Brazil s unlimited growthThe middle class in Brazil continues to grow, boosting the opportunities for private equity in th...
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Private Equity International 4.5.11

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Private Equity International 4.5.11

  1. 1. Brazil s unlimited growthThe middle class in Brazil continues to grow, boosting the opportunities for private equity in the consumer and retail sector in the country,writes Seth Zalkin.posted - 01 Apr 2011 16:07 GMTupdated - 01 Apr 2011 16:12 GMTOver the past six years, interest in Brazil has reached a crescendo as good news has been abundant and headwinds have been scarce. From the pre-salt oil discoveries to theupcoming Olympics and World Cup, Brazil has captivated the world s attention.But with a sixfold increase in the amount of private equity committed to Brazil over this period, whispers have grown louder that prices are too high and attractive companies too few.Auspiciously, Brazilians have been too busy buying new cars and building new houses to notice.Unlike past bubbles caused by irrational exuberance or fleeting economic conditions, interest in Brazil is predicated on strong fundamentals and a market too large to ignore. In acountry famed for income inequality, extreme poverty was cut in half between 2003 and 2008, and more people entered the middle class during this period than the total number ofpeople living in Portugal, Greece and Belgium combined. In fact, Brazils C class alone now represents a larger market than the entire population of Germany, France or the UnitedKingdom. While effective social programs have received a lot of the credit, substantial increases in real wages and the lowest unemployment in Brazil s history have been significant factors. Moreover, the expansion of consumer credit has fueled a new class of consumers eager to enjoy what for so long has been out of reach. In the coming years, demographic trends will only accelerate this growth. Unlike the United States, where baby boomers are now retiring, or China, where the one- child policy has caused the working-age population to shrink, Brazil is entering its prime. The percentage of people between 25 and 50 is expected to grow 30 percent over the next 10 years. The impact of more consumers, with more money and more credit cannot be overstated. Seth Zalkin -situated to leverage this trend, Positivo Informatica enjoyed an annual growth rate in excess of 100 percent.With more stores and distribution points, increased productivity and the experience of private equity investors, consumer products companies and retail chains are better positionedto take advantage of this opportunity than ever before. And private equity firms are eager to help.Although competition among private equity firms can result in higher prices, valuations in Brazil are not as high as China or India and are reasonable given the favorable marketconditions. Moreover, mid-market companies, particularly those outside of the major population centers, can be relatively inexpensive with multiples between 5 and 8 times EBITDA.In addition to the strong fundamentals, PE firms are excited about the opportunity to finally employ leverage with their Brazil investments. Historically, most deals have been financedexclusively with equity or with very little debt. Although interest rates are expected to gradually increase in the coming months, the long-term trend should see rates fall to historic lowsin a country that has rarely enjoyed cheap credit. Lower interest rates and available credit will provide an extraordinary opportunity for investors to compound returns.A common saying has long been that Brazil is the country of tomorrow and always will be. Although valuations have increased and competition for good deals is real, investors areeager to harness Brazil s outsized fundamentals and to add to its short list of publicly traded companies. Consumers are spending, investors are investing and the world iswatching. From the Bovespa to the favelas, there is a sense that tomorrow is finally here.Seth Zalkin is founder and managing partner with Astor Group and Astor Group Capital, an investor in early stage companies. PEI Media Ltd. All rights reserved. Content on this site may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission ofPEI Media or in the case of third party content, the owner of that content. You may not alter or remove any trademark, copyright or other notice from copies of the content. You maydownload material from this site (one machine readable copy and one print copy per page) for your personal, non-commercial use only.

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