Around the world, private equity firms have been taking a battering. Years of spectacular growth and profits came to an abrupt halt when credit dried up in 2008, and few are predicting 2009 will be much better. However, there may be a bright spot in Brazil, where the industry operates under very different conditions than in the larger markets of the US, UK and Europe.
In Brazil, there is far less use of leverage and a much more protectionist stance on how it can be invested. What would have seemed foolish in the boom times seems to have paid off.
According to Luiz Eugenio Figueiredo, president of the country’s private equity association (ABVCAP), the industry is doing relatively well, and as evidence he points to solid growth levels and the fact that in recent months a number of foreign private equity firms have begun opening offices in the country.
He believes that the industry can go even further, as certain areas of the domestic market, particularly its institutional investors, have yet to be fully tapped.
Private equity’s growth in Brazil is uncontested. Over the last four years it has grown by 52 per cent to $26.6bn (€20bn) in committed capital. Of that, about half comes from foreign investors who are predominantly American and European, though there is interest from around the globe. Furthermore, $11bn of the industry sits in cash and has yet to be invested. Domestically the industry employs around 1,400 people.
A bright future
Mr Figueiredo, who is also the chief operating officer management director at the hedge fund Rio Bravo, says: “The Brazilian market is one that is growing a lot, and the government has done a lot to boost the industry. We feel pretty confident about the future.”
One of the main reasons for this optimism is the stated $11bn in committed capital sitting in cash that has yet to be invested. Mr Figueiredo did not make any predictions on when this money might be put to use, but the simple fact that it is available, and is not based on leverage, gives him some comfort.
Brazil’s private equity industry effectively began in the 1980s, with a series of private venture capital investments by a firm named CRP. At the time, there were hardly any regulations on the industry, but this would change a few years later when the country’s central bank started making allocations towards private equity. Rules were introduced that provided more transparency, but still managed to leave the industry unburdened by red tape. This also helped open up the industry to Brazil’s $400bn pensions and institutional investor market, which has been a large reason for its recent growth.
As it stands, Brazilian pension funds are permitted to allocate as much as 20 per cent of their assets into private equity, but they are not allowed to make any foreign investments, something that has effectively forced them to go domestic for any private equity play and given a boost to the industry. In the future, pensions are expected to be able to invest abroad, but to date there has been little activity in pushing for this right from the government.
Regardless, there is far more that could theoretically be invested. Currently, the average scheme’s allocation to private equity is significantly less than the limit, at around 2 per cent, but this is much higher than a year ago, when most funds only had about half a per cent in the asset class. Reasons for the higher allocations were not clear, but with most of Brazil’s schemes being equity and bond heavy, there was probably some interest in diversifying.
Commenting on the growth, Mr Figueiredo says: “It has increased a lot, as we were able to get them to increase their allocation. It’s still low compared to some other countries, but I think it’s just a question of time. Interest rates are still high, and many pension funds don’t know how venture capital and private equity funds operate. So they have to learn, and there has been an education effort on our side.”
Government backing
This growth and interest on the part of funds looks set to continue, particularly as the Brazilian government has not joined in on the populism of bashing the industry, even with its centre-left tendencies.
Private equity does not appear to have the same image problem in Brazil as it does in places like the UK or US, and one reason could be that Brazil’s private equity firms use substantially less leverage. Instead most deals are made with 100 per cent equity. A deal made with more than 50 per cent of leverage is extremely rare, and still substantially less than the average US deal, which uses anywhere from 60
