Big PE firms Eye Brazil for Tasty Deals

SAO PAULO (Reuters) – As Brazil emerges stronger than many other countries from the deepest global recession in decades, the time may have come for the largest private equity firms to plant roots in Latin America’s biggest economy.

In the past 20 years, local firms led by GP Investments got the best deals, while global players such as General Atlantic, TPG Capital and Carlyle Group opted to make opportunistic, minority transactions. That may now be changing.

“At this point, you cannot be global without being in Brazil,” Carlyle co-founder David Rubenstein said recently. “In private equity, you only make money where the economy grows, and that is the case in Brazil.”

U.S.-based buyout firms have been increasingly looking further afield for investment opportunities to offset losses incurred as credit markets seized up late last year. Leveraged buyouts, which for years propelled growth in the industry, practically evaporated as access to credit collapsed.

Those setbacks “should speed up the move within the industry toward Brazil,” said Claudio Furtado, head of private equity research at Fundacao Getulio Vargas (FGV) business school in Sao Paulo.

Brazil represents half of Latin America’s overall gross domestic product, and 45 percent of private equity investments in the region, according to Emerging Markets Private Equity Association data.

“For some firms, coming to Brazil isn’t an option, it’s mandatory,” Furtado said.

Opportunities linger in the consumer and industrial sectors as wages climb and companies are not highly leveraged, said Duncan Littlejohn, managing director at private equity firm Paul Capital Partners in Sao Paulo.

Carlyle may pay about $250 million to win control of local tour operator CVC Turismo, a source with knowledge of the deal told Reuters on Tuesday. The firm could soon seal two or three deals around the “hundred million dollar area,” Rubenstein said.

Littlejohn said tourism projects could attract private equity investments to help Brazil finish the venues for the 2014 World Cup and the 2016 Olympics that it will host.

Other targets include hundreds of infrastructure projects listed in President Luiz Inacio Lula da Silva’s $350 billion investment plan, Fabio Moser, chief investment officer of Previ, Brazil’s largest pension fund, said recently.

NO LEVERAGE

Dealmaking in Brazil does not rely much on leverage, but more on sound management skills and high-powered connections, Furtado said.

Brazil offers global funds less competition, high returns and developed capital markets that make it easier for private equity firms to unload their stakes in stock offerings. While private equity investments in the United States represented 1.4 percent of the U.S. economy last year, the ratio was less than 0.2 percent in Brazil, EMPEA said.

Initial public offerings, the industry’s favorite exit vehicle, are booming after a lull in 2008. This year, two of the world’s largest IPOs took place in Brazil.

In June, South African lender Standard Bank started its private equity unit in Brazil, with a focus on consumer goods, retail, logistics and transport.

This month, its five-banker team, led by industry veteran Marcelo di Lorenzo, clinched the $45 million purchase of a controlling stake in Casa do Pao de Queijo, a restaurant chain that sells cheese bread, a popular snack in Brazil.

“It’s great for our industry because there’s size, diversification and exit alternatives,” said di Lorenzo, a former Merrill Lynch private equity executive.

But the size of deals will probably be far smaller than those that Blackstone Group and rivals pursue.

“There will be room for deals, but I don’t know whether there will be a lot of room for a lot of deals for the mega-buyout funds,” Littlejohn said.

Some opportunities are project finance-related or start-ups that rarely fit into buyout firms’ strategy, he added.

Fundraising also poses a challenge for the mega-funds. Locals such as GP Investments have extensive track records, expertise and connections that are key to raising money.

“Raising funds without a track record in Brazil is quite hard even for a Carlyle-sized player,” said di Lorenzo.

GP Investments has been a warehouse for banking talent, and many of its former bankers now run some of the nation’s largest firms.

The firm, co-headed by market icons Fersen Lambranho and Antonio Bonchristiano, has made more than 30 successful exits, including the IPOs of homebuilder Gafisa, shopping mall operator BRMalls and consumer goods maker Hypermarcas.

Even as Brazil’s economy is thriving, newcomers will have to stay attentive to political and currency volatility that helped derail massive LBO plans in the 1990s for funds like Hicks Muse Tate & Furst.

(Reporting by Guillermo Parra-Bernal; additional reporting by Megan Davies in New York and Aluisio Alves in Sao Paulo; Editing by Elzio Barreto and John Wallace)