14
FINANCING BRAZIL
BRAZIL CONFIDENTIAL
DATE 2011
PRIVATE EDUITY TAKES DFF,
PUSHING VALUATIDNS UP
many are dose to writing eommitments, he says.
Others agree that the industry is on the cusp, Most believe $S-7bnis areasonable estimate for this year with Patrice Etlin, managing partner of the giant Brazilian operations of Advent International, predieting $6bn.
That is driving EBIDTA valuations sometimes into
double digits ereating a high hurdle for private equity investments. In the retail seetor, for example, blue ehips
such as Lojas Renner and Pão de Açúcar, are at record valuations. Average valuations in private equity are running
to six times annual EBITDA,managers say. "There are not
cheap assets in Brazil any more," says one.
KEYPOINTS
> The technical
c:hallenges in the
pre-salt area are
c:onsiderable.
> Prupused new
legislation would
nbring in produc:tion sharing
agreements that
make business
less attrac:tive for
the private sec:tor.
> Lucal contenl
rules are to
inc:rease, again reduc:ing the space
for the private
sec:tor.
>Newsafety
requirements and
higher insuranc:e
- post-Macondo
spill - wiIl inc:rease cnsts,
Fund Buws
Foreign investors have been tuming to Brazil to offset
weak economic growth at home. A large number of foreign pension funds, family offices, endowments and direct investments are looking at the market, says Mr
Regueira. Foreign firms have struck up joint ventures
with existing Brazilian funds to hit the ground running.
Blackstone bought a 40 per cent stake in Pátria, one of
the most respected funds in the country for an undisdosed sum in September, The firm plans to invest sr-zbn
in Brazil over two years, according to Steve Schwarzman,
Blackstone's chief executive. The Brazilian firm is spread
across sectors induding consumer, retail, real estate and
infrastructure.
Earlier this year, Buenos Aires-headquartered SouthPetroleo Brasileiro SA headquarters
em Cross raised si.zbn and is looking for buy-out opporin Rio de Janeiro, Brazil
tunities via its Brazilian office. Warburg Pincus has
teamed up with Tarpon Investimentos to invest R$3som
BraziI is a hrighl spot on lhe oiIindustr(s
in a renewable energy fund Omega. The investment represents the US company's return to the Brazilian market
map bul lhe pre-sall araa could be hazardous. We lake a dose look ai lhe risks. after a near 10year absence.
Even highly specialist funds are taking their first
ew private equity managers and money are steps. Silver Lake ofMenlo Park, California, made its first
pouring into Brazil with locaIs excited by the Latin investment in Brazilian internet specialist Locaweb
leveI of interest and forecasting greater i~.~ Serviços de internet. San Francisco-based specialist Buris raising $100m to invest in biotechnology compaflows through next year. Many foreign firms
have launched in the country this year thanks to eco- nies throughout Brazil.
At the other end of the spectrum are the giant Brazilnomic growth and recent industry performance. The
downside is that many of the newcomers are foeused on ian banks which have the resources to invest and an uninvesting in larger eompanies and the wall of money is matched depth of contacts. Itaú-Unibanco has an 80 per
driving asset values up fast just as the govemment is cent share in start-up private equity specialist Kinea
Investimentos with partners owning the remainder.
trying to slam the brakes on private equity to contain
thereal.
Itaú provided seed capital of Rszçom and the high
"I see a real possibility of a major flowin funds with as street bank's name has helped it recruit investors and
open the door to companies, says Cristiano Lauretti,
mueh as $10-20bn in 2010-11," says Mareus Regueira,
managing partner at Kinea in São Paulo. Itaú has 40 per
founder of Belo Horizonte-based FIR Capital and former
cent of the high net worth market, defined as those with
president of the Brazilian Private Equíty and Venture
Rsioom or more to invest, making it an ideal partner for
Capital Association (ABVCAP~The attitude and how
Kinea in raising funds, he notes. Kinea has already
stitutional investors are talking aboutBrazil has ehanged:
N
rin
rn:-
®
15
FINANCE BRAZIL PRIVA TE EOUITY
TAKES DFF, PUSHING VALUATIDNS UP
Guillherme Bastos
INSIGHT
MAKlNG MINING
EASIER
Chinese join lhe Cl'uwd
as private sectar
prepares lar new
bidding rounds.
Two years ago, a successful
$pbn IPO by OGX symbolised the growth of intemational interest in Brazilian oil.
But it is perhaps significant
that - so far at least - the
company, which is part of the
EBX industrial conglomerate owned by billionaire Eike
Batista - is not part of the
pre-salt story. The company
expects to begin producing by
the middle of next year but its
estimated reserves - of about
4bn barrels - in the Campos
and Santos Basin reserves
are above the salt layer. The
company has sti1l to qualify
as a deep water operator,
but Paulo Mendonça, the
company's chief executive
says: "Brazil is bigger than the
pre-salt. "
Indeed, activity in the IPO
market this year has focused
on other areas. HRT, which
raised more than $1.sbn in an
October IPO, has a portfolio
which includes 21blocks in the
Solimões Basin in Amazonas
state with potential reserves
of about I.S3bn barrels of oil
Karoon, the Australian group
which postponeda $773m IPO
in November, had also been
largelyfocusing outside the
pre-salt area, and so is Q..ueiroz
GaIvão, the conglomerate
which plans to float its oil and
gas interests earlynext year.
Merger and acquisition activitytoo has seen big intemational oil majors reducing their
risks and gain access to capital,
as theywait forthe approval of
new legislation and a resumption ofbidding rounds. Repsol
YPF of Spain sold 40 per cent of
its sub-salt assets for $pbn to
Sinopec, china's Petrochemical Corporation, in October. In
May, Norway's Statoil agreed to
sell ao per cent of the Peregrino
field [ofheavy oil] that borders
OGX's blocks in Campos to
Sinochem Group. [Statoil, however, will be the operator in
the reservoirs, which are set to
start production in early 2011.]
Both those deals reflected
growing Chinese interest in
8razilian oil And talring a typically long-term view, the Chinese appear to be as enthusiastic about pre-saIt as theyare
about less riskyareas. There
is speculation that a Chinese
companycould buythe joper
cent stake that in seven shallow water fields in the Campos
Basin that OGX is looking
to unload. OGX discovered
oil in 21 of the 22wells it had
drilled. But then again, China
is mentioned when ever there
is speculation about a Brazilian deal. "The door to my office
has not stopped swinging,"
says one official at the industry
regulator ANP, commenting on
a succession of Asian visitors
that he has received.
Proposed regulation
changes thatwould limit the
participation in the pre-saIt
blocks may make the already
geologically challenging fields
even less attractive to westem
oil industrymajors
but not
necessarilyto the Chinese,
"Theywould be perfect1y happyto take an equityinterest
and allow Petrobras to operate
as it wants," says one long es-
BRAZIL CONFIDENTIAL
DATE 2011
@ raised
some R$200m in capital for its planned first
transaction,
"Itaú's private banking group helped us reach family
offices, many of whom had not invested in private equity
before," says Mr Lauretti. "It also gives us a compelling
story at a time when even getting in to see management
of target companies can be difficult," he claims.
The expansion of the industry is far from over and
there are more competitors waiting in thewings. "We see
a lot of interest. I get visits every week from investors
wanting to understand the market," says Mr Etlin.
That has made hiring and retention a very real challenge for the industry. "Training and retention has been a
major topic in the industry over the last five years," says
Mr Etlin. Advent started a trainee programme in 2003 to
bring in talent through a selection process in which suecessful candidates receive support to take an MBA in the
USo"You have to create a pool of talent that's closer to
you,"hesays.
Strategies and Sectors
The large number of new, very large private equity
managers in Brazil is causing concerns about valuations and some managers privately question whether
big players are concentrating firepower on a small segment of the market. Most large investors, including GP
Investimentos,
Pátria, Carlyle, APAX and Southern
Cross, tend to be concentrated on investrnents in large
companies and buy-outs as opposed to minority investments, says one manager.
Advent operates in this end of the market and has
stepped on the brakes in Brazil. "We are more cautious on
Brazil. Our pace of investrnent this year in Brazil has
slowed down compared to 2009, as we are keeping our
discipline in entry valuations. We have the benefit ofbeing a Latam fund and are also very active in other countries in the region," says Mr Etlin.
The very large transactions end of the market is a
<e
Rising steel and chemicals imports •••
Shenzhen Development
Bank
Ningbo
_ .•.. -
~Pudo~g Developmenl Bank
2009
2010H
79.08
73.84
73.92
72.92
71.71
72.72
Hua Xia
-------_._---
73.96
72.79
Minsheng
78.28
72.36
Merchant
-----_._--
73.74
75.94
Nanjing
65.63
60.24
77.88
78.37
Industrial
............. __ ..__
_-_
_ .
_-_._._
61.44
--_ ..__ .__ .__ ..
...__ .._---_ .._._ ....__ ._ .... _----_._._._-_ .._------_
...
43.16
ABC
44.66
--------------------- ._------Beijing
61.19
BoCom
77.54
76.6
ICBC
58.63
58.66
77.25
Everbright
81.16
CCB
60.24
62.26
BOC
73.45
74.25
CITIC
79.41
73.21
Source: Company reports, China Confidential
FINANCE BRAZIL PRIVA TE EOUITY
TAKES DFF, PUSHINO VALUATIDNS UP
16
BRAZIL CDNFIDENTIAL
DATE 2011
9 very
crowded niche, says Luiz Eugenio Figueiredo,
vice president at ABVCAP.At the same time, owners of
companies are getting more sophisticated and calling in
financial advisers to help them get the best valuation
driving up prices, he notes. Foreign investors also need to
take into account the high level of currency, he says.
Themes in the private equity industry are similar to
those in public equity, with attention focused on consumer-related stocks and infrastructure
plays. With
share prices rocketing for the most popular sectors on
Bovespa, private equity is emerging as a powerful way of
tapping these markets. That is especiallythe case as these
sectors are under-represented on Bovespa.
That listed consumer stocks have done very well
may not be obvious at first glance as Petrobras has
dragged down key Bovespa indexes. However, smaller
cap stocks and particularly consumer-oriented
ones in
retail, financial and IT are at record levels, according to
MrEtlin.
Given high valuations for large companies that have
the option of turning to the stock market, there is more
space for investrnent in small- and medium-sized business, thinks Mr Figueiredo. The area is more fiddly and
difficult to research and requires a local presence. Angel
and seed capital and private equity for small companies is
growing fast but are not showing up in statistics in Brazil,
he reckons. That's because the transactions are neither
heavily publicized by the parties involved nor do' they
make headlines. "The feeling is that not much is happening, but it is," he says. Firms specializing in smaller investrnents include Antera (Rio de Janeiro), CRP (Porto
Alegre), FIR Capital and Stratus (São Paulo).
tries related to construction such as equipment and materials. The fund is also ..analysing opportunities in health
and education, although no deal has been signed so faro
FIR Capital concentrates on smaller companies where Brazil has a global competitive ad- 'Visit São Paulo or Rio de
vantage in areas such as mining, IT and tour- Janeiro these days and the
signs 01 Bmsils new lound
15m.
Rio Bravo has ma de two recent R$2ym in- prosperity and seli-coniivestrnents in the north-east. One is Multdia, dence are everywhere"
a processor and distributor of foods, specializing in baby foods, in Natal, Rio Grande do Norte.
"This is a dynarnic company and the distribution business allows us to go deep into the interior where infrastructure is very weak," says Mr Silvestri.
Giant Advent is looking to spread its wings geographically and already has investrnents in the south of Brazil
and Minas Gerais state. However, Mr Etlin points to some
of the pitfalls. "We found that when you go out of the
main cities it becomes difficult to attract top tier management teams. Brazilian chief executives and finance
directors don't like to live in smaller cities. This is very
different to the USoThe big challenge in moving out of
the São Paulo-Rio axis is finding human talent," he says.
01 Foreign interest
In the future, Advent is interested in infrastructure
is likely to remain
plays as well as continuing a strategy to look at regions.
strong and will
Mr Etlin is studying opportunities in ports and airports.
continue to drive
The firm has an edge in this sector as Advent has signifiup valuations on
cant experience in Mexico and the Caribbean and can Brazilian deals,
bring that expertise to Brazil, he says. His team is analyzesper:ially those
ing airportregulations and he is confident that newrnodinvolving bigger
eis will emerge. That optimism comes in spite of a lack of r:ompanies.
coherence and progress and the state-run airport infrastructure group Infraero' 5 allergy to the idea.
02 The best value
"The new govemment will have to deal with airports
Sectors
investments may
well be outside the
even though president-elect Dilma Rousseff is more
Private equitymanagers
need to specialise and be nimble and look at areas well off the radar screen of the big wary of privatizations and concessions," says Mr Etlin. most developed
players and at regions, says Mr Silvestri. Rio Bravo is He points to the concession model at Natal's airport and south and southcalls this a test scheme, which could serve for other air- east DfBrazil. Little
launching its North -East Two Fund, looking at compaports if successful. The proposed airport concession is known northem and
nies with between $so-lQom in revenues in the region,
north-eastem states
for 28years with estimated investments of'Rsôyorn.
henotes.
may offer particuStill, even these niche areas are being cluster bombed
The focus is on capturlng the increase in consumpby investrnent banks and private equity firms looking to larly rir:h pir:kings.
tion through food processing, special retail and indusThey are expanding
buy stakes. One private equity leader recounts a story
from a low base but
that is common to the industry. On visiting a small
disposable income
pharmaceutical <::gID.!2any
in southern Brazil, the owner,
is rising quíckly
Rising steel and chemicals imports ...
without prornpting, announced he would only sell his
making for interest_ Proportion of respondents interested in home purchase (RH~ business as 12times EBITDA or more. "Business owners
ing possibilities in
-Average Household Income (LHS)
are really focused on the price that you'll pay and beareas such as retail.
Rmb 1.000/month
cause they have been pitched so much, they are knowl200 --------------------------------------300k
edgeable," says the banker. "We could be running head03 Watch for any
first into a brick wall," says another.
\
25%
potential fall-out
150
At the same time, ABVCAP has been fighting a rear- from moves to
20%
guard action to secure an exemption on the industry
tax or controls on
100
from a financial transaction tax, the IOF, which was in- capital flows. The
15%
ínenming govemcreased a second time to 6 per cent on October 18.Indus50
10%
ment oí DUma
try leaders recognise that the tax may be necessary
5%
0'-'•••••
-to slow short-term portfolio investrnent but argue pri- Rousseff will do all
25-29
30-35
36-40
>40
Age <25
vate equity, which invests for the long-term, should be it can to reduce the
value ní the real.
exemp 1,700 words .•
Source.Oeelopmeot,
Induslry and fureign Trade Minislry
lImlml
l1!I]lljJJ