November 24, 2014
Interviewed by: David Snow
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StepStone: Portfolio Exposure to Brazil is Crucial

Long-time private equity investor in Brazil StepStone is seeing some of the shine wear off of the country’s economy and its investment thesis, says the firm’s Duncan Littlejohn. Still, there is a lot of capital to put to work, thanks to previous successful years of fundraising, and he says that no PE portfolio should be without exposure to the country.

Long-time private equity investor in Brazil StepStone is seeing some of the shine wear off of the country’s economy and its investment thesis, says the firm’s Duncan Littlejohn. Still, there is a lot of capital to put to work, thanks to previous successful years of fundraising, and he says that no PE portfolio should be without exposure to the country.

StepStone: Portfolio Exposure to Brazil is Crucial
With Duncan Littlejohn of StepStone

David Snow, Privcap: We’re joined today by Duncan Littlejohn of StepStone. Duncan, welcome to Privcap today. Thanks for being here.

Duncan Littlejohn, StepStone: Thanks very much, it’s a pleasure to be here.

Snow: As a longtime participant in the Brazilian private equity market, how do you gauge the mood right now among LPs and GPs?

Littlejohn: Okay, well, the mood is a little bit more somber. Obviously some of the shine on the Brazilian economy and investment thesis has been removed, and on a relative basis, neighboring economies have done better. There’s a lot of interest for Mexico today and Peru and Columbia, particularly. Nevertheless, the GP community continues to be active. There’s plenty of opportunities that are not necessarily GDPcorrelated. These are growth equity opportunities with companies that are getting traction in whatever markets they’re in. They’re buy-and-build strategies, and that’s where they’re oilandgasrelated. That’s the kind of thing that is getting the attention of GPs today. On the LP side, Brazilian LPs are still struggling to get there on private equity.

Snow: Riding on, I guess, tailwind of stronger GDP growth in Brazil in, I believe, 2010, 2011, Brazilian funds—private equity funds—raised more money than ever, and there were a number of very large mega funds. How is that capital being put to work? What has been the effect on the market?

Littlejohn: We’re seeing, certainly in the middle market, deals that are being done probablyI don’t know what the average is, but I’d say well below eight, I’d say. Probably six is the average multiple in the middle market, which is well below developed markets. This year has been a reasonably good year for fundraising. There’ve been some large funds that have come to the market and have been successful in raising billiondollarplus funds. You still have a top-heavy concentration on large funds. It’s just the way large LPs are more comfortable investing in large funds, and so they tend to get funded more easily than smaller funds.

Snow: Talk a bit about the Brazilian stock market, the Bovespa. What’s the outlook there? How is that going to present opportunities for private equity firms wishing to exit their investments? And then, of course, in addition to the regular Bovespa, there’s been the addition of a new, smaller market—or rather, a market for smaller companies—called the Bovespa Mais. What has been the effect on the private equity market?

Littlejohn: I think the Bovespa is an exit alternative with a window that will continue to open and close. Markets have been choppy of late. We expect them to continue to be choppy in the context of the end of tapering, potential increase of interest rates here, the consequent rebalancing of portfolios. A very large percentage of the Bovespa is foreign capital, so we’ll expect that to continue to be choppy, and I don’t see, in the near future, a lot of valuation possibilities in the Bovespa. On the Bovespa Mais, there’s been some programs announced recently with the BNDES of funds, to invest specifically in smaller companies that list on the Bovespa Mais. So there have been efforts made to support the Bovespa Mais, and they’re welcome and they’re necessary, because the local investors have trouble—large local institutional investors have trouble—investing in small companies.

Snow: Part of your mandate is to also do co-investments, direct investments. In what conditions and under what circumstances would StepStone be a direct investor in a Brazilian deal?

Littlejohn: We specifically don’t compete with GPs. So we would do, we do co-investments, which is an investment that’s done directly but together with a sponsor. So those are the investments that we do, and we do them happily, and we like them.

Snow: What does activity look like in Brazil? Are there largely Brazilian sellers of secondary interests, or is it a buying market?

Littlejohn: Brazilians have been reluctant to sell secondaries for a variety of reasons. The holders of private equities are the development bank, who has a whole series of constraints around selling. They’re a mature portfolio, and you have pension funds that also have procedures that are somewhat bureaucratic. And the nature of those organizations are such that it’s easier for them to hold on to old positions, to mature positions, than it is to sell them. The secondaries that we see are generally from larger investors in larger funds. They’re U.S., they’re European institutions or family offices. They are often brought to market as part of a larger package, and they’re often intermediated. So they’reyeah, it’s difficult to pick them off as a single-manager Brazilian secondary.

Snow: Also, as a backer of other people’s funds, as a primary investor in private equity funds, what kinds of teams are you looking to back in Brazil? What kinds of attributes and skills do they need to demonstrate?

Littlejohn: Well, the wish list is long, but ideally they’re on their third or fourth fund. There’s a team that’s been together for a long time. They haven’t had a lot of fallout within that team. They have a clear investment thesis and a strategy. They’ve shown that they can add value on the operational side of the business. They’ve stuck to their investment strategy. We like to see a track record that shows consistent value creation rather than one or two home runs—and, of course, a low loss ratio. That’s the wish list, basically, of every investor.

Brazil, as I mentioned earlier in my remarks, is under a bit of a cloud today but no private equity portfolio should be without exposure to Brazil. Brazil still offers the scale that no other country in Latin America can offer, and it also has the deepest private equity industry. And so there are dozens of GPs that are on their third, fourth funds and that are building significant track records. So I think that Brazil will continue to offer very interesting, very interesting opportunities in the private equity space.

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