Brazil bounces back

Private equity in Brazil has seen something of a slowdown since 2013. Data released by the Latin American Private Equity and Venture Capital Association (LAVCA) in April showed that private equity investments in Brazil totaled $2.34 billion last year, down 35 percent compared with 2012.

At the time, the slowdown was attributed to reduced confidence in the Brazilian market, a weaker currency, and the difficulty of finding investment opportunities. Going into 2014, all eyes were on the country as the FIFA World Cup got underway following months of reports about corruption and shoddy construction. Immediately following the World Cup, national elections would be held involving a president not especially popular with the business community.

Alongside the release of the data, LAVCA president Cate Ambrose said she expected to see fundraising increase as the slowdown allowed cheaper acquisitions. At that time, a handful of big funds were in the market and, by the end of 2014, a number of significant closes had happened. Patria Investimentos closed on $1.8 billion, beating its $1.5 billion target, in August. Advent closed in November on $2.1 billion. Grupo BTG Pactual is set to raise a similar figure for its latest vehicle. Investors, it seems, are once again paying attention.

“It is important not to get caught up in the headlines. Brazil has a broad and diverse economy. People may have been holding off before, but pricing is better and there is still a lot of activity happening, especially in the middle market where I focus,” says Álvaro Gonçalves, chief executive officer of Stratus Group, a Brazilian mid-market private equity firm. “If you just pay attention to discussions about the currency or what is happening with interest rates, you’re missing the amount of pent up demand in the economy.”

He points to the service sector as an example – Stratus most recently invested in Cinesystem, a movie theatres group in Brazil. “We’ve already seen 20 percent organic growth since we made the investment in February. That’s a big number.” Stratus has made two additional investments in the mid-market service sector from its most recent fund.


Investors in Brazil echo his views. They cite a leveling off within equities and the private markets in the months following the elections’ immediate aftermath, a welcome change after the volatility that was witnessed before and immediately after. Volatility on the Ibovespa stock exchange hit a three-year high immediately after the election, rising to 41.08 percent, the highest level since September 2011 and trailing only Argentina and Greece.

Investors in Advent’s Latin American Private Equity Fund VI include a number of US pension funds, which are returning to Latin American exposures en masse. Advent said at the time of the close that almost all the investors in LAPEF VI were returning institutions representing a geographic mix comprising the US, Europe and Latin America. The fund closed in less than six months, and the firm claims it’s the largest ever raised for Latin American investments.

“What you had with the elections was interesting,” Gonçalves adds. “It was basically a non-event until March and then people began focusing. The president has had a challenging time with the capital markets because they don’t find her that charismatic or friendly to them, but it seems clear that she took some lessons from issues that were brought up in the campaign. She may have been surprised to see support for certain issues. But we’re moving forward now, people are positive.”

Gonçalves and others expect to see the market continue to improve through 2015. Funds will have to put those newly raised billions to work, but less positive indicators from Brazil’s banking sector may also be a factor. According to research released from Fitch at the end of November, Brazil’s biggest banks are sounding the alarm bells over lending and the IPO window following concerns about who will run the finance ministry and the potential impact of macro-economic weakness.


Fitch says Brazil’s three largest banks – Caixa, Banco do Brasil, and BNDES – have seen weakening loan growth and are vulnerable to lower asset quality. This is in part due to diminished demand for loans as GDP growth slows as well as a sluggish equity market. Only one company went public in Brazil this year. That single IPO – a $171 million float of Quorofino Saude Animal Participacoes – saw half the shares taken by US private equity firm General Atlantic.

Another major private equity-backed transaction which closed this year created the single largest Brazilian education company. Meanwhile, Azul, one of the world’s largest privately held airlines, is rumored to be exploring a float.

A slowing banking market does not necessarily spell doom and gloom for private capital, especially in an environment where pricing is coming down. The large funds that have been raised indicate confidence in the market and other players are looking to get into Brazil through direct investment.

For instance, Macquarie Group recently acquired an interest in Brazilian energy provider Nova Energia, marking Macquarie’s first entry into Brazil’s energy sector, although it has had other investments in the country since 1999. GPs are looking at all of the options including majority stakes, minority stakes with control, and platform strategies.

“The name of the game now is going to be small ‘tuck-in’ acquisitions,” Gonçalves says. “We’ve made three investments and are already considering add-on acquisitions. That’s how you’re going to be successful in a low growth economy.”


Advisory firms, meanwhile, have beefed up headcount in the wake of recent fundraising efforts and the increase in deal flow. StepStone Group, Moelis & Co, and Gramercy Partners have all added to their presence in the country.

Moves on the regulatory side have improved the picture for private equity as well. Recent changes will allow companies to sell shares to qualified buyers without having to register for a public offering, which could get around some of the recent slowness in the IPO market and also open the door for GPs. The change amended a rule known as Instruction 476, which allows for this type of sale. Securities can only be sold to up to 50 qualified investors, and banks, mutual funds and investment firms are all on that list.

It may still be too soon to tell how the broader Brazilian economy holds up in the wake of increasing macroeconomic weakness globally, but with fresh dry powder and a clearer post-election picture, players are lining up to get in on the action.

Gonçalves notes that from where he sits (which also includes a pan-regional advisory position at LAVCA), Latin American economies are starting to show deeper resilience in the face of unrest. “There is a lot happening here, I think people are feeling good about where things are headed. These economies are making the effort, people want to come back here.”