Fund Forum LatAm 2012: Brazilian unfilled capital demand

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A brief presentation on Brazilian investment opportunities, and their sources, risks, and pricing.

A brief presentation on Brazilian investment opportunities, and their sources, risks, and pricing.

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  • 1. Fund Forum Latin America 2012 Brazilian unfilled capital demand: Sectors, estimated risks and returns* Malcolm McLelland Nilson de Lima Barboza Valdir Jorge Mompean * This presentation should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of Equilibrio Capital. Marco Lyrio (Insper) and James Hunter (Green River Advisors and Business School Sao Paulo) provided a number of helpful conversations. All errors and oversights in the presentation are due to Malcolm McLelland.© 2012 Equilibrio Capital | Brasil 1 www.equilibriocapital.com
  • 2. Investment premisesRecent experience and current conditions generally suggest …A1: Brazilian public capital markets preclude arbitrage opportunities.A2: Only long-horizon Brazilian investments are advisable.A3: Brazilian alternative investment transaction costs are generally high. © 2012 Equilibrio Capital | Brasil 2 www.equilibriocapital.com
  • 3. Economic data: Brazilian GDP component growth :: Investment capital demand has been increasingly filled over the last 5-6 years. :: Consumer spending is stable and growing faster than government spending . © 2012 Equilibrio Capital | Brasil 3 www.equilibriocapital.com
  • 4. Economic data: Brazilian import and export growth :: Rapid import growth under high tariffs reflects strong domestic opportunities. :: Recent flattened export growth reflects stagnant global economy. © 2012 Equilibrio Capital | Brasil 4 www.equilibriocapital.com
  • 5. Economic data: Brazilian production growth :: Brazil recovered rapidly from 2008-2009 due to a strong domestic economy. © 2012 Equilibrio Capital | Brasil 5 www.equilibriocapital.com
  • 6. Economic data: Brazilian manufacturing industry outputs :: Brazilian manufacturing with significant forex and cross-border risk exposures was damaged by the global economy beginning in 2008. © 2012 Equilibrio Capital | Brasil 6 www.equilibriocapital.com
  • 7. Economic data: Brazilian service industry outputs :: Brazilian services firms with significant forex and cross-border risk exposures were damaged by the global economy beginning in 2008, but recovered easily because of domestic growth. © 2012 Equilibrio Capital | Brasil 7 www.equilibriocapital.com
  • 8. Economic data: Brazilian selected production inputs :: Fuel consumption correlates closely with industrial output; electricity consumpt ion correlated closely with private consumption. © 2012 Equilibrio Capital | Brasil 8 www.equilibriocapital.com
  • 9. Economic data: Brazilian price level and foreign exchange (in)stability :: Brazilian prices since 2004 are remarkably stable given forex volatility, but 2008 forex volatility severely damaged Brazilian SMEs with foreign-source production inputs selling to domestic consumers. © 2012 Equilibrio Capital | Brasil 9 www.equilibriocapital.com
  • 10. Preliminary implications*Characteristics of Brazilian investment opportunities (circa 2012): 1. Mid-market private equity (and debt) transactions 2. Increased domestic consumer demand risk exposure 3. Decreased foreign input-output and forex risk exposure 4. Increased domestic production and input development* With the caveat that such investments must be properly priced and controlled, which leads to …© 2012 Equilibrio Capital | Brasil 10 www.equilibriocapital.com
  • 11. Capital market data: Brazilian equity and debt issuances :: Brazilian public equity and debt markets are quite small relative to the size of the Brazilian economy, suggesting general capital constraints and high capital costs. © 2012 Equilibrio Capital | Brasil 11 www.equilibriocapital.com
  • 12. Capital market data: Brazilian and US equity returns are highly correlated :: Brazilian private equity transactions are priced based on US equity markets. © 2012 Equilibrio Capital | Brasil 12 www.equilibriocapital.com
  • 13. Capital market data: A sector model of Brazilian equity returns   .425  1      .007   SELICt   3.417  Ct 1        n  24 RtBVSP  .303tBVSP 1   1.055   RtNASDAQ    .524   YtMFG  2 4  RtPE0  .21      R  .91 .005   BRLUSDt   4.061   YtSERV   4      .863   GDPtINVEST    4 © 2012 Equilibrio Capital | Brasil 13 www.equilibriocapital.com
  • 14. Brazilian capital demand: Segmented by life cycle stage (circa 2012)© 2012 Equilibrio Capital | Brasil 14 www.equilibriocapital.com
  • 15. Brazilian capital demand: Pricing and control issues© 2012 Equilibrio Capital | Brasil 15 www.equilibriocapital.com
  • 16. Principal suggestionsBrazilian investment opportunities are optimally* …R1: … centered in mid-market private equity (and related vehicles);R2: … centered in growth- and mature-stagnant-stage firms;R3: … the result of planned liquidity and management change events; andR4: … focused on Brazil’s internal (supply and demand) economy.  * At November 2012.© 2012 Equilibrio Capital | Brasil 16 www.equilibriocapital.com
  • 17. EquilÍbrio Capital | BrasilEquilíbrio Capital provides research-based transaction advisory services to qualified sellers and accreditedbuyers of mid-market firm assets, debt, and equity:© 2012 Equilibrio Capital | Brasil 17 www.equilibriocapital.com