Buying into Brazil

Private equity investment in Latin America’s largest economy increased dramatically in 2010, with no signs of slowing down anytime soon.

A question has been nagging private equity limited partners looking to gain, or increase, their exposure to Latin America as part of an emerging markets play – is a capital bubble developing in Brazil?

Alvaro Goncalves, founding partner of Sao Paulo-based mid-market firm Stratus Group, doesn’t think so.

While there has been a sharp rise in interest from global firms such as The Blackstone Group, Apax Partners and The Carlyle Group, the majority of Brazil’s businesses lie in the mid-market, under the radar of private equity’s largest players.

“There are some high profile deals being closed, but the overall activity is still 60 percent of what it was in the late ‘90s,” Goncalves says. “Overheating is when people start to make mistakes, backing things they shouldn’t, and I don’t see that at all here at this point. The middle market is still severely underserved.”

Foot in the door

A number of well-established private equity shops made big moves into Latin America in 2010.

Carlyle and Apax made their debut Brazilian investments in 2010, and The Blackstone Group bought a 40 percent stake in Brazilian asset manager Patria Investimentos. JPMorgan also moved into the country, buying a stake in Gavea Investimentos.

Overheating is when people start to make mistakes, backing things they shouldn't, and I don't see that at all here at this point.

Alvaro Goncalves

In May, global mid-market firm Advent International closed its fifth Latin America-focused fund on $1.65 billion, taking the title for the region’s largest ever private equity fund. The distinction did not last long, however, as Buenos Aires-based Southern Cross broke the record again in September by closing its fourth buyout fund on $1.68 billion.

Notable deals struck in 2010 include Carlyle’s $250 million investment for a majority stake in tour and travel company CVC Brasil, and London-based Apax Partners’ Brazilian $1 billion transaction for a 54 percent stake in IT company Tivit. First Reserve also invested $500 million in Brazil-based Barra Energia, an independent exploration and production company.

Beyond Brazil

While Brazil certainly dominated headlines in Latin America this year, private equity opportunities abound in countries such as Mexico, Peru, Colombia and Chile.

According to data from the Latin American Venture Capital Association (LAVCA), investments in the region in the first half of 2010 reached $3.8 billion, surpassing the $3.3 billion put to work in all of 2009. Total funds raised for Latin America during the first six months of the year reached nearly $3.1 billion, enough to fuel projections that 2010 will break 2008’s fundraising record of $6.8 billion.

The market is likely to stay hot in 2011. Blackstone-backed Patria is planning to launch its fourth fund in early 2011, a source told PEO, targeting slightly more than the third fund, which closed on $700 million. 

With institutional investors craving a slice of Brazil, raising funds will likely be less than challenging for those firms that can display a track record and solid local knowledge of the markets. As capital pours in, it remains to be seen if returns will meet the expectations of investors desperately seeking yield.