July 4, 2016
Interviewed by: David Snow
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Two Great Sectors in a Troubled Brazil

Jaime Cardoso of Bozano Investimentos talks about the trends driving education and healthcare investing in a struggling Brazilian economy.

Jaime Cardoso of Bozano Investimentos talks about the trends driving education and healthcare investing in a struggling Brazilian economy.

Brazil: Investing in Education & Healthcare
With Jaime Cardoso of Bozano Investimentos
David Snow, Privcap: Today, we’re joined by Jaime Cardoso of Bozano Investimentos. Jaime, welcome to Privcap today. Thanks for being here.

Jaime Cardoso, Bozano Investimentos: Thank you. Thanks for having us.

Snow: Your firm is a major investor in Brazil. Certainly, Brazil has been getting a lot of attention lately and I’m very interested to hear what the conditions are like to be a private equity investor in Brazil. First, can you give us a brief overview of your private equity strategy? Your firm will invest in early stage situations as well as in more mature businesses, correct?

Cardoso: We started our private equity practice in 2008 and when we raised our first fund in Brazil, the strategy was to invest in the education space in Brazil. At the time, we saw a lot of attractive opportunities to invest in education space. That first fund we raised was raised in 2009. Then, we started to invest in other sectors when we started managing a fund in 2010. So, [there were] very different conditions at the time when we raised those two funds than we would see in Brazil today.

Snow: I’d like to hear about what conditions are like right now, but let’s start by talking about your initial focus on education. That’s very interesting. What was it that you identified about education in Brazil that you thought would make for a good investment focus?

Cardoso: There were a couple of things that motivated us to invest in education. First of all, it’s in terms of the demographics. Brazil [has] a young population in which you had a significant—I think the main objective of the government for the past 15 years was alphabetizing the population in Brazil. Most of that work had been done. Because Brazil has 200 million people and, in K–12, we had about 40 to 45 million students. Then, if you think in terms of post-secondary education, there were only—at the time, 10 years ago— about three million post-secondary students and it was a very fragmented sector in terms of post-secondary education. We realized—not only us but also other private equity firms—that the government was going to be unable to do everything they expected to do in terms of the education space in Brazil. Combine that with, at the time, very positive dynamics in terms of real income growth. You had these massive, young students that are going to be formed and they want to improve their lot in life. They want to make better in life, also with improved annual incomes and access to financing. It was only natural there was a very fragmented post-secondary space in which there would be great opportunities to make investments and consolidate that space.

Snow: The Brazilian economy has taken a big downturn right now and there’s a lot of political uncertainty as well. How has that affected your deal flow? Are sellers less willing to sell because of the uncertainty or is there some selling that’s motivated by the distress?

Cardoso: One feature we have seen is that capital has become more scarce; not only more scarce, but more expensive. From that standpoint, the number of available opportunities in terms of private equity to invest has increased. You have to remember that the stock market in Brazil is relatively small. We only have 400 listed companies in Brazil, so the vast majority of the companies are not public, they are private. They are family-owned and, in a lot of instances, they have limited access to financing from banks. Banking is an industry in Brazil that mostly works where you’re providing guarantees in exchange of the loans. So, there’s a bigger space there for private equity to play an important role.

From that standpoint, the offer of opportunities has increased. Actually, general conditions have improved as well, not only in terms of the overall valuations and not necessarily in terms of multiples, but more because earnings have come down, so that has made valuations a bit cheaper. Overall conditions in terms of negotiating agreements with forming a partnership with companies and with entrepreneurs has become easier as entrepreneurs don’t have other options. And private equity really has been an interesting solution for them.

Snow: In addition to education, what are some other sectors you are focusing on right now and why?

Cardoso: We are in the process of raising our first international fund, tailored to international investors. It’s the first dollar-denominated fund. And even though the fund has a generalist mandate, we strongly believe in specialization, so that you’re not going to be able to be the best private equity investor in every single sector. In that sense, our focus is consumer goods, retail and services. Within services, of course we like education. An area in which we have been allocating a lot of time and sourcing opportunities is the healthcare space in Brazil—in particular, healthcare we see very similar dynamics to what we saw in education 10 years ago, first in terms of regulation change. Now, foreigners are allowed to have control of certain areas in the healthcare space, which before you were forbidden.

Just to give you an example: hospitals in Brazil [are] extremely fragmented, the same as it was 10 years ago in terms of universities in Brazil. So, there’s been a lot of capital flowing into the hospital space. A lot of consolidation just ripe in terms of select pieces that we like in order to make money and good investments for our LPs.

Snow: Would you actually be interested in owning and consolidating the hospitals themselves? Or is there a different play?

Cardoso: It’s the hospital themselves, exactly. Typically, we don’t invest in the real estate. We spin off the real estate and what we are doing right now is creating a company that will start consolidating and operating hospitals in Brazil. Just to give you an idea in terms of the opportunity: Brazil has 7,000 hospitals. Of those, 60% are private. The average size of those hospitals is 50 beds and [it is] impossible for you to make money with a hospital of 50 beds if you are a generalist hospital. So, the scale in which you start making money is about 100 beds and ideally 150 or more.

But the situation in Brazil is that these hospitals are typically owned by families of doctors. So, they don’t see these hospitals as a way in which they’re going to make money or by getting dividends or by capital appreciation over time. Quite the opposite. They put together this places to work, so they see them more as somewhere where they go and have access to the clients and make the consultation fees than anything else. That obviously is going to change over time as capital starts flowing and a scale differentiation is going to be critical for these entities to survive.

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