July 10, 2013
Interviewed by: David Snow
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Mapping PE Opportunities in Brazil

Eduardo Buarque de Almeida of Brazilian PE firm TMG Capital tells how he starts with a “map matrix” analysis for deal sourcing across the Brazilian landscape. He also details how the firm’s analysis of the healthcare industry in Brazil led TMG toward developing the largest dental-care company outside the U.S.

Eduardo Buarque de Almeida of Brazilian PE firm TMG Capital tells how he starts with a “map matrix” analysis for deal sourcing across the Brazilian landscape. He also details how the firm’s analysis of the healthcare industry in Brazil led TMG toward developing the largest dental-care company outside the U.S.

Mapping PE Opportunities in Brazil

A Privcap Conversation With Eduardo Buarque de Almeida of TMG Capital

How does your background in corporate Brazil inform the way that you’ve built TMG’s private equity investment program?

It facilitates enormously the contact with owners and executives of the companies we are approaching in the origination stage of the private equity cycle. So, it’s much easier to talk to them. We have some common grounds, in terms of experience, how to manage confidence. And it makes the real initial talks very much easier and fluent. At a later stage, when we are at a final negotiation stage also, the fact that we are not a financer or investment bankers, and actually, former presidents or former chief executives of some companies, that background facilitates the process again. And obviously, when we do the investment, at the monitoring stage – and the monitoring stage may take three, four, five, eight, ten, years – it especially helps enormously because we are close to the management. Helping them, not only with the strategy, but we are a sounding board for decision-making, for the hiring of consultants, for changing reports and things of that nature.

Has it taken Brazilian business leaders a while to warm up to the private equity opportunity?

Well, over the past 15 years, since we started our first fund back in 1997, there’s been a revolution. When we started, nobody knew what private equity was; we had to run and manage seminars to teach them what private equity is all about. But today, it’s completely different. There is a full awareness all over Brazil. Not only in Sao Paolo or Rio, but all over the country about the impact of private equity, the importance of private equity, but also the knowledge that private equity brings – not only capital – but strategy, modernization and the ethnic contribution to company growth.

What is TMG’s approach to sourcing opportunities?

We have sort of a strategic approach toward looking for companies, looking for targets. We actually map the larger industries in Brazil, all the industries and their segments, to find out where there are shortcomings or where there are bottlenecks in Brazil, either in terms of investment or market potential, for instance. And then, using the strategic map matrix as a base, we select certain industries. And we do in-depth research on those industries. And in each industry we investigate, we select some firms. Not randomly, but we do a nice study on them before we approach those companies. We try usually to do a proprietary approach toward those companies. We seldom use auction or certain types of situations. We participate in some auctions. But usually, we believe more in strategic sourcing of companies, of targets, rather than opportunistic deals. We’ve been doing this for 15 years with relative success.

Your firm had great success building up a Brazilian dental-care company called Odontoprev. Can you describe the ingredients to the success of that investment?

Yes. Actually, we sourced this company out of an original, basic analysis of the healthcare industry in Brazil. One of the target industries we identified at early stages of healthcare in Brazil offered a number of opportunities. At that time, we identified this company Odontoprev. There were about 40 million Brazilians with private healthcare plans. But there were no dental care plans, very few of them. And while in America, 70 percent of the families who have a healthcare plan do own a dental care plan. We did not have that in Brazil.

The other thing is that we have a public healthcare system called SUS, which is more or less equivalent to your Medicare, which offers healthcare but doesn’t offer dental care either. So, there was a huge vacuum and we immediately realized that. We looked into the market. There were a few, very small niche companies, usually wife and husband are dentists. And they put up a very small plan. So, we looked into this opportunity.

We did identify a company; a small one that had 90,000 lives only. But they had a very good IT platform. We created a very good relationship with the owners. And we decided to invest in it. The investment was originally aimed at two things. First, enlarge and improve the IT platform. IT is absolutely critical in the management of such companies, especially, good operational control, good financial control and to avoid fraud. So, this was the first part of investment. The second part of our investment was using, what we believe in very much, was strategy of consolidation. We acquired four more companies, small companies. And at the end, we had created sort of a good basis to have only internal growth, to grow from our basis.

So, when we started the company, when we made our investment, we had 90,000 lives. By the time we went to the IPO, we had close to two million lives. So, it was a very good success. We had continuous growth in sales, in revenues, in EBITDA, and an increase in loss ratios, which ultimately improves EBITDA. Nowadays, after we went public back in the end of 2006, six years later, Odontoprev has over six million lives. And that’s the largest dental care company outside of the United States.

 

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