Ernst & Young Sees Emerging Focus on and Increasing Opportunities for Private Equity Investment in Brazil

NEW YORK, Sept. 23 /PRNewswire/ -- While many of the largest private equity (PE) firms in the world have had sporadic dealings in Brazil -- the largest economy in South America and one of the fastest growing in the world -- PE firms are now starting to establish a permanent presence as they look to participate in Brazil's future growth.

In Brazil we are starting to see consolidating industries, effecting operational improvements and capitalizing on untapped markets, according to a new report released today by Ernst & Young LLP entitled, Private equity in Brazil: Ready for its moment in the sun, available at: http://www.ey.com/Publication/vwLUAssets/Private_Equity_in_Brazil/$FILE/EY_Private_Equity_in_Brazil.pdf.

"Brazil is increasingly on PE firms' radar screens and consequently activity is intensifying," said Jeff Bunder, Ernst & Young LLP's Americas Private Equity Leader. "Strong economic fundamentals are driving investment activity."

More activity to come

PE firms are taking notice of Brazil's growth and are increasingly active in the country. Established local firms and new entrants alike are raising new funds targeting Brazil. Over the last three years, more than US$5 billion has been committed to funds active in Brazil, and there are currently another 15 funds in the fundraising process seeking an aggregate US$4.9 billion in total commitments.

With significant capital to deploy, firms are looking to make investments across a variety of sectors as they actively engage the business community in a dialogue about succession, industry consolidation and growth capital opportunities available to them by working in partnership with PE.  According to the Emerging Markets Private Equity Association, PE firms have invested more than $1.5 billion in Brazil in the first half of this year, on track to match 2008 and more than a threefold increase over 2009.  

Drivers of growth

Brazil, currently the 10th largest economy in the world and growing, is a direct beneficiary of limited partners' interest in exposure to emerging markets and particularly the BRIC countries. The country's long-term GDP growth rate is projected to average 4.1% through 2040, handily outpacing developed economies such as the United States (projected 2.5%) and the European Union (projected 1.9%). A handful of important dynamics is driving that growth:

Political and economic stability

Brazil emerged from the recent global financial crisis in a much stronger position than many countries considered "more developed" due to its strict monetary policies, an aggressive stimulus package that kept banks lending and encourages consumption and historically low interest rates.

An emerging middle class

Over the last 10 years, nearly 30 million Brazilians have entered the middle class, making Brazil one of the world's fastest growing markets for everything from shampoo to automobiles. Domestic demand is expected to rise 6.3% in 2010 and continue to outpace global aggregates for the foreseeable future. Homeownership is rapidly expanding, thanks to low interest rates and increased access to consumer credit.

Maturing capital markets

Brazil's financial markets have undergone a regulatory transformation in recent years that has emboldened investors and sent the market cap of the country's primary stock exchange, BM&FBovespa, skyrocketing to US$1.1 trillion. Increasing by more than 70% in 2009, 75 companies priced initial public offerings on Brazilian exchanges between 2007 and 2009, raising nearly US$50 billion in aggregate proceeds.

"Private equity has plenty of room for growth in Latin America. The asset class accounts for only 0.03% of GDP. At 0.07% of GDP, Brazil lags other fast-growing countries, such as China and India in terms of PE investment today," said Bunder. "With the Brazilian economy growing at such a rapid pace, we expect this trend to change with an increase in activity by existing players."

PE exit options are increasing amid greater regulatory certainty

While multinationals still remain a popular exit path, Brazil's domestic mergers market now represent a feasible alternative, as cash-rich domestic firms look to consolidate industries and increase market share. Between 2006 and 2009, Brazilian firms spent more than US$148 billion in more than 900 acquisitions of domestic targets.

Brazil's capital markets have matured; initial public offerings are now in many cases an alternative means of exiting an investment. Driven by improvements in corporate governance and increased liquidity, companies have raised more than US$63 billion in BM&FBovespa listings over the last five years, including the largest PE exit in 2009, the public debut of Advent International's Cetip SA. The growing acceptance and competition for cross-border listings provide yet another means of exiting investments that, for all practical purposes, did not exist just a few years ago.

Bunder concludes, "Brazil's rising status on PE investors' lists and increasing prominence in the global arena are a confluence of many factors: favorable demographics, vast natural resources, a stable political climate and significant infrastructure needs, which are combing to drive interest and activity."

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SOURCE Ernst & Young