September 21, 2015
Interviewed by: David Snow
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Finding Opportunity Amid Turmoil in Brazil

Luiz Viana of Brazilian-based TMG Capital talks to Privcap about private equity in the South American company, and where his firm sees opportunity amid a recession and a political transition.

Luiz Viana of Brazilian-based TMG Capital talks to Privcap about private equity in the South American company, and where his firm sees opportunity amid a recession and a political transition.

Finding Opportunity Amid Turmoil in Brazil
With Luiz Viana of TMG Capital

David Snow, Privcap: Today we’re joined by Luiz Viana of TMG Capital. Welcome to Privcap today. Thanks for being here.

Luiz Viana, TMG Capital: Thank you very much. I’m very honored to have the chance to discuss ideas with you.

Snow: Why don’t we start with the mood right now in Brazilian private equity? Clearly, the Brazilian economy has slowed down, like many other emerging markets. What has this done to the private equity industry and what is your mood about the current state of affairs?

Viana: Brazil is now facing what can be called a recession and a crisis. But more important than other situations, it’s a crisis that is not just economic. It’s actually a political transition. We are confronting issues as a country that are extremely relevant for the future, issues related to free press, the role of the free press in the country, and the role of institutions. I think there is also the role of the regulatory agencies and reforms, like they need tax reform and political reforms.

The country has also been confronting an issue that is the economic press around the world about how to cope with corruption. From a young democracy like Brazil, that works imperfectly, but it does work as a democracy. We’re making significant progress. More and more, I see the country dealing with the real relevant questions, and that is a situation that will eventually, in our opinion, lead to a more stable, more mature environment for economic development and economic growth—but [we are] also dealing with building a stronger and [more] institutionalized environment than we have already achieved.

Snow: While that takes place, what does all this mean for the private equity industry in Brazil—which is, it must be said, the largest industry or the largest private equity industry in Latin America.

Viana: By far. If you look at the short term, we are facing a situation that creates adversity. Why? First of all, because interest rates, again, are significantly high. There is a fiscal adjustment underway that creates an environment of lack of capital. Public markets are not open, given the circumstances and, therefore, our companies strive to be able to finance growth or investments or acquisitions.

Having said that, I personally believe that that’s part of what I call the cyclicalities of emerging economies—Brazil being a specific case where the cyclical aspects also affect mature economies. But they are, in amplitude and in frequency, more important in emerging economies. I believe, therefore, in having an environment today that is not over the short term, [and is] friendly to exits. It is, on the other hand, a very important opportunity to deploy capital. That is not just because valuations are lower.

Snow: The public markets are somewhat closed for exits at this point and for basically any IPO. What does that mean for new deal flow for you? On the one hand, it’s not good to have fewer exit options, but on the other hand, this means that companies are in need of capital, correct?

Viana: That is correct. There are companies in certain sectors that continue to grow; not all of them. The companies that are in sectors that are affected by the fiscal adjustment, they’re flat—and some of the sectors are even posting negative growth. But that doesn’t mean there aren’t other sectors that continue to grow. I’ll give you an example: the bio-tech, pharma, education, healthcare, analytics and consumer products—these companies have a hard time finding the necessary capital to fund growth, be it organic or acquisition.

That also doesn’t mean that there aren’t exits. The strategics are looking at Brazil, [but not just] over the next two or three years. The strategics are looking for maybe a decade, in which case you can make the statement that we are probably going to get back to growth in two or three years down the line—which, as a consequence, makes this window that we are going through right now a good moment for deployment of capital.

Snow: You have an investor base that includes international investors. What kinds of questions do they have for you about what’s going on in Brazil?

Viana: There are many questions. First is the question that you posed to me: How do you see the future of financial sponsors in a market with that kind of cyclicality? The second is: How do you deal with currency fluctuation? The third is how do you deal with the fact that the concept of leverage buyout in an economy where interest rates are really high is not a feasible concept, and, therefore, how do you generate value for investors and shareholders?

The answer is pretty much related to our strategy since the inception of TMG. We look at those events—be it macroeconomic turmoil, like the hyperinflation of the ’80s; be it a country risk during certain periods of time that it went up to 2,000 basis points; be it a situation, like today, where you have the tax burden and the reforms that are still uncertain. That’s my answer to investors and I think I’ve been [listened to] until now.

You have to understand the impact of those variables, the economic impacts and how to take advantage of them. For instance, prior to founding TMG, I actually bought some assets with our own capital. I have been a CEO of small, midsized and large companies and I started a company from scratch. From that particular standpoint, I could see hyperinflation inducing hyperfragmentation. When we put together the first pool of capital on a professionally arranged basis, we wanted to do the buy-and-build and consolidation strategy to address the point of hyperfragmentation.

But hyperfragmentation was just one of the consequences. The other was, for instance, the void that certain areas created, like in pharma and in biotech. It is a fact today that healthcare, education and infrastructure have been badly underinvested, which creates difficulty in accessing capital and bringing talent and technology. The economy scars from these events, be it macroeconomic, a consequence of [the] regulatory environment, or a consequence of privatization that took place decades ago.

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