June 1, 2012
Interviewed by: David Snow
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Meet Three Brazilian LPs

Brazil has Latin America’s largest private capital market, which applies to both limited and general partners. Meet three Brazilian LPs who are diversifying their own organizations’ portfolios while educating other local institutional investors about the benefits of private equity.

Moderated by Privcap CEO David Snow, this panel includes Mauricio de Rocha Wanderley of Valia, Patricia Freitas of FINEP and Eduardo Klingelhoefer de Sa of BNDES.

We discuss the influence of declining interest rates and inflation, today’s appetite for diversification into equities, the paucity of fund of funds and venture capital funds in Brazil, and when local pensions will allocate beyond Brazilian borders.

Brazil has Latin America’s largest private capital market, which applies to both limited and general partners. Meet three Brazilian LPs who are diversifying their own organizations’ portfolios while educating other local institutional investors about the benefits of private equity.

Moderated by Privcap CEO David Snow, this panel includes Mauricio de Rocha Wanderley of Valia, Patricia Freitas of FINEP and Eduardo Klingelhoefer de Sa of BNDES.

We discuss the influence of declining interest rates and inflation, today’s appetite for diversification into equities, the paucity of fund of funds and venture capital funds in Brazil, and when local pensions will allocate beyond Brazilian borders.

David Snow, Privcap: We are very happy to be joined today by Mauricio Wanderley from Valia, Patricia Freitas from FINEP, and Eduardo de Sa from BNDES. Welcome to all of you. Thank you for being on Privcap today.

All of you are institutional investors in the private equity asset class in Brazil, and so I’m very interested to hear your perspective on the industry. First of all, maybe we can start by talking about where Brazil is right now in terms of the development of its private equity industry. I’ve spoken to many Brazilians who believe that there’s a very good moment for private equity in Brazil now.

What does that mean? And I wonder if you agree, and maybe we could start with Patricia.

Patricia Freitas, FINEP: Yes, I agree. I think now we have a lot of opportunities to invest and also we have many nice cases to tell about the companies that were invested in the last 10 years. And now, we have good returns to show to investors, so I think it’s a good opportunity for investors to invest and also to new GPs, because there may GPs from US, mainly from US. They’re establishing their offices here also or joining other GPs here in Brazil to form a firm here, so it’s also an opportunity for international GPs.

Snow: Eduardo, do you agree? Is it a good moment for private equity in Brazil?

Eduardo de Sa, BDNES: Yes, sure, because the economy is increasing, more people buying. The lower classes have the ability to buy. Therefore, I think there’s plenty of room to get the money out of it of course. And the condition, the macroeconomic conditions are pretty well as well with lower interest rates that attract more risk capital. So it’s a good thing, a good environment for Brazil at the moment.

Mauricio Wanderley, Valia: I also agree. I think from a pension fund perspective, we are living now a very important moment for pension funds, because we are in the middle of a reduction of the real interest rates here in Brazil, and all the pension funds are starting to diversify in their portfolio. N ot only in alternatives but also in equities and real estate. It’s a process that’s happening right now, and I think at this moment the Brazilian economy is very good to this transition from a high level of interest rates environment to a lower interest rate situation.

Snow: Well, let’s talk a bit about the history of the institutional investors of Brazil in private equity. Why did they start to get interested in private equity as an asset class, and how has that evolved? And maybe we can start with Eduardo.

De Sa: Yeah, well, since the Plano Real in 1994, I think there was a sharp reduction in inflation, and therefore, like Mauricio said, it started to see how to diversify the portfolio rather than just put into something that protects against inflation like the public bonds from the federal government. Then there was still the institutional investors started to think, well, let’s think about putting more money into long-term assets and then the private equity came in the mid ’90s.

But they really push it after the 2002, 2003, 2004, and then there was a real push, because the economy was really increasing, and the interest rates just reducing. I think that’s the story somehow of the institutional investors.

Freitas: Yeah, I think before that, they we’re investing through a private equity, but only huge deals, not small deals or venture capital and other asset class. But after 2003, 2004, they start to invest also in other type of companies, really looking more for the returns that came from value added by fund managers, value added by others that invest in the companies.

Snow: Well, that’s a very interesting point, and maybe Mauricio, it sounds like as the pension funds and other institutional investors have become more involved in the private equity asset class, they’ve become more diversified. Has that been a good story for them?

Wanderley: So we develop part of the portfolio where alternatives make an important role. The first reason is because the Brazilian equity market is very concentrated. So private equity is another way to diversify my equity portfolio, because I can access many different sectors that I couldn’t do if I invested only in equity.

And so we started investing in private equity in 1997. We had good experience investing in private equity. Today, we decided to increase our allocation to 6%. We have 15 managers today. We close the end of 2012 investing around one billion REIS in private equity, and we’re very optimistic about the perspective of this market and the asset class in the future.

Snow: So today, in the Brazilian private equity market, what is the appetite of the local LPs for private equity? What are they looking for? And what are their restraints? And what are their new opportunities? Maybe starting with Eduardo.

De Sa: Well, of course, the LPs, they usually, I mean the bigger ones, they tend to go to the private equity for the big funds and take part in the buyouts for instance. But for instance, in BNDES’s point of view, we try to be in all the range of the venture capital, the city capital, the growth, and then the private equity.

So we want to stay in all this stage. And of course, we have perceived that the investors not only the big institutional investors, but also the family office, for instance, they are coming along and taking the risk for long term. It changes the mindset of people not to go only to the stock market.

Freitas: I think all the major pension funds, they’re already investing, or they are close to start investing in the private equity industry. But the smaller pension funds, they’re not investing. We don’t have yet any fund of funds.

The last year, we received some fund of funds from international. They came to Brazil, but they’re establishing their offices now. But they didn’t launch a fund here yet, a fund of funds, only focusing on Brazil. So I think there’s a lot of opportunity for the smaller pension funds in Brazil to invest through fund of funds. Because it will be very tough for them to invest, because they don’t have a team to take care of this type of investment, and they need to invest each year to have a good portfolio of funds. Maybe it’s a good opportunity also for a fund of funds to attract smaller investors.

Snow: Can you talk a bit about the, now that Brazil is a very popular place for people around the world to invest their capital, what has been the influence of international capital in the local Brazilian private equity industry?

Wanderley: I think it’s increased. That’s good. As Patricia mentioned before, this coming of many new GPs with international experience in different countries is very good for us. And so I think that we have opportunities in many different sectors here in Brazil, and the need of capital is huge. And so we believe that makes sense. In our portfolio, for example, many times everybody complain about competition, and buyouts, and the price is increasing. But in our portfolio, we can see that we have good deals and reasonable prices. We can see this price inflation in our portfolio specifically.

Freitas: I think from Brazilian perspective, it’s nice to have international investors in the same vehicle, because they have a lot of opportunities besides the huge market that we have here for the local companies. This company has an opportunity to be global. And to have international investors and national investors in the same vehicle, they all will benefit from the returns at the end.

Snow: Well, let me ask the three of you briefly, as experienced investors in private equity and having seen private equity in Brazil evolve, what are your expectations from the asset class in your own portfolios for maybe, let’s say, the next 10 years or so? Maybe we could start with Valia?

Wanderley: Well, as I mentioned before, it will be a very important part of our portfolio for the next years. We have this challenge to continue, generate returns to match our liabilities. That’s our target. We have our largest plan is a GB plan with an actual rate around 6% in real terms. And so this diversification process is important, and we believe that the returns that will be given by the private equity. Private equity in the next years will be very important to complement our allocation and match the actual rate.

Snow: Patricia, what are your expectations for private equity?

Freitas: We are investing since the year 2001. We have like 24 funds that we committed capital, so it’s a huge portfolio of funds. And we will continue investing. We would like to see more venture capital. We think there’s a lot of opportunity in this middle.

We saw a lot of companies that were fostered by the government, and the last year is related also to innovation. And now the companies are here, and there are not so many venture capital funds investing. So we would like to invest more in venture capital.

De Sa: Yeah, Patricia raise a very important aspect, which is innovation. And we have received GPs from outside, even LPs. I mean strategic ones. They are coming along to Brazil, because they see plenty of opportunities in innovation, particularly in telecommunications for instance. But we can see in biotech, and clean tech, renewable energy.

I think there is a lot of opportunities I had to invest in these things that are happening and increasing demand from big companies, oil and gas, demanding more clean tech device. So this is another very important thing that it might attract more private equity in the venture capital.

Snow: Very quick question. When do you think local pension funds in Brazil will be able to invest in private equity internationally? Is that being talked about?

Wanderley: Well, I think all the pension funds make a local movement at first. I think that if you look at the value of portfolio right now it’s considered being very concentrated fixed income, because in the past, the level of interest rates here in Brazil, it’s led to this situation.

We have 60% allocated in fixed income. So it’s a case of value, but value started diversifying many years ago. But to the rest of the industry, continue to concentrate in fixed income, the smaller pension funds, they are concentrating on fixed income. And so, I believe everybody, the largest pension funds, they are studying international diversification.

But it should take a little time to do that, because in our case, for example, we are executing our private equity program. We believe that at the end of this year, we’ll get our target allocation. And after that, start looking at private equity outside Brazil. But I believe the industry needed to diversify not only private equity, but even in equity. The allocation of equity in Brazil [INAUDIBLE] for industry is low, compared to international standard. So in real estate also. And so we have a long road ahead.

Snow: Sure, so you’re just starting to really diversify.

Wanderley:  Talking about industry. But the largest, I think, it’s two years, one year, they will be starting investing abroad.

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