Brazil on the rise

Survey results show Brazil’s private equity industry to have $5.5 billion in capital, exceeding previous estimates of the sector’s size. Judy Kuan investigates.

The Brazilian private equity industry has $5.5 billion (€4.6 billion) in capital, according to a study released today by Brazil’s Getulio Vargas Foundation (FGV). The FGV study is the first comprehensive survey of Brazil’s private equity and venture capital industry.

According to the study, Brazil’s private equity industry received $5.5 billion between 1999 and 2004, a figure that is notably higher than previous estimates sizing the market at $3 billion.

Of the $5.5 billion, an estimated 60 percent came from foreign investors. Brazilian institutional investors – mainly pension funds and insurers – have also contributed $630 million of capital to the industry. 

Gledson, Ribeiro and Furtado: Sizing up Brazilian private equity

The study was conceptualized by Professor Antonio Gledson de Carvalho and Leonardo Ribeiro of the University of Sao Paulo, who co-authored the study along with FGV’s Professor Cláudio Vilar Furtado.

“There have been some estimates of the industry made in the past, but our study is the first census providing a complete overview of who’s operating in Brazil, what they are doing, the amounts involved, governance structures used, and remuneration,” says Ribeiro in an interview with PrivateEquityOnline.

The study also revealed that 53 of the participating fund managers are Brazilian organizations, managing $3.5 billion or roughly 63 percent of the private equity capital that has entered the country to date. Meanwhile, 10 US-based organizations are active in Brazil – including Advent International, AIG Capital Partners, Darby Overseas, JP Morgan Partners, and Merrill Lynch – managing a total of $1.8 billion.

Brazil’s private equity markets have undergone a rapid transformation in recent years, driven by policy changes to allow Brazilian pension funds to invest in private equity, as well as the formation of the Brazilian Venture Capital Association to promote the interests of the industry.

In recent years, the Brazilian market has also demonstrated strong liquidity compared to other Latin American countries, with a flow of public exits – primarily in the transportation, retail, and medical devices industries – beginning in mid-2004 that industry observers expect will continue.

“Since 1994, the [Brazilian private equity] sector has institutionalized itself. During 2002-2005, much discussion has taken place on the implications of private equity’s development for the Brazilian economy,” says Ribeiro. “Now there is an ongoing dialogue between the government, the players in the market, and multilateral institutions.”

Of the 71 organizations participating in the census, 55 are currently actively searching for investment opportunities and have expressed their intent to remain active. Within the remaining 16 organizations not currently in the market for new investments, eight are planning to return to the Brazilian private equity market and restart activities.

“We interpret this [data] as meaning that those organizations planning to stay or currently pursuing activities are expecting improvements in origination of deals, in fundraising, and in the cost of monitoring and negotiations,” says Ribeiro.

Gledson adds, “We are now seeing consolidation within the industry, and I believe most of the managers still active are here to stay.”