Can private equity help make Brazil the ‘country of the future’ again?

Can private equity help make Brazil the ‘country of the future’ again?

In Brazil, a conjunction of factors is creating unique opportunities for investment in Private Equity. As fundraising picks up again, the country’s economic distress might be ushering what looks like a bright season for buyouts.

The past year has revived economic pessimism regarding the Brazilian economy. The once called ‘country of the future’ now finds itself facing old struggles with high inflation and slow growth. When it comes to investments, however, a change in the horizon can turn short-term crises into long-term opportunities.

Brazil’s current economic slowdown is indeed adverse to those looking for a fast return, and even more so to those seeking to exit investments. However, for those interested in Private Equity – whose goal is to buy shares in private companies and sell them in the future with a profit – this year can be full of promises. 

Economic crisis: giving investors what they want

In 2014, a total of $10.4 billion was raised by over fifty funds combined for projects in Latin America.

Among the biggest players were Advent International Corp. and Patria Investimentos, Blackstone Group LP’s partner in Brazil, which raised $2.1 and $1.8 billion, respectively. Over half of the total amount is destined to Brazil, where investment is supposed to surpass the $4.3 billion worth of deals closed last year, according to the Brazilian Private Equity and Venture Capital Association (ABVCAP).

Interestingly, the negative conditions underlying Brazil’s lackluster growth rates are a pulling factor for Private Equity investors digging for good deals. For starters, asset prices have fallen substantially as the Brazilian real depreciated by over twenty percent against the US dollar in the past year. For funds raising capital in foreign currency, Brazilian assets have become a buy.

Moreover, in sectors such as real estate, where demand is now depressed due to a business cycle downturn, a weak real is causing good-quality assets to reach record low prices. JPMorgan Chase & Co. and Brookfield Asset Management Inc. have raised $1.2 billion worth of funds to invest exclusively in real estate in Brazil.

Similarly, GTIS Partners LP and GP Investments have recently completed a $400 million tender for shares in Brazil Hospitality Group, the country’s largest hotel owner.

Furthermore, following Brazil’s fiscal crisis, the government has curbed spending as part of a much needed austerity plan. The recent adjustment efforts resulted in opportunities being created in sectors such as infrastructure, healthcare and education, where demand continues to grow despite the economic slowdown.

In healthcare, for instance, expansion in infrastructure has not kept pace with the increase in health plan membership over the past years. This, along with the growing size of Brazil’s elderly population, led the government to approve legislation early this year allowing for foreign ownership in the sector. The market-friendly regulatory change has successfully attracted new investors, such as Carlisle Group LP’s, who recently announced a $600 million deal for shares in Rede D’Or São Luiz, the largest private hospital operator in Brazil.

Similarly, in education, a repressed demand and the expectations of high returns have lured new investors into the sector. Advent acquired for-profit university Faculdade da Serra Gaúcha last March, whereas Bozano Investimento raised over $300 million by the end of last year to invest in education in Brazil.

Once again, Petrobrás

Ironically, also playing out in Private Equity’s favor is Petrobrás’ corruption scandal.  Following investigations, companies found to be part of the scheme have lost access to capital markets and have been forbidden from signing new contracts with the oil giant until investigations are completed.

In Brazil, sectors such as gas, oil, and infrastructure have long been dominated by a selected group of large enterprises that acted both as investors and contractors. The scandal at Petrobrás has engulfed twenty-three of these companies. Some of them, such as OAS SA and Galvão Engenharia SA, have already filed for bankruptcy protection as they ran out of credit.

As Brazil’s most prominent construction companies now face difficulties to access finance, they may be forced to withdraw large-scale projects, making room for financial investors to kick in. Likewise, with old suppliers blacklisted, new players can break into the construction industry in the country by taking up future contracts with the oil company.

Behind the optimism

Most investors would agree, however, that betting money on underperforming companies in a stagnated economy is risky business, to say the least. In this regard, time horizon is crucial.

In the case of Brazil, the driving factor behind investments in Private Equity is the perception that the country has reached its lowest point in economic terms and that growth should pick up eventually, even if after a long struggle.

The current adjustment efforts corroborate this notion. Despite the retraction in growth, the government continues to push through austerity reforms in Congress, hoping to pave the way for recovery before the next elections.

In the same vein, the downfall in the Workers’ Party popularity exposed once again the political price of fiscal recklessness. As far as Brazil can rely on functioning democratic institutions, the tendency is for leaders to increasingly perceive monetary populism as a flawed, shortsighted political strategy.

In sum, for those who can afford to look beyond the country’s current economic distress, the return might be worth the wait. After all, Brazil’s title of ‘country of the future’ may be starting to make sense again – but perhaps with a slightly different meaning.

Categories: Finance, Latin America

About Author

Priscila Quaini

Priscila has worked for the Ministry of External Relations and Ministry of Finance in Brazil as well as the UN High Commissioner for Refugees in Brasilia. She holds a bachelor’s degree in International Relations from the University of Brasilia and a master’s degree in International Political Economy from the London School of Economics.