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September 28, 2011 12:52 am
New frontiers: redrawing the map
By Richard Lapper
This article was published in Financial Times: http://www.ft.com/cms/s/0/5063e8ca-e864-11e0-8f05-00144feab49a.html#ixzz1bhim7iRh
Not so long ago, Gica Mesiara spent sleepless nights wondering how on earth Quadro Vivo, her interior design business, would survive. But this year the 37-year-old entrepreneur and pioneer of hanging and other vertical gardens has been besieged by offers of investment from private equity groups. “They have started to sound me out,” says Ms Mesiara, who grew up in a poor suburb of São Paulo but now runs a business that turns over about R$4m ($2.2m) a year and employs more than 100 people.
The rags-to-riches story exemplifies the way increasing numbers of small and medium-sized businesses move out of the informal economy and into the mainstream of Brazilian economic life, helped by economic stability and prosperity linked to the expansion of the country’s consumer markets, and the strength and attractions of its raw material exports.
Both local and international private equity groups have been falling over themselves in an effort to win part of the action, in a trend that is now beginning to spread to other emerging markets in Latin America, the Middle East and Africa. Since returns in developed markets are currently depressed and the outlook for conventional investment opportunities is uncertain, institutional investors are set to increase their allocations to faster-growing, more dynamic developing countries.
Earlier this year, research by the Emerging Markets Private Equity Association (EMPEA) and Coller Capital suggested that allocations to such developing nations may rise from current levels of 11-15 per cent of the total to up to 20 per cent over the next two years.
Last month, the EMPEA reported growth in private equity activity across the emerging markets, with 89 funds raising $22.6bn in the first half of this year, compared with $23.5bn raised in all of 2010. China and India – the focus of private equity emerging market interest in recent years – account for more than half the money raised, but the industry is increasingly prepared to cast its net further afield. For example, so far this year deals have been completed in such unlikely destinations as Madagascar, Honduras, Mongolia and Laos.
“Interest has increased significantly,” says Erica Berthou, corporate partner and member of the private equity group at Debevoise & Plimpton, the New York-based law firm. “It’s expanded from Asia to the Middle East, Brazil, Latin America and Africa.”
Brazil, though, has been at the heart of this expansion, with local investors leading the charge. Since the beginning of the year, four separate billion-dollar-plus funds have been formed, putting the country on track to raise a record-breaking $6bn in private equity commitments in 2011.
BTG Pactual, the Brazilian investment bank, started the ball rolling with a $1.5bn fund raised in June. Gávea, the Rio de Janeiro fund manager in which JP Morgan took a 55 per cent stake earlier this year, followed on with a $1.8bn fund in the same month. Subsequently Vinci Partners raised $1.4bn in July and Patria, a group in which Blackstone of the US owns a 40 per cent stake, has launched a $1.25bn fund. Smaller deals include a $315m effort from Axxon, a Brazil-based specialist in small and medium-sized business that targets investments of between $15m and $50m.
These investors are focusing on three areas. First there are the small privately held businesses such as Gica Mesiara’s Quadro Vivo (which has not taken up the offers of investment). The growth of these businesses has been linked to the expansion of consumption, both among well-off and low-income groups. Although the family-owned businesses – which still dominate sectors such as retail and consumer goods, especially in the more remote north-eastern and centre-west Brazilian states – are cash rich and reluctant to cede control, a substantial number have chosen to do so. For example, Quero-Quero, a Rio Grande do Sul-based retailer, has grown rapidly since Advent International acquired a R$200m ($115.4m), 96 per cent stake in the company in 2008.
The sectors being targeted range from logistics and media to areas such as private education and healthcare services, whose growth has been closely linked to demand from better-off lower income groups. Sometimes the choices can seem surprising. Vinci and Gávea, for example, partnered with a third operator, Kinea, to buy for $300m a 47.2 per cent stake in Unidas, a car rental company.
Second, private equity investors have targeted possible investments in roads, railways, energy installations, ports and other infrastructure. Finally, Brazil’s raw materials base – its oil, gas and mineral resources and its strength as a producer of a range of food products and bio-fuels – has also attracted interest.
The deep-sea oil resources of the pre-salt reserves have been one focus; agriculture has been another. Although restrictions on foreign ownership of land have made the sector difficult for international investors, local players have recently been active. At the beginning of September, for example, Brazil Agronegócio FIP, a private equity fund managed by BRZ Investimentos, one of Brazil’s largest asset-management companies, joined forces with the UK-based investment group Agrifirma to launch a new farmland development company.
BAF will invest R$130m in the new company, whose farmland assets are concentrated in the west of Bahia state at the heart of Brazil’s new north-eastern agricultural frontier known as Mapitoba (an acronym which includes the first two letters of three other states: Maranhão, Piauí and Tocantins).
EMPEA believes that in spite of the growing appetite, “the range of opportunities is more than sufficient to sustain investment from a globally diverse set of investors and deliver generous returns for limited partners”. Even so, individual investment opportunities are being ever more hotly contested by fund managers, and with local investors ever keener to become involved, international players may choose to look elsewhere.
Diversification has certainly been a recent trend, with investments taking place in 54 separate countries in the first six months of the year. One highlight has been growing interest in Africa. In June, Helios Investment Partners, an independent firm set up five years ago by two former executives from TPG Capital, a large US buyout group, closed a $900m Africa fund. Among its first investments are Interswitch, a Nigerian payment processing company, Helios Towers Africa, a telecommunications company, Continental Outdoor, an advertising agency, and the downstreams fuels business in Africa of Shell, the international oil major.