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Emerging markets: Brazil, domestic powerhouses

by Matt Miller | Published February 17, 2012 at 12:00 PM


PE Special Features
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Global fund managers are eyeing Brazil with ever-greater interest. A few have launched targeted funds of their own there. Brazil, however, is possibly the most dramatic example of an emerging private equity market in which local firms have carved out better toeholds than their international counterparts. The response by some global players: Buy a stake in the local Brazilian firms.

"It gives new entrants, private equity funds looking to get into Brazil, the ability to ramp up quicker," says Tim Hartnett, who leads PricewaterhouseCoopers LLP's private equity markets practice in the Americas. Adds colleague Manuel Iraola: Indigenous firms "can provide them with local knowledge, local connections, local business practices."

The two most prominent deals came within a month of each other. In September 2010, Blackstone Group LP announced it would pay $200 million for a 40% stake in Pátria Investimentos. Four weeks later, Highbridge Capital Management LP, J.P. Morgan Chase & Co.'s asset management arm, announced the purchase of a 55% stake in Gávea Investimentos, Brazil's largest PE fund manager. The two didn't disclose the purchase price, which Brazilian media pegged at approximately $800 million.

Both Gávea and Pátria bring with them long investment track records and august management. Gávea was founded by Arminio Fraga, who headed Brazil's central bank from 1999 to 2002. Pátria's managing partner is Alexandre Saigh, a pioneer in Brazilian private equity from the mid-'90s and a former J.P. Morgan investment banker.

Brazil has built up an impressive array of top-tier private equity firms, almost all of which have raised or are raising impressive funds. They are buoyed by both offshore institutional capital and, increasingly, domestic investors.

In a stretch of the Brazilian winter last year, BTG Pactual closed on its initial fund of $1.5 billion in June. Vinci Capital Gestora de Recursos Ltda. followed less than two weeks later, when it closed its second fund, raising $1.4 billion. Pátria closed its fourth fund in August, raising $1.25 billion.

Late last year Gávea closed a fourth fund with $1.8 billion in commitment. The Southern Cross Group, a pan-Latin American fund management company with heavy exposure in Brazil, raised $1.68 billion in its fourth fund, which closed in September 2010.

Carlyle Group closed two Brazil funds last year that total $1 billion. A 360 million real ($208 million) fund, was raised in partnership with government-owned Banco do Brasil SA.

The fundraising prowess of the country's first-tier firms has come at a cost. "The success of the big players in raising capital has made life more difficult for the less-well-known," says Todd Crider, a partner at Simpson Thacher & Bartlett LLP, who divides his time between New York and São Paulo. "More of the private equity capital has started to coalesce around certain brands, although there is also talent elsewhere."

One example of fundraising that fell short involved Votorantim Asset Management, an arm of the country's third-largest bank. Last year, it announced a series of three renewable energy funds, which the firm said could total as much as R$1.2 billion. In the end Votorantim could raise only R$300 million.

Institutional investors are attracted to Brazil's booming economy and a growing middle class. They're also impressed by Brazilian private equity's track record for successful exits. "Private equity-sponsored IPOs have generally outperformed the market," says Crider, who cites as an early example the 2005 listing of Pátria-owned medical-devices company Diagnósticos da América SA, or Dasa, on the São Paulo Stock Exchange, known as Bovespa.

According to Iraola, of the "dozen or so IPOs in 2011, a majority were private equity-backed."

Strategic sales to both local and international players offer the most common exit. However, the choices are broadening. In 2010, Votorantim and Pátria combined for the country's first public-to-private deal. Fellow private equity fund Apax Partners LLP bought a majority stake in the Brazilian computer company Tivit Terceirização de Tecnologia e Serviços SA, which valued the company at about $1 billion.

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Tags: Blackstone Group LP | Brazil | J.P. Morgan Chase & Co.' | Pátria Investimentos | PE

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