Brazilian Private Equity: Trouble Ahead? – September 2015

by Simon Li

  • 16 Sep 2015
  • PE

From the late 1990s to the early 2000s, Brazil surfaced as a leader among the emerging market economies. Around the turn of the millennium, several years of improved macroeconomic data –both domestically and abroad – coupled with political stability allowed Brazil’s private equity market to develop rapidly. According to Preqin’s Fund Manager Profiles database, there are currently 209 private equity firms that list Brazil at least as part of their wider geographic focus, of which 67 are solely focused on investing in the country. Only one of these solely Brazil-focused firms is located outside the country; SLB Group, a timber-focused private equity firm, is based in France. As shown in the table below, the majority of firms that consider investing in Brazil are located in Brazil; however, private equity firms based in the US have raised significantly more capital in the last 10 years.

As commodities prices rose in the early 2000s, Brazil’s resource-driven economy benefitted from China’s rapid economic growth and insatiable demand for raw materials. One of the largest firms in terms of capital raised over the past decade focuses its investments solely on the energy and oil & gas sectors, with Modal Private Equity having collected over $1.5bn. In fact, among the firms that have raised the most capital solely focused on Brazil in the last 10 years, many have a preference for investing in energy, natural resources and agriculture.

The financial crisis in 2007 and the global recession that followed created an air of pessimism over the developed markets of the world, driving investment to the emerging markets. The macroeconomic environment that propelled Brazil’s private equity industry to its peak in 2011 has since suffered; Brazil’s GDP shrank 1.9% in Q2 2015, marking the fifth straight period of contraction. This has been reflected in private equity fundraising, with funds raised focused solely on Brazil in 2015 YTD accounting for only $400mn. This is set to be lowest amount raised for private equity investments in Brazil in over a decade. Despite the economic troubles, Carlyle Group closed their second Brazil-focused fund, Carlyle Brazil Fund II, in April this year, with a final size of BRL 700mn. The fund will follow the same strategy as the previous fund in the series, investing in a number of sectors, including consumer products, services and infrastructure.

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