A Local Opportunity

The private equity industry has not done well in Latin America recently. Investors excited by growth prospects in the 1990s showered private equity funds with money only to see many of their investments go sour. As always, the best opportunities to invest arise when markets and valuations are at a low ebb. Brazil, the continent’s biggest market, with its impressive stock of well-managed but poorly capitalized companies, is an ideal hunting ground. If attractive opportunities proliferate when times are hard, this is just when fund-raising becomes difficult. These days, all but the most hard-bitten private equity investors are staying well away from Latin America.

Alexandre Saigh, partner in Patrimônio, a São Paulo merchant bank, says that the immediate outlook is grim and that foreign investors are likely to stay away. “Private equity in the future will be more local. Fundraising will have to be local and [institutional investors] with excess cash like insurance companies, pension funds and banks will need a diversification,” he says. Eliane Lustosa, finance director of Petros, the pension fund for employees of national oil company Petrobras, agrees. Her fund, with assets under management of $5 billion, is devoting a sliver of its money to independent private equity funds with a variety of interests that range from technology, to oil and gas, to distressed assets.

A Local Response
Although the sums available are quite small compared to companies’ hunger for capital, Brazilian private equity funds are multiplying in number. Organizers hope to emulate the success of legendary investors like the reclusive Jorge Paulo Lemann, the founder of Banco Garantia, a São Paulo investment bank, and the brains behind the formation of AmBev, the giant drinks company. Stratus, a São Paulo fund owned by four partners, has even raised $10 million recently for a technology-oriented venture capital fund. The firm’s backers include a range of US groups like the Ford Foundation, GE Capital, the Inter-American Development Bank and local organizations like the BNDES development bank and Fapesp, a São Paulo state body that supports scientific and technological projects.

The bulk of private equity investments is going to mid-sized companies with a track record of growth which need a dollop of fresh equity and help with management to continue growing. Alvaro Gonçalves, executive director of Stratus, says there is no shortage of such companies. “There is a corporate Brazil out there that works, that Wall Street does not know about. There are companies with sales of $15 million to $100 million a year all over the interior of Brazil,” he says. These are usually companies in mid-technology industries which are no longer profitable for companies in developed countries, such as manufacturing, chemicals or food processing, but at which Brazilian companies excel thanks to the country’s plentiful resources and cheap labor.

Upwardly Mobile
Exiting, preferably at a profit, is a permanent headache for private equity investors in Latin America since IPOs are few and far between. On the whole, exits can only be achieved by trade sales to local groups or multinationals. Varel Freeman, managing partner of Baring Latin America Partners, says, “Brazil is a huge economy with a huge potential market and competitive businesses able to sell to developed markets. It is large enough for strategic buyers to look at and if you have a large enough company and a well thought out exit strategy you can do well.” South America Private Equity Growth Fund, which Baring advises, made two divestments in July. It sold Injepet Embalagens, a producer of bottles it bought into in 1997, to Australian-owned Amcor Twinpak Americas. The fund also sold a portion of its stake in Mobitel, one of Brazil’s largest operators of all centers, to Portugal Telecom.