Private Equity no Brasil, Private Equity em mercados emergentes

1. Management Report - Is Brazil a good opportunity for private equity investments?
Opportunity Hardworking Competition Positive Maturing
Discipline Opportunity Hardworking Competition Positive
Maturing Discipline Opportunity Hardworking Competition
Positive Maturing Discipline Opportunity Hardworking
Competition Positive Maturing Discipline Opportunity
Hardworking Competition Positive Maturing Discipline
Opportunity Hardworking Competition Positive Maturing
Discipline Opportunity Hardworking Competition Positive
Maturing Discipline Opportunity Hardworking Competition
Positive Maturing Discipline Opportunity Hardworking
Competition Positive Maturing Discipline Opportunity
Hardworking Competition Positive Maturing Discipline
Opportunity Hardworking Competition Positive Maturing
Discipline Opportunity Hardworking Competition Positive
The picture is intended to describe the Brazilian private equity industry from the perspective of the interviewees.

2. Introduction
Despite the 2007-2009 financial crisis that has shaken the world and has been a major challenge
for all world economies, the economic outlook for Brazil is still very positive. Brazil is expected to
become the fifth largest economy in the world by 2032*. Its resilient economic performance over
the recent years has attracted the world’s attention. A great number of investors want to increase
their exposure to the Brazilian market.
Equally positive are the prospects for the relatively young private equity industry in the country.
Private equity has the potential to play an important role in the Brazilian economy as only 380 of
the nation's 12 million companies are publicly traded. But the complexity of the Brazilian business
environment requires careful consideration from private equity firms that want to succeed in this
market.
*GOLDMAN SACHS. The Long-Term Outlook for the BRICs and N-11 Post Crisis. Global Economics Paper No: 192, 4th December 2009.
2

3. Scope
This paper considers whether Brazil is a good opportunity for private equity investments. The
findings were based on desk research carried out in London and interviews conducted in a field trip
to Sao Paulo. The recommendations were synthesized in three major themes: key drivers and
challenges for private equity investments in Brazil, Brazil’s private equity business model
idiosyncrasies and, pitfalls to be avoided by new entrants.
The findings in this paper indicate that there are indeed compelling reasons to believe that Brazil is
a good opportunity for private equity investments and that the private equity industry in the
country will evolve fast. Nonetheless, a number of internal and external factors will come into play
that will either help to propel or hold back this process, over time.
3

4. Acknowledgements
A number of people have contributed to the production of this management report. I am very
grateful to those who provided me guidance and shared their professional experiences.
I would particularly like to thank:
 Francesca Cornelli, supervisor &  Luiz Antunes M. Mϋssnich, Bawm Investments;
academic director of Coller Institute of PE;  Emilio Pϋschmann, Hamilton Ventures;
 Florin Vasvari, professor of PE&VC;  Antonio Caggiano Filho, Deloitte;
 Fernando Borges, The Carlyle Group;  Leonardo Zylberman, Integration;
 Doug Scherrer, General Atlantic;  Cláudio Vilar Furtado, GVcepe;
 Mario Spinola, DLJ South American Partners;  Alexander Appel, GVcepe;
 Nemer Rahal, Patria Investimentos;  Leonardo L. Ribeiro, OCROMA;
 Guilherme Passos, Pragma Patrimônio;  Paula Abreu, UKTI;
 Marcos Ayala, Gávea Investimentos;  Jorge Maluf Filho, Korn/Ferry International;
 Chu Kong, Actis;  Paulo Weinberger, Heidrick & Struggles.
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5. Agenda
Research Methodology & Framework
Brazilian Scenario
Assessing the opportunity
Brazilian PE&VC landscape
Recommendations

6. Research Methodology & Framework
Top down analysis
Desktop ➜ Economic & Political Scenario
Events
Research ➜ Growth rate & Economic outlook
Country ➜ Market Size & Growth drivers
➜ Opportunities
➜ Challenges & Bottlenecks
PE&VC
➜ Overview of Brazilian PE&VC industry
IndustryBrazil
PEI ➜ Drivers for investments
Interviews Forum ➜ Competitive landscape
➜ Challenges
6

7. Agenda
Research Methodology & Framework
Brazilian Scenario
Brazilian PE&VC landscape
Recommendations

8. Economic & Political Scenario
Size
But will economic policy change with the new president?
USD 1.6 trillion
(2009 GDP)
Most likely Roussef will provide policy continuity in terms
of macroeconomic policy orthodoxy.
Growth potential Strong internal
and demand
Do investors feel comfortable with the government
regional leader (60% of GDP)
transition?
Active and Low credit
independent issuance room The fear of a radical shift to economic policy no
regulators and CB for expansion longer exists. Evidence: Petrobras’s US$70bn rights
RE/consumer issue a few days before the national elections.
+15 years of Strong financial Diversified
political stability system exports
(democracy) (public and base
private)
Solid High/stable Fiscal Massive deposits
macroeconomic foreign exchange discipline of
indicators reserves natural resources
Source: Price Waterhouse Coopers.
… It looks like a stable environment for investments.
8

9. Brazil has overcome the crisis stronger and more attractive
What enabled the country to be in this favorable position?
GDP growth rate forecasts to selected countries
 Discipline and conservative behavior.
 Flexibility to adopt stimulus measures to boost internal
consumption.
 Credit expansion (45% of GDP in 2009).
2X
OK. Goldman Sachs Global ECS Research
Source: It sounds good. * Consensus Economics September 2010.
But will Brazil really become an economic power?
Is economic growth sustainable?
What is driving growth?
Good investment opportunities?
9

10. Things turned out to be better than we had thought…
GS projections vs. actual figures.
In 2009 Goldman Sachs reported: “BRICs
economic health post crisis suggests that GS
long-term projections are more, rather than
2.4X less , likely to be realised”.
Source: Goldman Sachs Global ECS Research.
Updated projections for the largest economies in 2032.
Now GS’s projections show that
Brazil will become world’s fifth
largest economy 18 years earlier.
Source: Goldman Sachs Global ECS Research.
10

11. Brazil’s sustainable growth and competitiveness
Global competitiveness index (GCI), 2009-2010
Growth Environment Score (GES) GES, a tool to monitor a country’s potential and
measure the strength of a country’s sustainable growth.
 In 2009 Brazil has scored 5.3 surpassing China
and becoming the highest-placed BRIC in the GES
ranking.
 The report indicated “ Brazil is now one of the 35
best performers globally”.
The index varies from 1 to 10.
Source: Goldman Sachs Global ECS Research, n. 192
The index varies from 1 to 7. Source: GCI 2009-2010 report.
GCI, enhances the understanding of the key factors determining economic growth in a country.
 In 2009-2010 Brazil has scored 4.2 moving up 8 positions to 56th place out of 133 countries.
 Within the BRICs Brazil ranks 3rd, having for the first time overcome Russia, whereas China ranks first followed
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by India.

12. Market size & Growth drivers
Brazilian economy
Growth of Credit Real income
investments expansion rise
Growth
Press Press Press
Drivers
It has benefitted from rise of commodities prices
It ranks 10th in terms of market size (CGI index)
12

13. Opportunities
Growing middle class Urgent need of infrastructure investments
 Poor infrastructure (airports, roads, ports, etc).
 2014 World Cup and 2016 Olympic games.
 Recent oil discoveries, Pre-salt, potentially
making Brazil the fifth largest country for
proven oil reserves.
Large pool of private owned companies Limited access to financing
 Only 380 of the country’s estimated 12  Average lending interest rate in 2010
million companies are publicly traded. (estimated 42% p.a.*). That encourages
 Sizable number of middle market companies private owned companies to look for
of around 250-1000 employees and annual partners (equity rather than debt).
revenues of US$ 20-200 million. * Source: Economist Intelligence Unit 13

14. However, … still many challenges ahead
Most problematic factors for doing business (GCI)
Tax regulations ................................................................19.0
Tax rates ..........................................................................18.5
Restrictive labour regulations.........................................14.0
Inefficient government bureaucracy...............................11.0
Access to financing..........................................................10.4
Inadequate supply of infrastructure ................................9.5
Corruption.........................................................................7.0
Inadequately educated workforce....................................4.9
Policy instability..................................................................1.1
Inflation .............................................................................1.0
Poor work ethic in national labour force ...........................0.9
Foreign currency regulations.............................................0.9
Crime and theft ..................................................................0.7
Poor public health..............................................................0.6
Government instability/coups ..........................................0.3
Source: GCI 2009-2010 report.
This chart summarizes those factors seen by business executives as the most problematic for doing business in their economy. The information is drawn from
the 2009 edition of the World Economic Forum’s Executive Opinion Survey. From a list of 15 factors, respondents were asked to select the five most
problematic and to rank those from 1 (most problematic) to 5..
Source: GCI 2009-2010 report.
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15. Bottlenecks
 Poor infrastructure (increases costs of doing business).
 Low labour productivity (insignificant improvements in the last 20 years).
 Lack of skilled professionals available in the Brazilian market.
 High cost of capital (bench market interest rates - SELIC 10.75% p.a.).
15

16. Agenda
Research Methodology & Framework
Brazilian Scenario
Brazilian PE&VC landscape
Recommendations

17. Penetration, fundraising and investments
Penetration –the regional leader in LatAm
Brazil is PE investment % of GDP, 2008. PE ecosystem in Brazil
2009 Investments by Geography 2009 Fundraising by Geographic Focus
4,000 7x  140 managing PE type investment firms surveyed.
4,000
19 15
3,500 190 140 81 155
3,500 323
217
226 462
3,000 423  236 investment vehicles.
3,000
605
USD (mm)
USD (mm)
2,500 108 2,500
75
2,000 2,000
3272  554 portfolio companies. 3633
1,500 1,500
1,000 2033
3x 1,000 1833
500  1,600 professionals and staff employed within
500
0 0
Brazil Peru Columbia Mexico Chile Argentina Other Total
the industry. ColumbiaC. Ame. Mexico
Brazil Regional Peru Chile Argentina Other Total
Source: LAVCA, EMPEA * Figures estimated by LAVCA.
Source: Interim results 2010 Census, Gvcepe research.
Approximately half of all funds raised in 2009 were targeted for Brazil; 62% of investments
Source: EMPEA - Fundraising and Investment Review – 2009.
in dollars were in Brazil.
The PE industry in Brazil is maturing but still has a long way to go.
17

18. Evolution of capital committed
Committed Capital allocated to Brazil (US$ Bn). Committed Capital as % of GDP
40 2.3% 2.5%
36
35 2%
2%
30
15% p.a
25
27 1.5%
20 1.2%
1% 2x
15 1%
10 13
2x 0.5%
5
6
0 0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Interim results 2010 Census, GVcepe research.
The evolution of committed capital is impressive, increasing more than 6 times since 2004
and 2 fold as percentage of GDP.
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19. Deal profile
Deal flow – Brazilian market, 09/2008 to 05/2010. Average deal size of EMPE inv. by region, 2008-2009, (US$ m)
Source: Ocroma Alternative Investments research. Source: EMPEA - Fundraising and Investment Review – 2009.
 Since the crisis in 2008 the Brazilian PE  Average deal size since the crisis has increase
industry has been very active, Ocroma’s to US$ 75 million. The most common deals
study reports a total investment of US$ 4.8 were in the range US$ 50-200 million.
billion in 63 deals from 2H2008 to May2010.
The PE deal profile enables GPs to set up local offices and hence improve the quality of their
transactions in Brazil. 19

20. Investment exits
Investment exit by value, 01/2005 – 06/2008 Investment exit by number, 01/2005 – 06/2008
9%
2%
22%
Trade sale
Trade sale
Write off
Buyback 5%
54% Buyback
IPO and Secondary
IPO and Secondary
19%
89%
Source: GVcepe, June-2008 report.
 In the period Jan-2005 to June-2008, there had been 111 exits valued at approx. US$ 2 Billion.
 PE backed exits slowed down significantly during the economic downturn mainly due to: high
levels of uncertainty, less attractive valuations and limited access to liquidity in the market.
 In 2009, trade sale was the primary exit and there was just one PE backed IPO.
 In 2010, there have been 3 PE backed IPOs, far down from the 17 registered in 2007. 20

21. Stage of development of capital markets
2030: Global market cap composition
Capital Markets , 2009. EM IPO & Follow-on, 2004 –Sep 2010, (BRL Bn).
capital markets as % of world, 2010 - 2030
%
Size of equity Number of
Market
Brazil market 70%
Country market as % of listed
Capitalization cap of 59%
GDP companies
5%
4% 3% China total 60% 55%
Brazil 5% 74% 377 1,167 2.4% 50% 49%
N. America 44%
6%
China 100% 1,700 5,007 10.3%
28% Europe 40% 37% 2010
India 90% 4,955 1,179 2.4% 31% 2010
9% Other EM 30%
2030
Japan 67% 3,208 DM 3,377
Asia 6.9%
20%
Russian Fed 70% 279 India881 1.8%
14% 25%
10%
UK 129% 2,179 Other EM Asia 5.7%
2,796
US 106% 4,401 15,077 Source: BM&Fbovespa.
31.0% 0%
Russia
World 81% 48,561 48,713 100.0%  24 public offerings in 2009 (6 IPOs and 18
GDP Market Cap
Source: World Bank. Global ECS paper N. 204.
Source: Goldman Sachs Source: Goldman Sachs Global ECS paper N. 204.
Follow-Ons).
 15 public offerings in 2010 (8 IPOs and 7 Follow-
EM equities may represent 55% of global market cap by 2030; 59% of global GDP.
Ons) through September.
Brazilian exchange (BM&FBovespa) already accounts for 2.4% of world’s total market capitalization. And
is expected to increase its share of the pie in the next 20 years.
21

22. Business environment for PE
LAVCA Scorecard Scorecard highlights:
 Brazil ranks second in LatAm;
 Positives: well regulated business
environment & favourable tax treatment
for funds.
 Negatives: perceived corruption & poor IP
rights.
Receptiveness for PE Investments in Brazil
 Tax incentive: Foreign investment in
regulated Private Equity funds in Brazil is
exempt from income and capital gains
taxes (if not registered in Low Tax
Source: LAVCA scorecard 2010.
Jurisdictions).
 Caveat: Gov. has imposed a 6% tax on
Scale of 1-100, 100 being the most friendly business environment.
capital inflows trying to curb “hot
money”.
22

23. Positive outlook
EMPEA / Coller Capital 2010 Survey Highlights:
 Brazil - second most attractive EMPE, (next 12 m).
 Investors with existing exposure to EMPE plan to
grow their exposure from 6-10% of total PE
commitments to 11-15% (next 24m).
 The majority of LPs expect EMPE funds to
outperform PE as a whole.
 61% of LPs consider themselves to be just as
aligned with their EM GPs as with their developed
market ones, while an additional 23% of LPs
Source: EMPEA EM PE 2010 Survey. consider to more aligned.
23

24. How Brazilian PE creates IRR
It is not driven by leverage and aggressive cost cutting; rather IRR is driven mostly by growth and
efficiency (focus on operational improvement).
Emphasis on providing funding and strategic plan for consolidation of fragmented industries.
Four ways to create IRR: Many funds use a blend of the four.
Source: IFC, The case for Emerging Markets Private Equity.
24
For further details press

25. Key company-industry features for PE investments in Brazil
Brazilian
Economy
 High growth rates
 Fragmented (Roll up strategy)
 Non-cyclical sectors
Industry
 Health competitiveness (no price war)
 Low governmental regulation
Investment
 Aligned with GPs expertise
Thesis
Company  Lack of financial sophistication from management
Majority stake  Succession problems
Company  Good management team
Minority stake  Domain knowledge of the sector from management
 Stable cash flow  High entry barriers
 Low fixed costs  High market share & strong brand
 Low Capex  Low customer concentration
 High profit margins  Attractive entry valuation
Company’s common  Scaling business model  Clear exit strategy
features
Note: The findings above described do not depict the PE industry in Brazil as a whole. It cannot be considered as proxy of the investment approach of 25
the executives that contributed with the research rather it is intended to provide deeper knowledge of the practices that have been applied.

26. Competitive landscape
Pre - crisis Post - crisis
• It was marked by an • Market is becoming more
“indirect” competition intermediated (estimated fitty-
from investment banks fifty).
which were “whispering”
• Becoming difficult to find
on companies’ owners
bargains (multiples leapt from
ears unrealistic valuations.
around 4-6 to 8-10).
But… • Increasing competition (new
 The percentage of deals that  The number of GPs is relatively funds entering the market).
have been done through small compared to that of
auctions is still low (estimated other emerging markets such
20%). as China and India.
26

27. Key identified challenges for PE investments
Investments Fundraising
High interest rates which
Company owners do not want
encourage investments in fixed
give up control
income securities
Transparency & Reliable Unlimited liability risk of current
company accounts FIP regulation
Brazilian pension funds request
Off-Books Practice to have a seat on funds’
investment committees
Slowness of the courts & Law
enforcement
Shortage of skilled professionals
Currency risk
27
Note: “FIP” stands for “Fundo de Investimento em Participação”, which is the most typical private equity fund vehicle in Brazil.

28. Agenda
Research Methodology & Framework
Brazilian Scenario
Brazilian PE&VC landscape
Recommendations

29. Assessing the opportunity…
Favourable Unfavourable
The PE&VC landscape in Brazil looks like a investments and then classified them
Selected 16 drivers and challenges for PE&VC good opportunity indeed.
between favourable and unfavourable.
But should investors enter this to financing
6) Limit access
market now or in a few years?
7) Stage of development 1) Shortage of skilled
What else is favourable in the Brazilian PE&VCprofessionals
1) Political stability of capital markets industry?
2) Market Size 8) Deal size and flow 2) Corruption
3) High GDP growth 9) Good alignment of 3) Slowness of the
What pitfalls can be interests with LPs entrants? judiciary system
rate avoided by new 4) Currency risk
4) Enormous needs for 10) Higher returns
investments expected
5) Large pool of private 11) Tax incentives for FDI
owned companies 12) Moderate competition
Country
PE industry 29

30. Timing: it would be better entering the market now…
• Opportunities for proprietary deals will most likely
Proprietary deals disappear in a few years from now.
• The number of GPs investing in Brazil is still significantly
Competition smaller than those of China and India.
• Still few GPs can sign big checks for large buyouts.
Shortage of skilled • There doesn’t seem to be a short-term solution to this
issue. GPs would be better-off starting to manage this
professionals issue now.
• The venture capital and secondary exit markets are still in
VC & Secondary exit the early stages of development.
30

31. Brazil’s PE business model
Drivers of Mature
Brazil Comments on the Brazilian model
returns Markets
Leverage Much less reliant on debt.
Key component for creating IRR.
Growth
Many more opportunities with macro
Multiple conditions improving and opportunities for
expansion proprietary deals.
Greater need of the type of skills and
Efficiency gains business knowledge provided by PE firms.
31

32. Lessons learned from the past….
Locals GPs have advantage of
sourcing (capillarity) and finding
Local presence
management for portfolio
companies.
Not only finance but also
operational background. GPs are
Diversified team
looking for team members that can
add value to the businesses of their
portfolio companies.
LPs are looking for GPs with
Replicating strategies
strategies that can be replicated in
future investments.
Brazil has a complex and multi-layered
tax system. Close consideration is
Tax Planning
required to this issue. Much money
can be legally saved through the right
tax planning.

33. Deep knowledge of the market is also key….
Pitfalls
Leverage with Due diligence Long-term
caution Double attention is investment
Do not required. Buyers are prospect
underestimate the responsible for past Recent strong
volatility of the liabilities and it is appreciation of the
Brazilian market. difficult to gain BRL, (estimated 30%
recourse to the overvalued).
sellers.
33

34. Thank you
for your attention
Victor Carlos Casabona Filho
Sloan Fellowship 2010
London Business School
Phone: +44 (0) 7872 490666
vcasabona.sln2010@london.edu
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35. Appendices
35

36. Investments
Growth of gross fixed investment (% of GDP) UNCTAD’s World Investment Prosp. Survey, 2010-2012.
 The 2010-2012 WIPS shows Brazil among the top
5 priority-host economies for foreign direct
investment (FDI).
 Brazil has moved up one position, raking 3rd after
India and China.
36
Go back

37. Credit expansion
Leveraging as the rest of the World De-leverages Credit expansion
37
Go back

38. Income rise
Income per Capita in 2050, (2007 - US$) Population, Inc. growth & consumption, 2005-2014
12th
2X
Source: Goldman Sachs Research, GES n. 169, 2008.
Source: Economist Intelligence Unit
38
Go back

39. Selected macroeconomic indicators
39
Source: Economist Intelligence Unit

40. Private equity value creation
 Financial engineering (leverage with caution)
 Leverage for funding acquisitions
Leverage
 Buy undervalued assets and sell at higher
Multiple valuations
Arbitrage  Macroeconomic scenario improvement – market
Market-
premium timing
Operational
Improvement  Operational improvement includes growth and
EBITDA expansion.
 Business plan development & implementation
Basic  Strengthening of management
Basic Value
Value  Roll-up strategy (acquisition)
 New management incentive program
Phase I Phase II Phase III
Buy Value Creation Sell  Best practices of corporate governance
 Cuts of headcount & Capex & renegotiation of
suppliers contracts
 Efficiency improvements
 Innovation (new
products, channels, markets, etc.)
 Credibility improvement - “Efeito Certifição” 40
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41. Fund manager skills
Source: IFC, The case for Emerging Markets Private Equity.
41

42. References
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