The FINANCIAL — As Brazil’s economy takes important steps toward stabilization after a major boom and a two-year correction, it is becoming attractive to private equity (PE) firms that want to diversify into emerging markets.
The continuing recovery, probusiness reforms, and growth in key industries are combining to create a clear opportunity for PE firms. These key findings are presented by The Boston Consulting Group (BCG) in its report Private Equity Strategies for Brazil’s New Economic Reality, which is being released on July 26.
Brazil’s economy is more mature than those of other emerging markets. About one-third of Latin America’s population lives in Brazil, yet the country attracted nearly half of all PE investments in the region from 2008 through 2015. Compared with developed markets such as the US, there is still significant room for growth. “That combination of factors puts Brazil in the sweet spot for companies willing to invest in emerging economies,” says Heitor Carrera, a BCG partner and coauthor of the report. “Over the next decade, the country will offer a rare opportunity to both global firms that want to add emerging markets to their portfolios and local firms in Brazil that want to step up their investments there.”
Steady Growth and an Increasingly Friendly Business Climate
Most economists predict that, despite some volatility in the first half of 2017, Brazil’s GDP will settle into a period of slower but steadier growth—about 1.8% a year through 2021, which is faster than that of the G7 countries. In addition, Brazil’s government has introduced a series of economic reforms—such as reducing the paperwork required to file some taxes or start a new company—aimed at promoting a more business-friendly environment.
Although the recent economic correction hit some industrial sectors hard, many others—particularly in consumer segments such as food and health—continued to expand at double-digit rates, and that growth will likely continue. These industries are now prime candidates for the kind of value creation strategies that PE firms can apply.
Five Strategies for Adapting and Thriving
Success in Brazil requires a deep understanding of the unique aspects of its PE market. For example, the average deal size in Brazil is smaller than that in many other markets, and even large global firms compete for smaller deals. In addition, IPOs are relatively scarce, and firms are more likely to sell their portfolio companies to strategic, nonfinancial buyers.
Given these factors, five strategies are crucial for PE firms aiming to compete in Brazil:
• Look beyond conventional targets—where competition is stiff—and consider investing in early-stage companies or even launching new companies from scratch.
• Revamp the screening process for a slow-growth environment. Identify small pockets of growth or buy assets from companies in trouble.
• Leave no stone unturned in creating value. Given that overall growth will be tougher in the future, firms will need to focus on profit margins and other approaches.
• Bring industry-specific expertise to the table. In a market where local expertise is critical, firms need to build strong teams that can make the operational improvements needed to create value in their portfolio companies.
• Protect against exchange rate volatility in Brazilian currency, potentially by setting long-term investment periods.
“Brazil has given investors a wild ride over the past decade,” says Carrera, “but as it now enters a period of slower growth, it presents PE firms with both challenges and strong opportunities. Firms that build the right foundation, understand the local market, and adopt a long-term view will set themselves up to take advantage.”