Challenges for Successful Private Equity Investments in Brazil

SEPT, 2009

By Zack Henry & Eric Saucedo 

Private EquitySomeone forgot to tell Brazil that we’re in the middle of the worst global recession in history.

Brazil is quickly becoming a political and economic leader in Latin America and the world. As with the rest of the global economy, Brazil entered into a recessionary period in 2009, but economic data that have been emerging from the Instituto Brasileiro de Geografia e Estatística (“IBGE”) increasingly point to a stabilization in the economy, further suggesting that the country has perhaps been less impacted than other markets in this global recession. After the 4.4% quarter-on-quarter decline in 4Q08 and a subsequent 3.5% decline in 1Q09, the country’s GDP reached US$417.8 billion at 2Q09, up 5.2% from the prior quarter, and projected GDP growth for the second half of 2009 is running at about 4.0% or even higher.

Many economists point to Brazil’s changing trade patterns as an important shield from the global recession as this year, for the first time, China overtook the United States to become Brazil’s single biggest trading partner. In addition, as copper and oil prices have remained relatively strong, Brazil’s commodity-based economy continues to demonstrate strong expansionary growth, and consumer spending, up 2.1% in 2Q09, represented the 23rd consecutive quarter of growth. Any PhD in economics can tell you, in technical terms, that this is ginormous.

All this good news obviously gets recognized in the markets. While the Brazilian Bovespa was down over 45.0% for 2008, the leading Brazilian index is up approximately 66.7% YTD and up 15.6% for 3Q09 alone, significantly outperforming its American counterpart, the DJIA (see Figure 2). Likewise, sovereign bond spreads similarly demonstrate optimism in Brazil, versus perhaps more pessimistic views towards countries like Argentina and Venezuela.

And as if things weren’t good enough, Brazil is a heavy favorite in the 2010 World Cup in South Africa, it will host the 2014 World Cup, and it just became the first South American country ever to host the Olympic Games, as they are now planning to bring the ultimate sporting event and the global audience to Rio de Janeiro in 2016.
You could say that things are clicking in Brazil. Muito bom indeed.

 

Private Equity in Brazil

With such favorable economic conditions, the buzz in Brazil again starts to converge on the topic of private equity. Like its fellow BRIC countries India and China, Brazil maintains some of the same arguments for the “perfect market environment for private equity.” Hundreds -– if not thousands –- of bankers&rsq.....




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