May 1, 2012
Interviewed by: David Snow
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Private Equity Brazil: The Facts

Latin America and, more specifically, Brazil private equity, are the subject of greater investor attention and, not surprisingly, of more research initiatives.

Jennifer Choi, Vice President for Industry and External Affairs at the Emerging Markets Private Equity Association (EMPEA), describes the findings of EMPEA’s research in partnership with EY to identify sources of value-add in Latin American private equity deals. Access the report here. Learn more about this study here.

Latin America and, more specifically, Brazil private equity, are the subject of greater investor attention and, not surprisingly, of more research initiatives.

Jennifer Choi, Vice President for Industry and External Affairs at the Emerging Markets Private Equity Association (EMPEA), describes the findings of EMPEA’s research in partnership with EY to identify sources of value-add in Latin American private equity deals. Access the report here. Learn more about this study here.

Privcap: What is a key Brazilian finding from the study on value creation in Latin American private equity that EMPEA conducted in partnership with Ernst & Young?

Jennifer Choi, EMPEA: I think as far as the way that the Brazilian managers approach generating value in their own portfolios, it’s not dissimilar to the approach you probably find in a lot of emerging markets. It is still very much about backing the entrepreneur. It’s not about finding mature businesses and helping them get the next level. It’s still very much about finding that founder, finding that CEO who’s got a vision for his business, and giving him the resources, and the skills, and the access to the network, and the financing to grow the business that he might not otherwise be able to get. Professionalizing in order to get to the next level– in most cases, IPO or trade sale, not necessarily into the private equity market.

I think we’ll be very interested to see what direction this goes. Will we see more sales from the middle market managers to the managers focused at the upper end of the market? And might that help us address the valuation challenges in Brazil?

Privcap: What were some important findings from EMPEA’s recent survey of LPs around the world?

Choi: There are a couple of striking findings. One was, the percentage of investors just overall who plan to put more money to work in private equity in emerging markets. So I think one would expect, there must be some threshold, and yet we’re seeing no slowdown in the enthusiasm and the interest among the investors that we survey year over year.

Additionally, I think we were struck by a greater speed of the diversification that’s taking place within the portfolio. So when you think back to when we first started doing this survey, 2004, ’05, ’06, the interest was really in, if you’re a European investor, Central and Eastern Europe, if you’re a North American investor, you might have gotten burned in Latin America, so you’re really looking at Asia exposure.

Fast forward to 2012, and the markets that are going to see the greatest uptick in new commitments and expanded commitments are markets in Latin America, including Brazil, Brazil at the top of the list in the region.

Privcap: How do LPs feel about the attractiveness of Latin America, ex-Brazil?

Choi: Brazil– if we go back to 2008, just as a starting point– Brazil was number four behind China, India, Central and Eastern Europe. And last year, Brazil moved into the top spot. This year, Latin America beyond Brazil just edged out Brazil.

Just to contextualize the finding, what does this really mean? This is the market where LPs think the environment for deal-making is the most attractive in the next year. So regardless of where they invest, where they can invest, these are the markets objectively that they think are the most attractive.

Privcap: How is Brazil faring the fundraising arena?

Choi: Sure. So 2011, we saw 39 billion raised across the emerging markets, of which 61% or thereabouts– and forgive me if I’m not precise– but about 60% went to just two markets– China, 40%, and Brazil, 20%. So it is translating into commitments.

When you look a little bit deeper, however, you see that 95% of that capital went to these very large funds focused on the Brazilian market. So I think we had $6 billion plus funds in 2011. That is significant because when you look at the underlying market itself, the scale of the opportunities doesn’t necessarily map to loads and loads and dozens and dozens of billion dollar plus funds.

The scale of the opportunities in the market mapped more closely to middle market funds, and yet there are some scale challenges there. How do you take investor flows and channel them into those funds without effectively breaking the model?

Privcap: What significant challenges does the Brazilian market still face?

Choi: The number one challenge, I think, right now is probably this issue of scale. So how do you help investors who want exposure to Brazil, who didn’t come into the very big regional funds or the very big Brazil funds, and appreciate that the middle market is where a lot of the growth will be? How can they find access, particularly the LPs, where they have to put a minimum amount of capital to work? They can’t make a commitment under x, which would be in excess of what a lot of funds focused on the middle market might be able to absorb.

It’s not just about the pension funds, et cetera, who are trying to put a lot of money to work. It’s also for the smaller investors who don’t necessarily have the in-house teams to really understand the dynamics of the Brazilian market, and to understand and identify the managers who are probably best positioned to ride the next wave.

So I think the scale challenge is a big one, and another one is valuations. This is something, I’m sure, has come up in a lot of your conversations with managers about Brazil. When we look at the EMPEA data on this, I mean, just look at the median size of investments around emerging markets, globally, the median investment size– and we just track equity amounts– hovers around 14, 15 million. Brazil, it’s more between 45 and 55 million, according to our statistics.

So far and away, Brazil is still the most expensive of the markets that we’re looking at and I think that’s borne out by the anecdotal evidence I’m getting from my own conversations with fund managers.

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