargas Business School's Center for Private Equity and Venture Capital Research (Gvcepe), there are more than 71 private equity and venture capital firms with offices in Brazil, which makes the country home to Latin America's largest private equity industry.

As with any industry, among the piethora of firms that make up Brazil's private equity industry are a handful of players that dominate the market for large deals. Below are profiles of a few firms that have built strong franchises at the large end of Brazil's increasingly active private equity market.

GP INVESTIMENTOS
Aggressive in Brazil, traded in Luxembourg

An admirer of GP Investimentos compares one of the firm's founders, Jorge Paulo Lemann, to Warren Buffett. Indeed, the firm's reputation within Brazilian financial circles is that of a very savvy and focused group of individuals. More than one market observer used the term “aggressive”, although this may be a euphemism for a style of investing that insists on control in a market where such terms are not commonly demanded.

The time is ripe for educating potential investors as to the country's economic and institutional assets

Lemann, along with Carlos Alberto Sicupira, Marcel Hermann Telles and Roberto Thompson Motra founder merchant bank Banco Garantia in 1971, and in 1993 used part of the considerable wealth created from that success to found GP Investimentos. Ten years later, the firm underwent a complete generational change when control, and then 100 percent economic ownership were transferred to Fersen Lamas Lambranho and Antonio Bonchristiano.

Bonchristiano, who studied politics, philosophy and economics at Oxford, speaks quickly and precisely, and gives the impression of someone who has complete command of the facts. He might even be mistaken for someone who might do well in politics, except that Bonchristiano assiduously avoids the local press. He says with confidence that GP Investimentos is primed to enjoy a long period of wealth creation while the rest of the world gradually becomes aware of the Brazil opportunity. “Our deal flow is better than we've ever seen it, ” he says. “And there is very little capital in the market. We are benefiting today from the work we've done over the years.”

With the Bovespa red-hot as an exit market, GP Investimentos owns a portfolio of companies that were groomed to be taken public. Bonchristiano estimates that his firm may return to investors approximately $500 million over the next six months.

From its founding, the firm has been among the biggest fundraisers in Brazil. Its first fund closed on $500 million in 1994. GP Investimentos then raised an additional $800 million for its second fund in 1997. A technology fund was raised in 2000 that drew R$56 million (at the time equivalent to $56 million).

A third fund was raised last year that drew $250 million – a much smaller sum than the amount attracted prior to the series of setbacks experienced by the Brazilian economy, and indicative of the less enthusiastic mood of North American and European LPs toward the Brazilian opportunity. Bonchristiano calls the raising of Fund III a “challenge”.

In part due to frustration that Brazil as an investment destination seems to go in and out of fashion with foreign investors, the new leaders of GP Investimentos became intrigued by the permanent and publicly listed capital model of the UK's 3i. Earlier this year, GP Investimentos listed a similar vehicle, called GP Investimentos, on th Luxembourg Stock Exchange. In doing so, the firm has sold a stake in its management company to a rather different base of investors, many of them hedge funds. The listing raised $350 million and made GP Investimentos the only publicly traded Latin American private equity firm.

According to the GP Investimentos prospectus, as of April 2006 the firm had a 10-year, gross IRR (dollar-based) of 11.7 percent. But the real-based total gross IRR was 18.4 percent, having been less affected by the currency meltdown of the early 2000s.

Thanks to a subsequent string of exits, that track record has now surged, and even a number of pre 1998 investments have performed spectacularly, defying the conventional investor expectation that private equity investments in Brazil easily get wiped out by economic hiccups.

A prime example of this is GP Investimentos' experience with Gafisa, a homebuilding company that has been this year's biggest IPO on the Bovespa. In 1997, GP Investimentos invested $77.8 million in the company when it was financially distressed. Last year the firm brought in Chicago-based Equity International as a strategic investor. Equity International's founder, real estate titan Sam Zell, was instrumental in lining up share-holders prior to Gafisa's IPO, which took place in February. Post-IPO, GP Investimentos is now enjoying a roughly 6x return on its Gafisa investment.

Bonchristiano has ambitious plans for his firm. Next year, GP Investimentos will be back in the market raising capital for its fourth fund, which is expected to have a target of roughly $500 million. Some of that capital will come from the public vehicle. The firm's leaders have “thought very seriously” about adding real estate to the product mix, given the high interest from foreign investors for Brazilian property.

Bonchristiano is clarly pleased at having access to a permanent source of capital. He says: “We are now in a position to be able to look ahead 10 to 20 years.”

GAVEA INVESTIMENTOS
The house of Fraga

Gavea is led by co-founder Arminio Fraga, the governor of the Central Bank of Brazil from 1999 to 2002. Fraga is widely credited with being a key force in stabilising Brazil's economy and currency. Prior to his role in government, Fraga ran emerging markets investing for George Soros' Quantum Fund.

Thanks largely to the support of some of Brazil's wealthiest family groups as well as large international institutions, the Rio de Janeiro-based firm already has roughly $2.5 billion in assets under management, according to a source. Of that, roughly $2 billion is dedicated to liquid trading strategies and wealth management, but the rest has been set aside for illiquid investments, including private equity, real estate and lending activities. The illiquid group, launched just last July, is led by Gavea co-founder, Luiz Fraga, who brought in a dedicated senior team including Fraga's long-time co-manager Christopher Meyn, and Darby International's Brazilian head of private equity, Piero Minardi.

Although Gavea has the ability to “cut among the largest cheques” for any deal in Brazil, says a source, the firm will pursue mostly deals in the $10 million to $25 million range. Gavea has no opposition to investing as a minority.

PACTUAL
Rio DLJ

In an otherwise unrefurbished section of Rio de Janeiro is a gleaming, modern office building that houses the headquarters of Pactual, an investment bank founded in 1983.

Advent's limited partners have indicated roughly $i billion of interest – a sure sign that Latin America's, and Brazil's, next wave of private equity is building serious momentum

Pactual has grown into a multifaceted financial services specialist with 34 partners and 533 employees. A glance at the firm's business lines – which include proprietary trading, asset management, corporate finance, private banking, capital markets and private equity – makes Pactual seem a bit like a kind of Brazilian Donaldson, Lufkin & Jenrette prior to the later firm's being acquired by Credit Suisse. Indeed, the strength of Pactual's position in the Brazilian market has been noticed by the largest global firms. After merger talks between Pactual and Goldman Sachs broke down, the firm this year announced an agreement to be acquired by UBS. In addition to having the largest infrastructure investment group in Brazil, with a R$740 million fund ($340 million), Pactual also manages a unique private equity platform that mixes partner capital with client capital.

“With interest rates going down, we are expanding our focus” beyond infrastructure, says Alessandro Monteiro Morgado Horta, a partner at Pactual.

New areas of interest for Pactual's partners include consumer products, although Pactual will likely raise a new private equity fund without any specific sector target. The firm will aim to set a fundraising target that will set Pactual apart from most of the other private equity investors in Brazil, both local and foreign. Horta says a $1 billion fund is not out of the question. He expects the partners of Pactual to be the biggest investor block in the fund.

“Right now the environment is very good to invest in Brazil,” says Horta. “One of our biggest strengths is deal flow, but also reputation. We have a reputation of being good partners.”

ADVENT INTERNATIONAL
Global beft, local gravitas

A competing GP says of Advent International's Brazilian operation: “I strongly admire them. They took it step by step and have made a very long term commitment to Brazil.”

Advent, based in Boston, was among the first private equity firms to build a truly global approach to investing. Right from the outset, this included Latin America, and the firm has remained in the region through its numerous crises. The first Advent Latin America fund was raised in 1996 with $235 million in commitments. In 2002 to firm raised its second dedicated Latin America fund, drawing $265 million. Fund III drew $375 million last year, and deal flow has been such that Advent expects to be back in the market next year with a follow-on fund for Latin America.

Advent's Brazil investment team is led by Erwin Russel and Patrice Erlin, two managing directors based in Sao Paulo.

Russel estimates that 40 percent of Advent's Latin Americian-earmarked capital has been invested in Brazil. The Brazil team has never been busier or nore successful than it is today. “We've had two exits this year,” says Russel. “Another portfolio is coming to IPO soon, and then another one.”

Although Advent in Brazil typically pursues deals that require $50 million equity cheques, the firm is “starting to look at larger deals”, says Russel, who adds that the firm is also very open to co-investing with limited and outside partners, partially the result of Advent's funds not being big enough to match the range of opportunitie today in Brazil.

No surprise, then, that Advent will target significantly more capital for its next fund, due in the market next year. Russel says a target has not yet been set for the vehice, but he says Advent's limited partners have indicated roughly $1 billion of interest – a sure sign that Latin America's, and Brazil's, next wave of private equity is building serious momentum.

SOUTHERN EXPOSURE
Porto Alegre-based CRP is on its second generation of investment leadership.

Those skeptical of the long-term prospects for business growth in Brazil need look no further than the history of CRP for evidence that private equity has become a permanent force in the market.

CRP, based in the southern city of Porto Alegre, was founded in 1981 with funding primarily from private companies and local development banks. Since then the firm has raised six funds, most recently CRP VI Venture, a R$60 million (€25 million) vehicle closed last year that will invest in emerging companies, many of them based in Southern Brazil.

The firm's chief operating officer, Andre Burger, is the son on CRP's founder, Ary Burger, who was the first president of the Central Bank of Brazil, as well as the CEO of Gerdau, a major Brazilian steel producer. The junior Burger is eager to make institutional investors more aware of the thriving business culture of Brazil, particularly in the south, which has a growing pool of entrepreneurial and technology talent.

For example, computer giant Dell has located on of its manufacturing plants outside of Porto Alerge. More recently, Intel announced plans to back a research and development centre in the region.

CRP has experience guiding small companies through to large exits, although in some cases this has taken a while. The firm made a small investment in a company called Lupatech in 1984. At the time, Lupatech, a microfusion, precision casting and valve production specialist, had revenues of $2 million. Last year the company had revenues of $100 million. CRP exited its investment in Lupatech in 2003, but retains a seat on the board.

With Brazil looming larger on foreign institutional investor radar screens, CRP is planning an expansion of its own. A partner, Russell Deakin, has moved to Miami in part to establish better ties with the many Latin American family offices there, but also to work on the exit of CRP portfolio companies to US buyers.

CRP is getting reading to hit the road with its next fund – $100 million-targeted vehicle that will seek to continued the success of Brazil's oldest private equity firm.