UKTI_Brazilian_Private_Equity_Report-FINAL

Private Equity and
Venture Capital in Brazil

I am delighted to present you with a copy of Peter Thorpe’s
report on Brazilian Private Equity and Venture Capital
opportunities for UK businesses.
This report has been researched and written on behalf of
UK Trade & Investment (UKTI). The report is also supported by
Lord Mayor of London and the Brazilian Chamber of Commerce.
Brazil has undergone a rapid transformation over the last few years
that has seen substantial rises in GDP levels and increasing demand
for goods and services to meet the expanding needs of consumers.
With a population of nearly 200 million, geographically the size of
Western Europe and rich in natural resources, we believe that this
market offers tremendous opportunities for UK businesses.
I am sure that you will find Peter’s study informative and that it will
provide you with a better insight into this market.
Sir Andrew Cahn
Chief Executive
UK Trade & Investment
UK Trade & Investment
UK Trade & Investment is the government
department that helps UK-based companies
succeed in the global economy. It also helps
overseas companies to bring their high-quality
investment to the UK’s economy – acknowledged
as Europe’s best place from which to succeed
in global business.
UK Trade & Investment – Private Equity and Venture Capital in Brazil

Peter Thorpe
Peter is an associate director in the assurance and business
services department of top 10 accountancy firm Smith &
Williamson. At Smith & Williamson, his client base is focused
primarily on small and mid cap Main Market and AIM listed
companies, as well as owner-managed and private equity
backed businesses.
Commenting on his recent secondment to UKTI in Sao Paulo,
Peter explained that “being provided with the opportunity
to spend 5 months in Brazil at such a positive time in its
development was very exciting. Very early on in the
secondment, through speaking with an number of people
within the financial services and business communities,
I realised that there is real potential for private equity in Brazil
and UKTI could play a major role in trying to bring together the
UK investor community and private equity opportunities there”.
Smith & Williamson
As a business, Smith & Williamson has been working in
Brazil and servicing Brazil focused clients for several years,
both on the accounting and tax advisory side, as well as in
our role as Nominated Adviser for AIM Listed businesses.
We are part of two global alliance organisations – Nexia
International (on the accounting side) and M&A International
(on the corporate finance and M&A side). Both organisations
have a strong presence in Brazil.
Speaking recently about the secondment opportunity to
UKTI in Brazil, Stephen Drew, head of London assurance
and business services, explained that, “as a firm, we see
real value in terms of developing and nurturing a long term
relationship with UKTI. The Brazil secondment was one
important aspect of this, but we see ongoing mutual
benefits in terms of being able to build deeper and broader
relationships with the financial services and business
community in Brazil”.
UK Trade & Investment – Private Equity and Venture Capital in Brazil i

ii UK Trade Investment – Private Equity and Venture Capital in Brazil

CONTENTS
1. Executive summary 2
2. Why Brazil? The opportunity 6
3. The Brazilian Private Equity industry in 2010 14
4. The Brazilian model and how it might develop 18
5. Venture Capital and innovation 24
6. Sector focus 26
7. UK investors interested in Brazil 42
8. The focus of international investors 44
9. London’s capabilities 48
10. The London Stock Exchange and the Alternative Investment Market 52
11. The challenges ahead 64
12. The next steps 70
13. Appendices 72
1: Example tax efficient structures 73
2: Definitions 77
3: Useful contact organisations 77
4: Bibliography 78
5: Acknowledgments 78
UK Trade Investment – Private Equity and Venture Capital in Brazil 1

SECTION 1
EXECUTIVE
SUMMARY
2 UK Trade Investment – Private Equity and Venture Capital in Brazil

A country of superlatives
Brazil has undergone an economic transformation
over the past decade. A volatile history of seriously
high inflation and interest rates has now given way
to economic and political stability.
Furthermore, the country received investment grade status
in April 2008 and avoided the worst of the international
financial crisis (GDP growth was flat in 2009 and has recently
been upgraded to 6-7 per cent for 2010). Depending on which
forecast you read, Brazil is expected to become the fifth
largest economy in the world in the next 10-15 years.
This is perhaps not surprising when you consider that the
country is geographically the size of Western Europe, has
a population of close to 200 million, plays host to 20 per cent
of the world’s productive agricultural land and given the
abundance of its minerals and natural resources. If recent
major oil discoveries off the coast of Brazil are proven to be
commercially viable, then exploitation of these could take
Brazil from being the thirteenth largest oil producer in the
world to the sixth largest producer.
But it is not just these natural factors that are propelling
Brazil forward.
Over the last few years, there has been a dramatic rise in
people moving out of poverty and up into the lower middle,
and middle, income class brackets. It is estimated that
between 2000 and 2008, 23.5 million Brazilians moved up
from bands D/E to band C and that 11.4 million people moved
up to bands A/B. In addition, GDP per capita is rising – from
US$2,638 in 2002 to US$8,626 in 2008.
The combined effect of the expanding middle classes and a
relatively young population is to feed demand for consumer
goods and credit – people aspire to the quality of life that
they see enjoyed in more developed countries. This
translates to rapidly increasing car ownership, a surge in
new shopping malls and retail centres, regularly eating out,
increased travel and tourism and generally better provision
for themselves and their families.
While harnessing the country’s agricultural and natural
resources potential, together with satisfying and anticipating
the growth in consumer demand, offer huge opportunities for
businesses and investors, the Government has realised that
Brazil suffers from serious deficiencies in infrastructure that
will inhibit growth potential unless they are tackled urgently.
With this in mind, in 2007, the Government introduced a four
year Accelerated Growth Plan (PAC) which aimed to provide
in the region of US$250 billion of public and private sector
investment in energy, social and urban and logistics
infrastructure developments. While much of this investment
comes from the Government and the Brazilian development
bank, BNDES, significant private sector investment is
required − not only within the infrastructure projects
themselves, but also in respect of the supply chain and the
application of new technologies, many of which have been,
or will be, sourced from overseas.
THE time for Private Equity in Brazil
These economic developments provide serious opportunities
for the further development of Private Equity in Brazil.
While by December 2009, committed capital to Private
Equity in Brazil had increased to US$34 billion, the country
has remained a relatively underpenetrated market. As at
30 June 2008, capital committed to the Brazilian Private
Equity industry represented just 1.7 per cent of GDP,
compared to a world average of 3.7 per cent and a UK figure
of 4.7 per cent. This is primarily because the industry is still
relatively young in Brazil (ABVCAP, the Brazilian Private
Equity association recently celebrated its tenth anniversary),
but also arises as a consequence of the business
environment in Brazil. There are a large number of privately
(often family) owned, mid market companies with around
250–1,000 employees and annual sales of US$20–200
million that are perhaps difficult to access and remain largely
untapped by the Private Equity industry. Many of these
businesses operate in fragmented sectors and/or have
succession issues which are preventing them from achieving
their growth potential.

At the sector level, there is massive scope for consolidation
of fragmented industries − for example, within retail,
leisure and entertainment, the dairy and agribusiness
industries, logistics and distribution as well as ethanol.
The opportunities for infrastructure funds and investments
have been highlighted above. A number of these opportunities
offer relatively high return and low risk characteristics,
especially those arising within the telecommunications and
electrical energy sectors. There is also widespread interest
in renewable energy sources – not just biofuels, but
hydroelectric power too. It is a staggering statistic that
45 per cent of Brazil’s energy comes from renewable sources.
The link between venture capital and the development and
application of innovative technologies, often working with
universities and science parks, is also becoming crucially
important in Brazil. For more information on opportunities in
these sectors, as well as others, please refer to Section 6.
It was mentioned earlier that the Brazilian Private Equity
industry is relatively young. Despite this, as at 31 December
2009, the industry comprised 180 Private Equity managing
organisations, with 236 investment vehicles and 554
portfolio companies. During the period from 2005-2009,
there have been 489 new or follow on investments and
37 Private Equity backed IPOs. The average Private Equity
investment over the period 2005-2008 was US$45 million.
There are indications, however, that the average deal size
since the onset of the financial crisis has risen to closer to
US$100 million.
In terms of personnel, industry in Brazil is increasingly
being driven by highly qualified, experienced professionals.
In 2009, 1,700 professionals and staff were employed by
industry and according to a 2008 survey, at least 74 per cent
Private Equity managers and managing partners hold a
postgraduate degree. In addition to a high quality academic
background, the vast majority of managers also have relevant
practical experience, either as finance sector professionals
or experience more closely related to the formation and
execution of business strategies. Section 2 provides some
interesting findings regarding the track record of Brazilian
Private Equity funds and managers.
The Brazilian Private Equity model is committed to
operational value creation, with a strong emphasis on
improving management and providing strategic direction
to companies – all of which are of critical importance to
many of those mid market, family orientated businesses
referred to above. The model lacks leverage. This is due
to a limited history of medium to longer term bank lending
to business in Brazil, partly as a consequence of historically
high rates of interest and inflation, but also due to a cultural
environment where banks and businesses were reluctant
to commit to long term funding due to risk aversion and the
unpredictability of rules and economic scenarios.
Crucially, the regulatory and structural environment within
the Private Equity industry is continuously strengthening.
The LAVCA (Latin American Venture Capital Association)
2010 Scorecard rates the business environment for Private
Equity in Brazil as being virtually on a par with that of Chile
and Spain. In their commentary on Brazil, LAVCA highlighted
favourable laws on fund formation and operation, together
with permissive regulations on institutional investors as
strengths of the regulatory environment in Brazil.
In 2003, the CVM (the Securities and Exchange Commission
of Brazil) issued Rule 391, which governs the typical Private
Equity fund vehicle in Brazil (the “FIP”). The principle
objectives of this regulation were to define participants’
rules, drive higher levels of corporate governance and
enhance investment and transparency standards within
the industry. The result of this is that the Brazilian Private
Equity industry is now widely acknowledged to be the most
transparent and regulated of all of the BRIC nations (Brazil,
Russia, India and China) and, some commentators argue, is
more transparent than the industry in some more developed
countries such as the USA.
In addition to the CVM regulation, ANBIMA (Brazilian
Association of Financial and Capital Market Entities) together
with ABVCAP (Brazilian Association for Private Equity and
Venture Capital), are currently developing a self regulation
code for the industry with the aim of ensuring enhanced
transparency for the funds and for the work carried out by the
General Partners. This code also intends to establish criteria
that are more rigid for the registration of Private Equity funds
in Brazil and that consider the relationship between General
Partners and Limited Partners.

The United Kingdom and Private Equity
in Brazil
The UK has much to offer Brazil and the Brazilian Private
Equity industry. This is partly because the UK and the City of
London have long been respected as pioneering and dynamic
financial hubs, but additionally due to geography and the time
zone advantage of being located between the Americas and
Western Europe, the Middle East and Asia. This gives the
UK a natural comparative advantage compared to other
financial centres.
The breadth and depth of London as a financial centre
means that it is home to a large number of institutions
and organisations that are excited about, and are actively
pursuing, opportunities for investing in Private Equity in
Brazil. UK based investment managers with emerging market
allocations, family offices, private equity funds of funds and
other institutions are seeking to increase the proportion of
their funds that they allocate to high growth markets and to
Brazil in particular. The EMPEA (Emerging Markets Private
Equity Association) 2010 Survey found that of all emerging
markets in the survey, Brazil should see the largest increase
in new investors over the next two years – according to
EMPEA, 19 per cent of emerging markets Private Equity
investors expect to begin investing in Brazil over that period.
In respect of UK Private Equity houses themselves, a number
of the largest firms have either made significant portfolio
company acquisitions in Brazil or have/are seeking to
establish a place of business there.
The London Stock Exchange and the AIM market (the
exchange for small and mid cap businesses), with their high
levels of liquidity and deep pools of capital, provide an often
cost-effective route to IPO (for a detailed comparison of the
relative strengths of London compared to the New York
exchanges, please refer to Section 10).
In short, the timing for Brazil and the UK financial community
to work together in order to fulfil the potential for Private
Equity in Brazil has never been better. With this is in mind,
UK Trade Investment (UKTI) is arranging to take a delegation
of interested UK investors and Private Equity Houses to
Brazil in the autumn of 2010. While in Brazil, the participants
will meet up with Brazilian funds and businesses interested
in Private Equity investment for a series of one to one
meetings, as well as meet advisers to the Private Equity
community in Brazil. The event will be held in conjunction
with ABVCAP, the Brazilian Private Equity association. If you
require further information about this event, please contact
Paula Abreu at paula.abreu@fco.gov.uk.

SECTION 2
WHY BRAZIL?
THE OPPORTUNITY

There are three principal reasons why international
investors are focusing attention on Brazil and
Brazilian Private Equity in particular:
— Economic context
— Business environment
— Private Equity specific factors
Economic context
The long term macroeconomic outlook for Brazil is strong.
The country received investment grade status in April 2008
and avoided the worst of the international financial crisis.
GDP was essentially flat in 2009 and real GDP growth in 2010
has recently been upgraded to 6 or even 7 per cent. It is
projected that the GDP growth rate will continue to be higher
over the next few years than the expected growth rate of the
major developed economies.
In addition to strong growth, rising domestic investment
supported by the 2014 World Cup and 2016 Olympics, major
new oil discoveries, enhanced integration with international
trade, high currency reserves and relatively low levels of
corporate and consumer debt (although consumer debt is
rising rapidly) all converge to enhance stability and
international confidence in Brazil.
The other compelling economic factor for Brazil is the rising
middle classes over the last few years. It is estimated that
between 2000 and 2008, 23.5 million Brazilians moved up
from bands D/E to band C and that 11.4 million people moved
up to bands A/B. In addition, as well as absolute real GDP
growth, GDP per capita is rising – from US$2,638 in 2002 to
US$8,626 in 2008 (source: IMF, World Economic Outlook).
The combined effect of the expanding middle classes and a
relatively young population is to feed demand for consumer
goods and credit, providing the stimulus to business growth
rates that is often lacking in more advanced economies.
Chart 1: GDP per capita
US$
Brazil
China
Russia
India
Chile
Colombia
Mexico
South Africa
Spain
UK
Key
10,0000 20,000 30,000 40,000
Source: IMF, World Economic Outlook

Business environment
Brazil hosts a huge pool of privately owned companies. Only
circa 500 of the country’s estimated 12 million companies are
listed. Many of these private companies are middle market
companies of around 250–1,000 employees and annual sales
of US$20–200 million. Although a large proportion of such
businesses are located in the south and south east of Brazil,
a large number are benefiting from rising consumer demand
in the north east of the country and others are agribusiness
companies situated in the central west (Mato Grosso and
Mato Grosso Do Sul). These are companies that are well
positioned to benefit from the ongoing boom in middle class
consumption and are the candidates for mid cap IPOs. Some
operate in very fragmented sectors and could therefore
serve as platforms for high value added consolidation plays.
Others are family owned companies undergoing succession
processes and experiencing difficulties in sustaining high
growth without a professional management team and
adequate funding. Currently, the vast majority of available
Private Equity is directed towards a small group of
companies and this potential market of mid size companies
remains relatively untapped. It is clear that further research
and analysis is required of the many thousands of growing
mid market companies that have not yet been targeted by
the Private Equity industry.
Chart 2 highlights the very low levels of productivity for
Brazilian businesses – even compared to regional peers.
One of the reasons for this is that a relatively low level of
corporate investment in employees and training, together
with historically low government spending in this area, has
resulted in a poorly qualified and low paid workforce that
is not motivated to become more productive. Additionally,
the cost for firms of complying with Brazil’s onerous labour
and tax laws also affects productivity levels. By targeting
businesses in high growth sectors, which are currently
underproductive and therefore are in need of additional
managerial focus, this provides significant opportunities for
operationally focused Private Equity firms to create value.
Chart 2: Labour productivity
(GDP in US$/hours worked)
UK
Spain
Mexico
Colombia
Chile
Brazil
Key
0 10 20 30 40 50
Source: The Confederation Board Total Economy Database

Private Equity specific factors
The Emerging Market Private Equity Association (EMPEA)
2010 survey in association with Coller Capital produced some
interesting findings:
— Emerging markets share of Limited Partners Private
Equity investment will continue to grow, with total
commitments to emerging market Private Equity funds
expected to rise from 6-10 per cent to 11-15 per cent in
two years time.
— Seventy-seven per cent of Limited Partners expect annual
net returns greater than 16 per cent from their emerging
market Private Equity portfolio, compared with 29 per
cent of Limited Partners who expect similar returns from
their global Private Equity portfolio.
— Seventy per cent of Limited Partners are either satisfied
or very satisfied with the performance of their emerging
market Private Equity portfolio relative to that of their
listed emerging market equities.
— Sixty-one per cent of Limited Partners view the alignment
of their emerging market Private Equity managers as just
as strong as that of their developed market General
Partners, and an additional 23 per cent of Limited
Partners see a greater alignment with their emerging
market General Partners.
— Of all emerging markets included in the survey, Brazil
should see the largest increase in new investors in the
next two years – 19 per cent of emerging markets Private
Equity investors expect to begin investing in Brazil, while
only 3 per cent of current investors plan to reduce or stop
investment in the country.
Furthermore, the 2009 EMPEA and Coller Capital survey
showed Brazil moving up to second place (from fourth) –
behind China – in terms of emerging market attractiveness
over the subsequent 12 months.
Table 1: Emerging market attractiveness
2009 survey 2008 survey Change
China 1 1 –
Brazil 2 4 +2
India 3 2 -1
Central Eastern Europe 4 3 -1
Latin America (excluding Brazil) 5 7 +2
Africa (excluding South Africa) 6 5 -1
South Africa 7 9 +2
Middle East 8 8 –
Russia/CIS 9 6 -3
Source: EMPEA/Coller Capital Emerging Markets Private Equity Survey, 2009
On an annual basis, the Latin American Venture Capital Association (LAVCA), in conjunction with the Economist Intelligence
Unit, produces a “Scorecard” which ranks the business environments for private equity/venture capital activity on a scale
of 1-100, with 100 being the most friendly. Twelve Latin American and Caribbean countries are included in the benchmark,
together with four countries from outside of the region.

The table below is an extract from the 2010 Scorecard:
Table 2: Business environment for Private Equity
Argentina Brazil Chile Colombia Mexico Peru Israel Spain Taiwan UK
Overall score 43 75 76 60 63 51 81 76 61 93
Laws on VC/PE
formation and
operation
1 4 4 3 2 2 4 3 4 4
Tax treatment of VC/PE
funds and investments
1 3 3 2 3 1 3 4 3 4
Protection of minority
shareholder rights
2 3 3 3 3 1 4 3 1 4
Restrictions on
institutional investors
investing in VC/PE
0 4 3 3 3 3 3 3 2 4
Protection of IP rights 2 2 3 2 2 2 2 3 3 4
Bankruptcy
procedures/creditors’
rights/partner liability
2 3 3 2 2 2 2 3 3 3
Capital markets
development and
feasibility of exits
2 3 3 2 2 2 3 3 3 4
Registration/reserve
requirements on
inward investments
2 3 3 3 3 3 3 3 2 3
Corporate governance
requirements
2 3 3 3 3 3 4 3 2 3
Strength of the
judicial system
2 2 3 2 2 1 3 2 3 4
Perceived corruption 1 1 3 1 1 1 3 3 2 3
Quality of local
accounting/use of
international standards
4 4 3 2 3 4 4 4 2 4
Entrepreneurship 3 3 3 2 2 2 3 2 3 4
Source: LAVCA 2010 Scorecard

An interesting observation here is that Brazil’s score of 75
is only one behind that of Spain and is almost on a par with
the best performer in the region − Chile, with a score of 76.
While Brazil’s score remained constant from 2009 to 2010,
in its commentary, LAVCA highlighted favourable laws on
fund formation and operation, permissive regulations of
institutional investors and quality of accounting standards
as among the country’s major strengths.
In their June 2010 Private Equity Update – “Rising Star:
Brazilian private equity after the crisis”, Ocroma Alternative
Investments explain that while the Brazilian Private Equity
industry has been very active since the crisis, it has only
been since the end of 2009 that the raising of new funds
with foreign investors has been able to take place. They
provide the example of the closing of Advent’s LAPEF V fund
at US$1.65 billion in April 2010 – which was the biggest
fund ever raised for the region. Ocroma continue by
commenting that “while the level of activity is high...
and more investments are made from funds coming from
abroad, one can hardly feel the same level of competition
for deals usually seen in Asia and especially China”.
In considering the attractiveness of Brazil as a destination
for Private Equity investment, there are three further factors
that are worthy of discussion here:
Domestic investor risk appetite
Due to historically high interest rates, many domestic
investors have come to expect fixed income investment
returns of +10 per cent as normal in return for assuming
very little risk. More recently, the relative success of the
Brazilian stock exchange, BMFBOVESPA, has offered
investors a market return with the added benefits of high
liquidity and transparency. This gives rise to an environment
where local investors determine a high hurdle rate when
analysing private investment in higher risk and less liquid
assets. This creates an opportunity for overseas investors
who might be more patient, more experienced and therefore
more willing to fund investments that local investors are
reluctant to finance.
It is worth mentioning here, however, that wealthy Brazilian
families that have historically invested their money via the
banking system and other more traditional means (including
government debt, which has historically been a profitable
and liquid market), are now beginning to consider Private
Equity for investment opportunities.
The role of Brazilian pension funds
Similarly, Brazilian pension funds have historically invested
in high interest fixed income securities. More recently,
however, and due to generally lower interest rates, these
funds have had to look to the equity market in order to
maintain actuarial return. The Government has facilitated
this by increasing to 40 per cent the proportion of their
investments that these funds can allocate to equity
securities. Most funds are well below this limit. In order
to invest in equity securities and to analyse opportunities
effectively, they need to develop equity expertise, which
has been lacking in-house. Instead, they are looking at more
experienced equity managers to provide the skills that
they require.
They are also seeking to allocate part of their funds to
Private Equity investment managers. In September 2009,
a resolution of the National Monetary Council (CVM – a
Brazilian Government institution responsible for promoting
the improvement of institutions and financial instruments)
established Private Equity as a separate class for investments
by closed pension funds. They now may invest up to 20 per
cent of their reserves in Private Equity funds. On average,
Brazilian pension funds currently allocate 2 per cent of their
capital to Private Equity. This compares to the international
average of 8-10 per cent. In the UK, the largest investors in
Private Equity are pension funds. There is therefore huge
potential in Brazil for pension funds to increase their
investment in Private Equity.
This situation creates a number of possible opportunities
for UK investors and pension fund advisers.
The first opportunity is that there is potential for
experienced investment advisory specialists to assist
Brazilian pension funds in analysing the equity investment
opportunities available.

The second is that Brazilian pension funds might provide a
source of funding for global investors who are interested
in establishing a presence in Brazil. The same resolution
referred to above also established a limit of 10 per cent for
pension fund commitments to funds registered abroad.
One potential problem that would need to be resolved
here, however, is that traditionally, Brazilian pension funds
have tended to take a relatively active involvement in their
investments (by board representation etc). This is a problem
for international investors who may struggle to see the
benefits of such representation and who will be nervous
about potential conflict of interest scenarios (there are,
however, some tentative signs that some pension funds are
starting to reconsider this). The other point here is that, in
practise, there are regulatory and political issues that would
need to be overcome in order to facilitate such investment.
It is the lack of domestic investor appetite for Private Equity
and the potential issues surrounding pension funds’ demands
for active investment involvement that have led to a number
of domestic Brazilian Private Equity organisations looking to
international investors as a key source of funding.
A growing talent pool
According to a GVcepe (Centre for Private Equity and
Venture Capital Research at FGV-EAESP) 2008 survey,
at least 74 per cent of Private Equity managers and
managing partners hold a postgraduate degree.
In addition to a high quality academic background, the
vast majority of managers also have relevant practical
experience, either as financial sector professionals
(for example, investment bankers) or experience more
closely related to the formation and execution of business
strategies (for example, CEOs, entrepreneurs, consultants
or angel investors).
Research by Ocroma Alternative Investments produced
the following findings in relation to track record in the
industry in 2008:
Table 3: Industry track record
Depth of previous
private equity
fund experience
Number
of funds
Proportion of total
number of funds in
sample (%)
Commitments
(US$ million)
Commitments as a
proportion of total
commitments
across sample (%)
Firm wide 10 41.67 3,964.29 52.85
Team 5 20.83 2,700.00 36.00
Individual professionals 6 25.00 495.95 6.61
None 3 12.50 340.48 4.54
Total 24 100.00 7,500.71 100.00
Source: Ocroma Alternative Investments – Private Equity Update, Fundraising Report – Brazil, Leonardo L. Ribeiro, 12/2008, based on a sample of 24 Private
Equity funds that were still in fundraising or pre-fundraising phases

These findings show that at the time of the survey,
63 per cent of funds with 89 per cent of commitments are
either being raised by firms with prior track record or by
new firms with experienced teams (for example, spin-offs
of existing Private Equity groups). This indicates that
management talent within the industry is growing rapidly
and compares well with other BRIC countries.
It is clear from this analysis that excitement among
international investors for business opportunities in
Brazil is coupled with real enhancements to the business
environment over the last few years that have sought to
make Private Equity investment a very attractive prospect
in Brazil. The attraction seems to arise primarily due to an
expectation that emerging market funds will outperform
developed market ones, at least in the short and medium
term, and because in Brazil in particular, strong underlying
growth rates matter more than leverage in terms of
driving returns.

SECTION 3
THE BRAZILIAN
PRIVATE EQUITY
INDUSTRY IN 2010

The Private Equity industry in Brazil is relatively
young, establishing in the early 1990s, but due in
part to foreign exchange cycle issues, only really
developing and evolving since 2004, when the
Brazilian economy stabilised and the IPO market
took off.
It is interesting to note that it was during this period that
one of the most recognised brands in Brazil – Gol – Latin
America’s leading low cost airline, listed on the New York
and São Paulo stock exchanges. More interesting still is that
Private Equity investment had enabled Gol to consolidate
its strategy and expand its operations. The IPO netted AIG
a return of seven times its initial US$1.2 million investment,
a sum advanced just 18 months prior to the listing.
Before providing an overview of the Brazilian Private Equity
industry in 2010, it’s worth mentioning that while there have
been a number of very useful studies conducted into the
industry, there is always scope for further detailed analysis.
This is particularly as a consequence of the recent rapid
evolution and development of the industry and the renewed
international interest in Brazilian Private Equity in the last
couple of years or so.
Private Equity fundraising in Brazil in 1999 totalled
US$3.7 billion, but by December 2009, committed capital
had increased to US$34 billion (source: GVcepe). Despite this
impressive increase, Brazil’s Private Equity market remains
underpenetrated. As at 30 June 2008, capital committed
to the Brazilian Private Equity industry represented just
1.7 per cent of GDP, compared to a world average of 3.7
per cent and a UK figure of 4.7 per cent (source: GVcepe).
In December 2009, the industry consisted of 180 Private
Equity managing organisations (General Partners), with
236 investment vehicles and 554 portfolio companies.
During the period 2005-2009, there had been 489 new or
follow on investments and 37 Private Equity backed IPOs.
Within the industry 1,700 professionals and staff were
employed. This compares to around 7,700 in the UK and
38,500 in the USA (source: GVcepe).
The average private equity investment over the period
2005-08 was US$45 million, while the average venture
capital investment was US$4 million, mezzanine investment
(see Section 4 for explanation) was US$11 million and PIPE
(see Section 4 for explanation) investment was US$4 million
(source: GVcepe). This compares to an average UK private-
equity based buy-out in excess of £100 million – a figure
which has remained relatively constant over the last decade
– once the exceptional impact of the £11 billion Alliance-
Boots transaction in 2007 is stripped out. There are signs,
however, that over the period 2007-09, the average deal size
in Brazil has started to increase from the small to mid market
transactions that have historically dominated the market.
Indeed, according to Ocroma Alternative Investments
research analysis included within their June 2010 paper,
the average deal size in Brazil since the financial crisis was
US$75 million, with deals in the range of US$50 million
to US$200 million being the most common, representing
more than half the aggregate capital invested and almost
40 per cent of the number of deals.
In terms of the investor base, in 2009, 41 per cent of
committed capital to Private Equity came from outside
of Brazil. Twenty six per cent came from the USA and less
than 2 per cent came from the UK (source: GVcepe). The
proportion of committed capital originating from overseas
was less in 2009 than in 2008. This isn’t unexpected, given
that the USA and Western Europe were more affected by the
financial crisis than Brazil. It is anticipated, however, that the
proportion originating from overseas will rise in the next few
years, as investors from developed countries increase their
interest in Brazil.
Global private equity firms with offices in Brazil include Actis
from the UK and Advent, Carlyle Group, Darby Overseas and
One Equity Partners (working with JP Morgan) from the USA.
This list is not exhaustive, but seeks to highlight that most
interest to date has been from the USA, rather than the UK
and Western Europe. This imbalance of overseas investor
interest in Private Equity in Brazil has been a common theme,
mentioned by a number of companies and funds that were
interviewed as part of the information gathering process for
this report. It is something that the UK should actively be
seeking to rectify, as explained in the Executive Summary
of this report.

In terms of the class of investor involved in Brazilian Private
Equity, this is well diversified and consists of the most stable
sources of financing over the long term. One particular point
of interest here is that as at 30 June 2008, pension funds
provided 27 per cent of the total committed capital to
Brazilian Private Equity. This proportion is higher in other
more developed economies and is anticipated to increase
further in Brazil, as the authorities raise the proportion of
the total funds that pension funds can invest in equity
instruments and Private Equity.
Chart 3: Industry analysis
by category of investor
Pension funds 27%
Government 4%
Parent organisation 13%
Insurance companies 1%
Investment funds 8%
Trusts endowments 8%
Banks 7%
Multilateral organisations 1%
Family offices 6%
Funds of funds 5%
Private companies 4%
Others 12%
PE/VC Organisation
Partners 4%
Key
Source: GVcepe December 2008 research report: Overview of the
Brazilian Private Equity and Venture Capital industry
Of the 127 Private Equity organisations (General Partners)
in Brazil as at 30 June 2008, 79 per cent were independent
(including seven publicly traded companies), 12 per cent had
ties to financial institutions, 2 per cent were public sector,
2 per cent industrial groups and 2 per cent corporate ventures.
As at 30 June 2008 the distribution of portfolio companies
was as follows:
Chart 4: Distribution of portfolio companies
by category of investor
Venture capital start up 12%
Venture capital seed 5%
Venture capital early stage 17%
Private equity expansion 43%
Private equity later stage 8%
Public traded 15%
Key

Co-investment in portfolio companies by more than one
Private Equity organisation is infrequent in Brazil. According
to GVcepe, as at 30 June 2008, less than 10 per cent of
portfolio companies had investment from more than one
Private Equity organisation. This is an area of activity that
could therefore expand in the future and one where the UK’s
experience in syndication could add value. It is considered
further in Section 9.
In terms of whether Private Equity firms in Brazil seek control
of the companies within which they invest, according to
GVcepe, around 10 per cent of investment vehicles with a
focus on earlier stage venture capital require control of their
investment, while 30 per cent of vehicles working with
private equity sought control.
Given that a large number of portfolio company investments
were made before 2005 and considering that the lifespan of
investments in Private Equity in Brazil is on average three-
five years, we can expect a number of investment exits in
the near future.

SECTION 4
THE BRAZILIAN
MODEL AND HOW
IT MIGHT DEVELOP

This section seeks to highlight some of the principle
characteristics of the Brazilian Private Equity model
and also discusses some of the main differences
to the model adopted in the UK and the USA.
The rationale for Private Equity in Brazil
and leverage
The Brazilian Private Equity model is committed to
operational value creation, with a strong emphasis on
improving management and providing strategic direction to
companies. Furthermore, it is focused on creating value in
high growth markets and harnessing demand from the rising
middle classes. As a consequence, Brazilian Private Equity
deals tend to centre around the provision of growth capital
and mid-market buyout transactions. Consolidation of
fragmented markets is fundamental in this respect.
This is different to the way that the model has developed
in the USA and Western Europe, where, due perhaps to
more limited growth opportunities and market maturity,
cost cutting to create value, together with leverage and
financial engineering, have become the dominant part of
generating returns.
In Brazil, leverage is limited and this is due to a limited history
of medium to longer term bank lending to business in Brazil.
This is partly as a consequence of historically high rates of
interest and inflation, but also due to a cultural environment
where banks and businesses were reluctant to commit to
long term funding due to risk aversion and the unpredictability
of rules and economic scenarios.
There are signs, however, that commercial banks are starting
to offer longer term debt products to business (relatively
lower interest rates and deeper financial markets help here).
Nevertheless, this is still a relatively undeveloped area and
the products on offer are, in comparison to the USA and
Western Europe standards, relatively unsophisticated
and expensive.
The breadth of investment
All the main aspects of the traditional investment chain are
active in Brazil, including: venture capital (encompassing
seed, start up and early stage), private equity (covering
expansion, later stage and buy out), Mezzanine and PIPE
investment. Venture capital in Brazil is considered in more
detail in Section 5.
Mezzanine investment is a hybrid instrument combining the
characteristics of equity and fixed income investment. It is
comparable to an investment in capital, in that the expected
return depends on how well the investment performs and
generally sits between senior debt and equity in terms of
both risk and reward. It is usually applied to later stage
companies with the characteristic of steady cash flow and
the capability of servicing both senior and mezzanine debt.
PIPE refers to Private Investment in a Public Entity. This is
where the investing organisation takes an equity stake in
a listed company, and often arises due to a belief that the
company is either fundamentally undervalued by the market
or, more commonly, because the optimal strategy of the
business is inconsistent with the requirements of the public
markets. By aligning the shareholders and managers more
closely, due to the fund manager becoming actively involved
in the strategic management of that company, it is argued
that a turnaround or repositioning of the business can be
more effectively achieved. Ocroma Alternative Investments
research signalled that PIPE transactions in Brazil had risen
significantly during the financial crisis, perhaps not surprising
given the attractive valuations of listed assets.
While both Mezzanine and PIPE still represent a relatively
small proportion of the total number of Private Equity
vehicles in operation in Brazil, both are likely to expand their
roles in the future. As the Brazilian stock market expands
and matures, and in particular as the market for small and
mid cap businesses becomes more established, then public
to private transactions could become more prevalent.
For Mezzanine, the sophistication of the more established
London market should have something to offer here
(see Section 5).

Vehicle structure
According to research carried out by GVcepe, the distribution
of total committed capital by legal structure of vehicle as at
30 June 2008, was as follows:
Chart 5: Committed capital by vehicle structure
Proportion of total (%)
CVM model
Limited partnership
Direct investment
Holding company
Corporate venture
Other
Key
0 10 20 30 40
Source: GVcepe December 2008 research report: Overview of the Brazilian
Private Equity and Venture Capital industry
The GVcepe report revealed that while the limited
partnership structure still represents a significant proportion
of all committed capital in the industry, this proportion has
fallen from 62 per cent in 2004 to 34 per cent in 2008. In
contrast, the proportion of committed capital held under
the CVM (the Securities and Exchange Commission of Brazil)
model has risen from 23 per cent in 2004 to 39 per cent in
2008. This helps to illustrate the widely held belief that
the institutional model created by the CVM in 2003 (and
explained in more detail below) has been successful.
Although holding companies constituted 24 per cent of the
total of all investment vehicles in the industry as at 30 June
2008, they only represented 2 per cent of committed capital.
This is essentially because they are vehicles that are used to
investsmalleramountsofmoneyinventurecapitaloperations.
The CVM vehicle
Funds focused specifically on investing in equity
participations were initially regulated by the CVM through
the introduction of FMIEE’s (Mutual Funds for Investment
in Emerging Companies). CVM Rule 209, which created the
FMIEE, however, addressed only investments in emerging
companies, with limited characteristics and purposes.
This rule, therefore, did not benefit those investors that
intended to use a fund structure to invest in companies
with other characteristics. These investors continued to
use more complex corporate structures for Private Equity
investments, which allowed greater flexibility when choosing
the investment’s targeted assets.
In response to this situation, in 2003, the CVM issued
Rule 391, which governs the Fundo de Investimento em
Participacao ‘FIP’, the now typical Private Equity fund vehicle
in Brazil. The FIP is a close ended investment fund of defined
duration whose purpose is to raise funds in the capital
markets in accordance with the rules and investment policy
set out in the charter of the FIP. This structure allows funds
to invest their assets in the acquisition of shares, debentures,
warrants or other securities convertible into shares issued
by public or private companies, with no restrictions as to
company size or characteristics.

The principle objectives of Rule 391 were to protect the
FIP’s investors, define participants rules, drive higher levels
of corporate governance and enhance investment and
transparency standards within the industry. The result of
this is that the Brazilian Private Equity industry is now widely
acknowledged to be the most transparent and regulated
of all the BRIC countries and, some commentators argue,
is more transparent than the industry in certain more
developed economies, such as the USA.
It is a requirement of the rules that FIP’s are active in the
decision making process of the companies in which they
invest, thereby exerting real influence on strategic policy
and management (for example, through the appointment
of members to the company’s board of directors).
FIPs must be registered with the CVM and administered by
a legal entity which is also registered and authorised by the
CVM to perform professional portfolio management services
(in addition, this administrator usually retains a manager
provided that it is also registered and authorised by the
CVM). The administrator is equivalent to the General Partner
in the UK. Investors in the FIP (Limited Partners) can be
individuals or legal entities. The FIP is subject to disclosure
requirements, including the need to prepare and submit
to the CVM annual and semi-annual financial statements
prepared in accordance with specific rules. This information
is also made available on the CVM website. Additionally,
the annual financial statements of the FIP must be audited
by an independent auditor registered with the CVM.
The cost associated with structuring a FIP is generally lower
than that for a FMIEE, as registration is automatically granted
by the CVM upon presentation of the required documents, as
long as the regulation’s demands are met. From a taxation
perspective, both are treated in the same way.
Foreign investors will generally invest in the FIP through a
mechanism provided by the Central Bank of Brazil. This
mechanism enables the remittance of funds to Brazil for
investment in the Brazilian capital markets. Investments
made in accordance with this mechanism may afford the
investor beneficial tax treatment with respect to Brazilian
withholding income tax, provided that the investor is not
domiciled in a low tax jurisdiction and that certain other
requirements are met.
A note of caution here is that some commentators
believe that whilst the development of the FIP and
associated regulation has been a significant step forward
for the industry in Brazil, the structure is still not as robust
in terms of insulating Limited Partners from the liabilities
of the fund as the more traditional Anglo Saxon Limited
Partnership structure.
As mentioned above, a growing number of funds in Brazil
are now being established under CVM regulation. There is,
however, still a tendency for funds that raise capital from
international investors to establish their funds offshore,
either as Limited Partnerships (LP’s) of Limited Liability
Companies (LLC’s) in places such as the Cayman Islands or
Delaware. This is because international investors are more
familiar with such offshore jurisdictions and try to keep away
from funds established locally, that might have investors
sharing control of investment and exit decisions through their
exit committees.
The regulatory and legal environment
In addition to the CVM regulation discussed above, at the
present time, ANBID (National Association of Investment
Banks) together with ABVCAP (Brazilian Association for
Private Equity and Venture Capital), are developing a self
regulation code for the industry with the aim of ensuring
enhanced transparency for the funds and for the work
carried out by the General Partners. This code also intends
to establish criteria that are more rigid for the registration of
Private Equity funds in Brazil and that consider the relationship
between General Partners and Limited Partners. The
expectation is that this regulation will cover all funds in which
the managers are part of ABVCAP or ANBIMA (ie virtually all
of those not managed by an overseas Limited Partnership)
and will be monitored by the associations themselves.
From an international investor’s viewpoint, the hope is
that this regulation will be aligned to western standards.
LAVCA, in their 2010 Scorecard commentary on Brazil,
highlighted favourable laws on fund formation and operation
and permissive regulations on institutional investors as
strengths of the industry regulatory environment in Brazil.
Additionally, it gave above average scores to protection
of minority rights, bankruptcy procedures and corporate
governance. On the downside, it highlighted the enforcement
of, and procedures associated with, intellectual property.

In terms of minority rights, the perception is that Brazil is
relatively strong in this area and the recent development of
arbitration as an effective form of dispute resolution should
enhance funds’ ability to hold minority interests, as they can
be more confident that they will be able to resolve a dispute
quickly, rather than getting bogged down in the legal system.
It should be noted, however, that while there have been
certain significant steps forward in terms of the legal
environment over the last few years, Private Equity
investment structures and obligations have yet to be the
subject of analysis in Brazilian courts. Likewise, there is
no case law regarding the industry in Brazil.
In respect of the ability to borrow externally to invest in
Brazil, while there are foreign exchange controls, in practice
it is possible to get money into and out of the country and
the effect of such controls on the Private Equity industry is
unlikely to be significant.
Remuneration
In terms of the reward structure for Private Equity managers,
this is converging towards the international standard
structure. Typically, the management fee is 2-3 per cent
of the committed capital or equity of the fund. Higher
management fees are usually only charged by smaller funds
in the venture/seed capital arena, while those funds charging
less than 2 per cent are mostly first time funds attempting to
differentiate their offer, and not, as one might expect, the
larger funds sharing some of their economies of scale with
investors. The performance fee/carried interest is variable
and based on a pre-established percentage, usually 20 per
cent. The hurdle rate can vary widely, but is common at
around 8 per cent.
Taxation
Brazil has a complex and multi-layered tax system, primarily
due to taxes being levied at federal, state and municipal
levels. The complexity of tax is a serious impediment to doing
business in Brazil, an issue that is considered in more detail
in Section 11.
In 2009, a 2 per cent tax on capital inflows was imposed.
This will impact overseas investors investing in local funds,
but will not impact offshore funds. The aim of this legislation
was to put off flows of hot money and the effect on the
Private Equity industry should be small, as the 2 per cent
is effectively diluted over time.
The key driver of tax in the Private Equity industry in Brazil,
like elsewhere, is the choice of vehicle. A company is
considered a legal entity for Brazilian tax purposes, whereas,
in most cases, a Brazilian investment fund – such as the FIP
– is generally not considered to be a legal entity for tax
purposes. Taxes levied on gains by funds that are regulated
by the CVM are usually lower than those that are applied to
other structures, such as equity holding partnerships or
investment holding companies.
Currently, as an entity, a FIP is not subject to tax on the
acquisition and disposal of investments in Brazil and the
income received by this entity from such investments is
not normally taxed at the entity level (it should be noted,
however, that the 2 per cent tax on financing transactions is
now applicable to FIPs). Conversely, the companies in which
the FIP holds equity participation are normally subject to all
Brazilian taxes applicable to a standard legal entity.
Foreign investment in regulated Private Equity funds is
exempt from income and capital gains taxes provided that
it does not come from entities registered in tax haven
countries. Therefore, deals can usually be structured so as
to manage the tax burden from the investee company to
the ultimate fund investors and to avoid double taxation
by overseas investors, even in the absence of a double
taxation treaty (there are ongoing discussions regarding
such a treaty between the UK and Brazil, but nothing has
yet been finalised).
Please refer to the charts on pages 73, 74 and 75 for example
structures that can be utilised to help ensure that future
distributions are received in a tax efficient manner.

Fair value and transparency for investors
There is ongoing worldwide discussion at present of the need
for investors to keep track of the performance of the assets
in which they invest. This discussion is also taking place
in Brazil.
Regularity and quality of financial information is obviously
crucial, but there is much debate about the underlying
valuation techniques utilised. While historical cost,
transaction adjusted historical cost, equity equivalent/
consolidation and fair value are all used to value investments,
there is a trend in Brazil towards fair value (the amount paid
by an unconnected third party) and towards transparency,
ie attempting to ensure that all funds are valued in the same
way across all time periods. Part of the rationale for this is
to ensure that fund management and performance fees are
charged accurately and consistently.
The secondary market
It is widely recognised that a strong secondary market
provides liquidity for the buy out market when alternative
exit routes might be difficult. It enables Limited Partners
to rebalance their portfolio and to re-focus resources.
The results of the Coller Capital Global Private Equity
Barometer – Winter 2009-10, showed that 29 per cent
of Limited Partners surveyed have no exposure to the
secondary market, but 34 per cent of private equity investors
surveyed have increased their exposure to secondary funds
over the past two years. The Barometer comments that
“investors’ views of the secondaries market have changed
significantly over the last couple of years. Limited Partners
now see secondaries as an important tool for changing the
overall composition and liquidity profile of their portfolios”.
Secondary market activity is beginning to emerge in Brazil,
but is still rare. The market is not yet developed well enough
to see exit routes other than by IPO, trade sale or buyback.
However, as the Private Equity industry in Brazil evolves
and given the renewed interest in this market by Limited
Partners, it seems likely that we will see a growth in
secondaries in Brazil over the coming years.
This is an area where London’s expertise can come in useful.
Indeed, there is an example of this very recently with the
UK’s Apax Partners entering into an agreement to acquire
a controlling interest of TIVIT, a leading integrated IT and
Business Process Outsourcing service provider in Latin
America, headquartered in Brazil. One of the existing
shareholders of TIVIT that has agreed to sell to Apax is Patria
Investimentos, a leading Brazilian Private Equity business.
TIVIT believes that the transaction with Apax will provide it
with enhanced flexibility to execute its long term strategy.
Commenting on the firms’ website, Martin Halusa, Chief
Executive of Apax Partners, explained that “Our first
investment in Brazil advances our global strategy of investing
in large companies that have strong, established market
positions and the potential to expand. We are excited by
Brazil and have been actively sourcing opportunities in the
country for some years”.
Club deals
A club deal refers to a Private Equity buyout or the
assumption of a controlling interest in a company that
involves several different Private Equity firms making the
acquisition collectively. The practice has historically allowed
Private Equity firms to purchase much more expensive
companies together than they could alone. Also, with each
Private Equity firm taking a smaller position, risk can be
reduced. While club deals have grown in popularity in the
more developed Private Equity economies in recent years,
there are many issues that can arise related to regulatory
practices, conflicts of interest and market-cornering. Given
the stage of development of the Brazilian market, it may be
that club deals remain relatively infrequent there for some
time to come.

SECTION 5
VENTURE CAPITAL
AND INNOVATION

According to GVcepe’s 2010 census of the Private
Equity industry, 23 per cent of Private Equity
investment vehicles in Brazil operate purely in
the venture capital arena (seed, early and later
stage). Despite this, the early stage part of the
Private Equity industry is not nearly as developed
as the growth capital and later stage parts of
the industry.
Seed capital in particular, however, has been gaining
importance over the past few years, primarily due to
public policies and government support aimed at sustaining
industry development over the long term. The Brazilian
Innovation Agency (FINEP – Financiadora de Estudos e
Projetos), which is linked to the Ministry of Science and
Technology, is a key player in the Brazilian venture capital
industry, acting both as an investor in venture capital funds
and as a coach for new innovative companies seeking capital
and managerial support to grow. This proactive role played
by public bodies distinguishes venture capital in Brazil from
other emerging countries.
There is also a developing role for universities and similar
organisations in producing and nurturing start up businesses
that become venture capital candidate firms. Although this
symbiotic relationship is less developed than, for example,
in the UK, clusters of technology companies are establishing
around the best universities in São Paulo, Rio de Janeiro,
Belo Horizonte, Santa Catarina and Pernambuco. Indeed,
recent studies have shown that there might be as many
as 400 incubators and up to 4,000 incubated companies
in Brazil, operating in a wide range of sectors including
industrial and commercial automation, communications,
biometrics, renewable energy and nanotechnology applied
to various industries including agriculture and medicine.
It is the development and expansion of this type of
relationship that will have a significant impact on Brazil’s
ability to produce world-class companies with breakthrough
technologies. Such technology development is high risk,
but would produce serious opportunities for venture
capital investment.
Alongside the development of the venture capital industry
in Brazil, an angel network of investors is also becoming
established. Many of these angel investors are former
businessmen and work with incubators and universities in
order to help determine where best to invest and to provide
hands-on experience to new businesses. Their aim is to
provide an accelerator so that businesses can grow quickly
and a principle exit strategy is through the merger of several
incubated companies.
The most innovative firms tend to leverage Brazil’s strength
in agriculture and there are numerous examples of such
firms in the biotechnology and ethanol technology sectors.
Furthermore, Brazils’ position as a leading technology
player fosters a favourable environment to cutting edge
IT and communications innovation. Further analysis of
the opportunities for private equity and venture capital
in these sectors is provided in the following sector
specific commentaries.

SECTION 6
SECTOR
FOCUS

It is clear that the development of consumer
demand over the last decade or so has created huge
opportunities to develop and grow the consumer
goods and services space in Brazil.
The aim of this section of the report is not to consider every
sector of the economy in which Private Equity might have an
interest. Rather, it is to highlight some of the key sectors that
are particularly receptive to Private Equity style investment
and which are currently undergoing significant growth and
development in Brazil.
The sectors covered are:
— Infrastructure, logistics and distribution
— Agribusiness
— Life sciences and biotechnology
— Renewable energy
— Information, communications and technology (ICT)
— Construction and real estate
— Financial services
Overview
Research by Ocroma Alternative Investments indicates
that “most investments made since the (financial) crisis
were directed to sectors with a strong link to domestic
consumption and the growing and unleveraged Brazilian
middle class. Sectors such as retail, education, healthcare,
media and financial services represented half of the invested
capital. Also, infrastructure investments, mainly energy
and logistics, amounted to 30 per cent of aggregated
capital invested”.
Chart 6: Sectoral investment analysis post
financial crisis
Retail 17%
Healthcare 9%
Financial services 11%
Energy 18%
Education 5%
Media 10%
Logistics 12%
Others 18%
Key
Source: Ocroma Alternative Investments – Private Equity Update,
Rising Star: Brazilian Private Equity after the crisis, Ricardo Kanitz
and Leonardo L.Ribeiro, 6/2010
Interestingly, however, according to GVcepe research,
almost half of the Private Equity investment vehicles that
were active in Brazil as at 30 June 2008 did not possess a
defined sector focus. Chart 7 provides an analysis of sector
focus for those Private Equity vehicles that, as at that date,
did possess a focus. Of the vehicles with a focus in one
or more sectors, the principle industries were IT and
electronics, agribusiness, telecommunications and energy.
The chart also provides a sector analysis by number of
portfolio companies as at 30 June 2008.

Chart 7: Investment sector focus
By investment vehicle (%)
By portfolio company (%)
IT electronics
Agribusiness
Telecoms
Energy
Industrial products services
Construction real estate
Logistics distribution
Food beverage
Communications media
Financial services
Education
Other
Key
50 10 15 20 25
Source: GVcepe Research Report December 2008 – Overview of the Brazilian Private Equity and Venture Capital industry

Chart 8 provides a sector analysis by value of investment
made by Private Equity players during the period 2005
to 2008.
Chart 8: Sector focus
by value of investment
Food beverage 24%
Industrial prod/serv 20%
Constr/real estate 17%
Retail 8%
Agribusiness 5%
Energy 4%
IT electronics 3%
Communications media 1%
Biotechnology 1%
Other 17%
Key
This seems to tell us is that while the number of deals in
certain industries such as food and beverages, industrial
products and services, and construction is less than in other
industries, the size of individual deals in these sectors is
large. Furthermore, and unsurprisingly, vehicles that work
in venture capital, where deal size is smaller, possess a
greater focus in certain technological sectors (for example,
IT and electronics, telecoms and biotechnology).
Infrastructure, logistics and distribution
Brazil suffers from serious deficiencies in infrastructure
that will require major new investment to resolve. With this
in mind, in 2007, the Government introduced a four year
Accelerated Growth Plan (PAC) which aimed to provide public
and private sector investment in infrastructure as follows:
Table 4: Original PAC projected infrastructure
investment
Sector Focus Value (US$)
Energy
infrastructure
Oil and gas 138 billion
Renewables
Social and urban
infrastructure
Housing 85 billion
Metro and
urban trains
Electrification
Water resources
Logistics
infrastructure
Roads 29 billion
Ports
Airports
Waterways
The merchant
fleet

Expanding on the original PAC, in 2010, PAC 2 has been
confirmed which forecasts the following infrastructure
expenditure in the period 2010-2014:
Table 5: PAC 2 forecast infrastructure investment
Programme/Sector
Expenditure
(2010-2014)
(US$)
Urban infrastructure (“Cidade Melhor”) 32.4 billion
Social infrastructure
(“Comunidade Cidadã”)
13 billion
Housing plan (“Minha Casa,
Minha Vida”)
158 billion
Electrification and Water Resources
(“Agua e Luz para Todos”)
17.4 billion
Transportation 59.4 billion
Energy 264.5 billion
Opportunities therefore abound for investment in a wide
range of infrastructure, including highways, ports, airports,
dams, railroads and stadia − hosting the World Cup in 2014
alone is forecast to require investment of some US$50 billion.
Existing Private Equity infrastructure funds in Brazil tend to
focus on providing medium to long term financing for new
or expanding mid sized infrastructure projects and assets.
The focus is usually on the supply and operational side of the
sector. A number of the opportunities seen offer relatively high
return and low risk characteristics, especially those arising in
the telecommunications and electrical energy sectors.
In some funds, a mezzanine component is structured so as
to match the project or company’s cash flows. This type
of security is particularly well suited to infrastructure
type projects. The mezzanine securities are comparable
to investment in capital given that much of the expected
return depends on how well the company or project
performs. Investors in such securities are protected from
downside risk through the existence of collateral and
financial covenants on the fixed income component.
However, they participate in the upside potential,
thereby reducing the volatility of the expected return.
In 2007, Brazil’s securities regulator, the CVM, issued
regulations governing the specialist Private Equity funds that
invest in infrastructure. These funds are known as Fundos de
Investimento em Participacoes em Infra-Estructura (FIP-IEs).
Under the regulations that were issued, the FIP-IEs are
restricted to investing in the energy, transportation, irrigation
and sanitation sectors. The rules require that each fund should
have a minimum of ten shareholders and that no individual
limited partner should invest more than 20 per cent of a fund’s
total capital. Tax incentives are provided in order to attract
local institutional investors into the infrastructure sector.
In addition to traditional core infrastructure development,
the country is also seeing rapidly increasing demand for
professional logistics services from multinational and
expanding domestic players. This is another area that
should provide serious opportunities for Private Equity
type investment.

Agribusiness
While in a number of ways Brazilian agriculture is considered
to be a world leader (for meat production, soya, sugar,
orange juice, for example), in many segments it is fragmented,
dominated by poor management and held back by inadequate
infrastructure.
Partly as a consequence of this position, many commentators
believe that agricultural land in Brazil offers one of the most
compelling farmland opportunities in the world today.
Inexpensive land compared to other agricultural countries,
high productivity as a consequence of ideal sub-tropical
climatic conditions, consistent rainfall and water supply and
low population density are all factors which fuel Brazilian
agribusiness excitement among investors.
The Deloitte January 2010 LATAM Confidence Survey
suggested that “Over the course of the next five years,
we expect to see a meaningful number of agribusiness
companies going public in Brazil. Agribusiness accounts
for 27 per cent of Brazil’s GDP and there is a huge gap
between the limited number of publicly-traded vehicles
in agribusiness in comparison to agricultural GDP”. This
further illustrates investor appetite for Brazilian agribusiness.
On the production and processing side, consolidation is
well underway and some very large internationally focussed
processors, such as JBS-Friboi have emerged. It is therefore
perhaps on the more fragmented farming side of the industry
that opportunities abound. For Private Equity the dairy
industry, in particular, might be attractive. Typically low
margins due to limited added value mean that this sector
is ripe for consolidation and efficiency gains.
With the world’s consumption for wood continuing to grow
and the use of paper in all of its forms remaining low in most
of the world (apart from Western Europe and North America),
together with buoyant construction and industrial pulp
industries in Brazil, there are serious opportunities for
sustainable reforestation. Ideal climatic conditions, huge
amounts of space and relatively low interest rates all work
together to make this alternative asset class an attractive
and potentially profitable proposition to potential investors.
The disorganised nature of the industry also lends itself to
Private Equity and fund style investment.
Life sciences and biotechnology
In 2008, the Brazilian life sciences and biotechnology
industry generated an estimated US$400 million in revenues
and US$55 million in profits. Despite this, the industry in
Brazil remains relatively young.
Many Brazilian biotech SMEs (small- and medium-sized
entities) focus on agricultural or plant and animal
biotechnology applications, primarily because Brazil is one
of the few emerging countries of the world with a strong
infrastructure in agricultural research. For example, it
is widely respected for the provision of technological
developments that enable the successful industrial scale
production of renewable fuels (see renewable energy
section on pages 34-37).
In health biotechnology, innovative businesses are involved
in the development and provision of health products for
human consumption. In a country of nearly 200 million
people, many of who live in poverty, the Government has
taken legislative and other steps to build upon the country’s
innovative capacity in health and to address the demand for
local health needs, and more broadly, neglected diseases.
The industry in Brazil is therefore now transitioning from one
based on generics to one capable of producing innovative
products. The country is also one of the leading producers of
gene sequencing data in the world and has also acquired a
strong reputation in a number of crucial areas such as stem
cell research and vaccines.
Pele Nova Biotecnologia is a Brazilian company that has
developed a patented product now referred to as BIOCURE.
This product is being used for wound healing applications,
including diabetic ulcers, vascular insufficiency ulcers,
pressure sores, vasculogenic ulcers, surgical and traumatic
wounds. The active ingredient in the material, derived from
Brazilian rubber trees, has been identified to help promote
angiogenesis. Seed capital for this company was raised
from an angel investor and three private equity firms.
The South East of Brazil, encompassing São Paulo and Rio de
Janeiro states, Minas Gerais and Espirito Santo, is home to
72 per cent of all life science companies, which are clustered
in and around universities and science parks. Technology
incubators provide services that facilitate the formation and
growth of new biotech companies.

Brazil has undertaken several strategies to enhance its
innovation base, including the adoption of a National
Innovation Law in 2004, which foresees the establishment
of Technology Transfer Offices across the network of
universities. In addition, in 2007, President Lula signed
a National Policy for Biotechnology. The policy called for
investments of up to US$5 billion over the next decade
and encourages biotechnological applications in human
and animal health, food security, industrial products and
environmental quality.
In terms of financing, for a large number of firms, government
agencies and development banks such as BNDES and FINEP
are a major source of funding for their development and
innovation activities. This is partly because traditionally high
interest rates mean that debt financing is too expensive as
a source of funding.
While there are a number of domestic early stage private
equity and venture capital players in the sector, there
remains a belief that there is a lack of private capital
availability to fund innovative biotech companies.
This is due to:
— The risk averse nature of most Brazilian venture capital
investors. The consequence of the historical investment
environment, in particular, traditionally high interest rates
and the return that could therefore be achieved by
investing in fixed income assets, means that the hurdle
rate for many investors to commit funds to venture
capital is high.
— A lack of knowledge about the sector among the investor
community.
— The protracted nature of the development period.
— Potential legal implications for angel investors who in
some cases can be held liable for the actions of firms that
they invest in.
— The lack of available exit strategies to venture capital
and angel investors, such as the demand for IPOs
in the biotech sector or an established history of
company acquisitions.
Could this therefore result in opportunities for the UK?
The leadership of UK innovation, especially in the life
sciences and biotechnology arena, and the excellence of
Brazilian science in this area, mean that concerted action
aimed at attracting UK biotech companies to Brazil could
have a substantial impact. The UK represents an enviable
innovation model as Brazil seeks to cement its own
innovation system. Exposure to UK practices through the
establishment of joint ventures, investment and joint
research and development (RD) activities would have
tangible and immediate positive effects on the Brazilian
innovation system and on UK stakeholders wishing to
access Brazilian science expertise.
With this in mind, in March 2010, UKTI and the Science and
Innovation team facilitated a trade mission to the UK by a
group of Brazilian venture capital participants, together with
other interested parties. The objectives of this mission were:
— To provide Brazilian venture capital firms direct access
to the UK innovation community in order to:
1) Generate Brazilian investment in UK companies that
are particularly suited to the Brazilian market (for
example, those operational in agro-biotechnology,
biodiversity-based drug discovery, and bio-energy).
2) Establish joint ventures or technology transfer
agreements between the UK and Brazilian start-ups
that have already received investment.
— To forge partnerships between the UK and Brazilian funds
with a view to establishing joint financing, exchange of
best practice, joint technology evaluation and exchange
of information on investment opportunities.
— To introduce Brazilian stakeholders to The UK
Innovation Fund.

The mission programme included:
— Meeting with The Knowledge Transfer Network (KTN)
and receiving presentations from a number of KTN
members in the biosciences arena.
— Visiting Imperial College London and NESTA (National
Endowment for Science, Technology and the Arts),
meeting with Technology Transfer Offices (TTOs)
and spin out companies.
— Meetings with UK venture capital and private
equity funds.
— The signing of a friendship agreement between the
British Venture Capital Association (BVCA) and ABVCAP
(Asociaçäo Brasileira de Private Equity and Venture
Capital), their Brazilian counterpart.
As a result of the mission, investment funds from both
countries are in the process of developing strategic alliances,
either through joint investment or joint-ventures with
investor companies. The next step will be to replicate the
mission to Brazil, having investment funds from the UK
visiting the Brazilian market, spin-out companies, and key
Brazilian stakeholders.
Energy
Brazil’s energy mix is among the cleanest in the world.
Forty-five per cent of all energy comes from renewable
sources. A recent United Nations Environment Programme
(UNEP) has identified that more than 90 per cent of new
investment in Latin America in renewable energy is targeted
to the Brazilian market.
Chart 9 compares Brazil’s energy mix to that of the OECD.
Chart 9: Brazil’s energy mix (%)
Brazil
OECD
Hydropower
Biomass
Natural gas
Oil derivatives
Nuclear
Coal
Key
0 10 20 30 40
Source: Brazilian Energy Balance 2007: Brazil vs World – EPE/MME (for Brazil data). Key World Energy Statistics 2008 – IEA (for OECD data)

Biofuels
Ethanol
Ethanol is the nation’s second most important energy source
overall, after petroleum. The use of biofuels – both ethanol
and biodiesel – is central to the Government’s commitment
to improving the country’s carbon footprint.
There are two ethanol programmes in Brazil. One is the
compulsory blend with gasoline (maintaining the blend
between 20 and 25 per cent). The other is the hydrated
alcohol programme at the pump.
In Brazil, flex-fuel vehicles, which are optimised to run on
any mix of petrol and up to 100 per cent anhydrous ethanol
currently account for around 92 per cent of new light vehicle
sales. The Government uses changes in the petrol blend
at the forecourt as an instrument to regulate the market
according to the supply of ethanol.
Good climatic conditions, land and water availability,
relatively low land costs and established infrastructure
supporting the sector combine to result in the lowest
production costs for ethanol in the world – US$0.75 per
gallon, according to UNICA, the Brazilian Sugarcane
Industry Association.
In terms of productivity, gains in sugarcane ethanol
productivity in Brazil have been significant over recent years.
Between 1975 and 2000, the sugarcane yield per hectare
increased by 33 per cent and the ethanol yield from
sugar rose by 14 per cent. This was primarily due to the
implementation of more modern production techniques
and better crop selection, driven by EMBRAPA, the Brazilian
Agricultural Research Institute.
Table 6 compares ethanol productivity from sugarcane to
that from corn, the dominant source of ethanol in the USA.
Table 6: Ethanol productivity.
Raw
material
Production/
hectare (kg)
Quantity of
product (litre
of ethanol)
Quantity
of ethanol/
hectare
Sugar
cane
85,000 12kg 7.08 litres
Corn 10,000 2.8kg 3.57 litres
Source: Brazilian Ministry of Agriculture
Additionally, it is widely believed that Brazilian sugarcane
uses significantly less energy per set output (up to four or
fives times less) than corn.
Brazilian sugarcane-based ethanol is a more sustainable
fuel than ethanol produced from corn – it performs well
in meeting sustainability criteria such as reducing CO2
emissions, mechanised harvesting and labour conditions.
Furthermore, and crucially, land utilised for sugarcane
plantations are long distances away from the Amazon
rainforest (in contrast to soy farming).
It is true that the global ethanol commodity market does
not yet really exist (as there is no worldwide technical
specification for trading ethanol, there is no futures market
[so hedging isn’t possible] and because infrastructure is still
poor). However, the Brazilian Government and UNICA are
seeking to position the country as a world leader in the global
ethanol commodity market, when it emerges. UNICA predicts
exports of 15.8 billion litres by 2020, compared to 5.1 billion
litres in 2008. Furthermore, many industry commentators
envisage that the European Biofuels directive is likely
to result in an expansion of the European market, which
should provide further opportunities for Brazilian exports.
Significant investment is still required in infrastructure
support for the growing export market as currently most
ethanol is transported by road (up to 90 per cent) or rail from
refinery to port. In 2010 especially, congestion in centre
south ports has resulted in a long line of ships waiting to load
sugar and exports being inadequate to meet world demand.

As a consequence, sugar stockpiles in warehouses have
expanded resulting in higher logistics and storage costs and
it is the centre south’s ability to export, not produce, sugar
that is now becoming the limiting factor for the global sugar
market. However, the anticipated construction of pipelines
is set to have a significant impact towards reducing the cost
of exporting.
Within the Brazilian ethanol industry, where are the main
opportunities for Private Equity investment?
While the main industry players have been the consolidators,
international Private Equity investors have been investors in
Brazilian ethanol. Companhia Nacional de Açúcar e Álcool
(CNAA) was created in 2007 as a joint venture between
Santa Elisa and Global Foods, with funding from the Carlyle/
Riverstone Renewable Energy Infrastructure Fund.
The market remains fragmented and family-run (although
it is undoubtedly consolidating). Many of the mills are small,
with less than 1.5 million tonnes of crushing capacity per
harvest, and utilise inefficient and antiquated equipment.
Cosan, the largest player, has a 15 per cent share. Partly
as a consequence of recent over-expansion in the industry,
there is still much scope for further efficiency gains
through consolidation.
Private Equity investment could be in the sugar mill as
a stand alone business – seeking to make improvements
via the introduction and application of new and innovative
technologies (to increase efficiencies, enhance processes,
storage capabilities, etc).
It could also be in other aspects of the industry. For example,
via land ownership. Here, the possible benefit could be
in making a return from price and volume improvements
(perhaps by the introduction of new technologies), from
improvements in storage (being able to better take advantage
of higher inter-harvest prices) and from enhanced distribution
(benefiting from infrastructure improvements). With land
ownership, the aim would be to partner with local producers
to build facilities close by and to therefore supply sugarcane
to these mills.
Clearly, with any commodity, price fluctuations are a
problem. The answer is to try to stabilise a commodity based
business by trying to complement the business with more
service orientated add ons. For example, Cosan has recently
joined up with Royal Dutch Shell in a joint venture where
it will benefit from Shell’s global logistics distribution
infrastructure. Additionally, Cosan has acquired Exxon’s
retail gas operations in Brazil. Some businesses in the sector
are also focusing on electricity cogeneration as a means of
spreading risk. This enhances stability, as cash flows are
inflation indexed and because energy could, for example,
be sold during the dry season when hydroelectric energy
is trading at a higher price (a note of caution here, however,
in that it is not always possible to benefit from fluctuations
in the spot price).
On the venture capital side, it’s worth noting that second-
generation cellulosic and new seed technologies remain
seriously underfunded in Brazil. In addition, there is a demand
for new drought-resistant sugarcane crop varieties as well
as genetically modified super-hybrids that produce higher
amounts of sucrose. Such developments will require funding.
A good example of new technology harnessing Brazil’s
strength in the biofuels sector is the development, in 2005,
of the world’s first commercially produced award winning
aircraft running solely on biofuels – Embraer’s EMB 202
Ipanema. This is a crop duster aircraft with an engine
powered by alcohol. The objective of Embraer when
launching the aircraft was to give a boost to agricultural
aviation and the crop duster market. As well as being
environmentally friendly, studies indicate that the use
of alcohol can extend the engine maintenance cycle and
result in a potential cost benefit advantage in terms of
operational cost, potency and consumption.
Wind energy
Latin America’s wind power industry is expected to reach
capacity of 46GW by 2025 and Brazil will lead the region
with 31.6GW capacity by this date, according to IHS
Emerging Energy Research. Industry experts believe that
Brazil’s market scale and proactive renewable energy
policies are moving Latin America towards a key tipping
point, from sporadic wind project activity to more sustained
market growth. In December 2009, Brazil’s energy research
corporation, EPE, approved the auction of wind farm licences
with a potential installed capacity of over 10GW. A second
auction is planned for later this year.

Government incentives and local content requirements are
encouraging equipment manufacturers to invest primarily in
manufacturing turbines of 1.5MW and larger. For potential
investors, it is envisaged that one of the largest opportunities
will arise through the wind turbine unit supply chain, given
that annual demand for more than 300 turbine units is
expected from 2011 onwards.
Hydroelectric power
Consistent rainfall and abundant river water systems means
that almost 15 per cent of Brazil’s energy mix comes from
hydroelectricity. An even more surprising statistic is that
more than 80 per cent of electricity demand is met by the
country’s hydroelectricity generation capacity. In Brazil,
small hydroelectric plants (SHPs) receive favourable
treatment because they have perceived social benefits
combined with minimal environmental impact. While large
hydropower plants build dams and reservoirs, SHPs operate
mainly through the rivers natural flow that allows for a large
number of eligible sites with lower construction costs.
SHPs are defined by the Brazilian electricity regulator as
hydroelectric power plants with installed capacity between
1 and 30MW and reservoir area of up to 3 sq kilometres.
Companies seeking to construct a portfolio of SHPs and
utilise process technological improvements provide an
attractive investment opportunity for Private Equity
style investment.
Information, communications, technology (ICT)
Brazil is a global strategic player in the IT and Business
Process Outsourcing (BPO) industry. To assist this, the new
brand image of the industry – BrasilIT+ – aims to stress the
competencies of the software and IT services industry in
Brazil, centralising the promotion of IT exports and the
international expansion of organisations in the sector.
Supplying information technology and solutions to the
financial sector is perhaps the key area where the industry
in Brazil has seen cutting edge development and innovation.
The necessity initially arose as a consequence of
hyperinflation and the constant rule changes of the 1970s
and 1980s that led to the provision of technological solutions
that are worldwide benchmarks in banking automation,
internet banking and funds transfer processes.
The most recent high profile and far-reaching project
involving banking operations was launched in 2009 – the
authorized direct debit (DDA). This is a system that will allow
all payments to be received electronically by the banks that
serve individuals and corporations. The impact of this change
is massive – firstly in terms of saving paper and postage −
monthly school bills, purchases, mortgages and car loans,
among others, leave a paper trail of around two billion
printed banking slips per year. Additionally, DDA will lead to
increased transaction speed and improved security. The
implementation of the system once again confirms Brazil`s
position as a pioneer and a global reference point in
business-related technology solutions for the financial
services sector.
In addition to the strong reputation enjoyed by Brazilian IT
in banking and financial services, the industry is also at the
forefront of telecommunications developments and new
opportunities abound for Brazil as a consequence of
innovation in mobile banking, a niche in which India does
not have the same international standing.
Brazil is also undoubtedly growing in importance as an
offshore IT destination. Many commentators believe that
time zone advantages (particularly with the USA) mean that
Brazil could be an important alternative to India, with the
intensification of globalisation leading to risk diversification.

As explained in Section 5, science parks, in close association
with federal universities, are providing incubator facilities for
the development of new technology and software and much
of this effort is focused on the IT, BPO and telecommunications
sectors. In addition, tax incentives are on offer to businesses
choosing to set up in Brazil, so long as a proportion of
turnover is reinvested into RD activities. Many large
international firms have taken advantage of this and it helps
to make Brazil relatively more attractive when compared
with some of its competitors. (Google, for example, has a
research centre in Brazil.)
While the IT and electronics industry continues to provide a
large proportion of companies in Private Equity portfolios in
Brazil, it has decreased in terms of its relative participation
in the last few years. This is primarily due to the considerable
number of divestitures in this sector from 2005 to 2008.
In respect of Private Equity, investment opportunities for
businesses interested in this sector arise as a result of:
— At the venture capital level, nurturing innovative IT and
telecommunication businesses through the development
and commercialisation of their product.
— Taking advantage of consolidation potential within
the industry.
— Understanding the international growth prospects of
businesses with cutting edge products and services that
realise the potential value of these products and services
to overseas markets.
The recent deal by Apax Partners with TIVIT, the integrated
IT and BPO business, as referred to in Section 4, is a clear
example of a UK Private Equity firm understanding the
potential domestic and international growth prospects of a
leading Brazilian player in this sector. Another success story
in this sector is the acquisition by Google, in 2005, of Akwan
Information Technologies from Fir Capital. Akwan was
an internet search solution provider. The sale of Akwan
generated an annual return of 72.1 per cent, achieving a
multiple of 16 times the invested capital for the period
of 2001 through 2005.
Construction and real estate
According to research carried out by GVcepe, real estate
has become one of the prominent sectors for Private Equity
investment in Brazil in the last few years. Its relative
participation in portfolio companies has risen from 3 per cent
in 2004 to 12 per cent in 2008. The main drivers of this
expansion have been relatively lower interest rates, more
easily available government credit, the growing economy
and the burgeoning middle classes.
Favourable economic conditions have driven a change in
the attitude towards real estate as an asset class in Brazil.
The investor model is therefore evolving from direct
ownership of property to more sophisticated structures,
including tailor made real estate portfolios, residential
(particularly focusing on lower and middle class housing) and
retail funds and Private Equity. One aim of these structures is
often to diversify risk and to transfer risk and responsibilities
to a management company.
Leverage is generally low in the sector. As can be seen
from chart 10, real estate debt currently accounts for just
2 per cent of Brazilian GDP. This compares to an average of
64 per cent for developed markets and a 12 per cent average
figure for the “best emerging economies”. Furthermore, there
is no second mortgage culture and a lack of mortgage backed
securities. Low real estate debt and the lack of sophistication
of mortgage securities therefore points to huge growth
potential in the sector for the future.

Chart 10: Mortgage loans
as a percentage of GDP
Brazil
Turkey
Mexico
Chile
South Africa
Japan
Ireland
Spain
USA
Australia
UK
Key
10 20 30 40 50 60 70 80 900
Source: Brazilian Central Bank
While the housing market still remains highly fragmented
in Brazil, the residential real estate sector has exhibited a
considerable increase in activity in the last few years. This
expansion is partly due to government incentives to increase
the availability of real estate funding, as affordable housing
has traditionally been the least supported in Brazil. It is also
due to unmet demand for home ownership arising from the
growing middle classes, together with increased access to
mortgage financing.
Many real estate companies went public in the 2006/2007
boom times and used the proceeds from IPOs to grab
development land at inflated prices. Then the financial crisis
hit and share prices dropped substantially. Consolidation
within the sector is now widely expected as the larger,
more profitable and efficient players acquire smaller and less
efficient businesses. The Private Equity model is predicted
to be successful here and also with those companies that
didn’t go public, as they are seeking alternative funding for
their activities.
It is also widely believed that the retail sector will experience
substantial growth in the coming years as the middle class
expands and has greater access to credit. The sector is also
underpenetrated and fragmented, creating an opportunity
for well capitalised players to expand through acquisition.
On the commercial property side, traditionally, Brazilian
companies have owned their property, production plant
or distribution centre. Recently, there has been an increase
in companies selling this property to real estate investors,
who then provide the company with some form of guarantee
of operation, for example, via a lease or establishment of
surface rights. Consequently, there are opportunities here
for real estate investment funds.

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