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Private Equity Looking for Opportunities in Brazil

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September 14, 2015

 

Brazil is set to host the Olympic games next year with interest and excitement building on the streets of Rio. But at the same time, the Brazilian economy is faced with some massive challenges. Brazilian asset prices are plummeting, but analysts are calling for value investors to seek opportunities in the sector and perhaps help the economy get back on track.

 

In fact, the recent research by the Latin American Private Equity & Venture Capital Association (LAVCA) shows, the first part of the year has witnessed increases in fundraising, investments and exits. The economic slowdown is providing opportunities, as heavily depreciating local currencies are creating lucrative asset investment options.

 

The Latin American Industry Outlook

 

The LAVCA data shows the region saw its fundraising increase by 21% in the first half of 2015. Latin American private equity and venture capital firms raised an aggregate $4.27 billion. The first half of the year witnessed the strongest fundraising since 2011. In 2011, a slightly higher $4.9 billion was raised during the first half.

 

It was the pan-regionally focused firms, which accounted for nearly 35% of the total capital raised. This was nearly three times more than these funds raised during the first half of 2014. In addition, the latest Preqin data shows that domestic managers have controlled the fundraising scene with nearly 86% of fundraising arriving from domestic funds.

 

Despite the strong fundraising effort at the start of the year, LAVCA’s analysts predict the levels will drop during the latter part of the year and the total fundraising for 2015 won’t necessarily beat the record levels of last year.

 

This might be because private equity and venture capital funds are set to find investments and deploy the masses of capital. Indeed, investments for the first half of the year were already up by 39%. The firms have made investments worth $3.58 billion.

 

Furthermore, the region continues to attract investments in logistics and energy-related infrastructure. According to the report, capital raised by private equity infrastructure funds, focused on the two sectors, accounted for nearly 50% of the total fundraising amount. In addition, investments in these sectors remained strong.

 

Large-cap transactions (those above $100 million) were at their highest in energy, oil & gas, and logistics sectors. Nonetheless, healthcare remained as the top sector in terms of attracting investment, with around $810 million worth of investments made. On the other hand, the IT sector saw the most investments with 62 transactions taking place.

 

Improving Exits Strengthening Investor Confidence

 

Investors can also feel confident over the region, as investment exits have provided increasing returns. According to LAVCA, first half exits in 2015 generated $1.74 billion in proceeds, which is about 8% rise from the levels last year during the same period. IPO filings have also recovered in the region.

 

Most investment exited through strategic sales, with secondary market offerings and sales to financial buyers following closely behind. LAVCA’s president & executive director, Cate Ambrose, said in the official press release, “Concerns over the slowdown in growth or the need for ongoing structural reforms appear to be outweighed by the opportunity to invest dollars in funds that will make investments in heavily depreciated local currencies”.

 

Improvement in exit levels would be especially important for the region. Exits rebounded last year in terms of exits and proceeds from the low levels in 2013. Overall, 60 partial or full exits took place in the region last year, providing proceeds of $4.64 billion. It remains to be seen how well funds can perform, in terms of exits, during the latter half of the year.

 

Brazil Is Among the Leaders in the Region

 

Interestingly, Brazil has seen the most interest in terms of investment activity, despite the country suffering from deep economic problems. According to LAVCA’s findings, Brazil witnessed 69 transactions, amounting to a total $2.28 billion.

 

Furthermore, fundraising activity in the region is dominated by Brazil, despite its economic troubles. The first half of 2015 has seen the two largest Latin America-focused funds being raised by Brazilian private equity firms. The industry has so far been dominated by Gávea Investimentos, which has raised around $4.90 billion in the last ten years, according to Preqin.

 

The country is in the midst of the worst recession of recent times, with Brazilian assets having plummeted from the record peaks of 2010. But this is offering opportunities for private equity investors. Ms Ambrose told the Financial Times on Sunday, “There’s never a better time to invest. You’re going to do really well on the exchange rate and business owners are more incentivised to work with private equity groups and valuations have clearly come down”.

 

One of the country’s big investors, Banco do Brazil SA, said recently that it’s expecting increasing activity on the mergers and acquisition market, as well as an influx of initial public offerings. The bank said it has been advising four M&A transactions during the first half of the year already. Last year, the bank only advised in five M&A deals during the whole of the year.

Furthermore, Brazil continues as the most mature venture market in Latin America. Fund managers in the country deployed 81% of the total investment during the first half. This amounted to around $213 million.

 

Areas of Low Demand Generating Strong Interest

 

In Brazil, it is the sectors riddled with low demand that are attracting the most interest. Real estate sector, for instance, has been able to offer many good-quality assets in stunningly low prices.

 

On the other hand, the country’s strong austerity measures are creating strong demand in sectors such as education and healthcare and this is likely going to attract a lot of attention from private equity firms. One of the year’s biggest news was Carlisle Group’s deal to buy $600 million worth of shares in the largest private hospital operator in the country, Rede D’Or São Luiz.

 

There is a sense among analysts that Brazil’s economic situation can’t get much worse and this could mean growth will eventually pick up again. Assets that have been acquired cheaply now could see plenty of growth in the next few years, providing funds lucrative returns. It remains to be seen whether the assessment proves to be right.

 

If you are looking for private equity deals in emerging markets like Brazil, check out the DealMarket platform.

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