Brazil Buyout Firms’ $9 Billion in ‘Dry Powder’ Ready for Deals

Buyout firms are poised to spend $9 billion in Brazil on everything from infrastructure to oil exploration as the economy recovers from a recession, the nation’s private equity and venture capital association said.

Grupo Santander Brasil and San Francisco-based Paul Capital Partners said they may purchase stakes in companies that will benefit from the country hosting the World Cup in 2014 and Olympics in 2016. Axxon Group in Rio de Janeiro said it is considering firms that supply the oil, health care and media industries. Carlyle Group, the world’s second-largest private equity firm, plans to invest $1.2 billion in Brazil in five years, said a senior associate, Daniel Sterenberg.

“The investment environment is probably the best in 20 years,” Geoffrey David Cleaver, who runs a $500 million private equity infrastructure fund at the Sao Paulo unit of Santander, Spain-based Banco Santander SA, said at an event last week in New York hosted by Abvcap, as the Brazilian association is known. The fund has committed 90 percent of its capital while disbursing about 65 percent, he said.

Latin America’s largest economy is luring investment after policy makers provided 100 billion reais ($55.3 billion) in stimulus and cut the benchmark interest rate five times to a record low of 8.75 percent to pull the country out of a recession.

Investment Rises

Foreign direct investment will jump 74 percent this year to $45 billion, matching the record in 2008, as the country builds houses, subways, railroads, roads, hotels and stadiums for the soccer and Olympic games, the central bank said. Economic growth may accelerate to 7 percent in 2010, Goldman Sachs Group Inc. Chief Economist Jim O’Neill said at a conference in Rio de Janeiro on Feb. 22. That would be the fastest pace since 1986, according to the International Monetary Fund.

“Companies are looking for capital because they see growth coming and don’t want to miss out,” Nick Wollak, who oversees $150 million in private equity for Axxon, said in a telephone interview. “We are now seeing some of the strongest and broadest deal flow pipeline since our fund began in 2001.”

While buyout funds in Brazil raised at least $10 billion by the end of 2008, only 10 percent of that was spent last year, Luiz Eugenio Figueiredo, the president of Abvcap, said in a telephone interview from New York. Investors were reluctant to commit as the global financial crisis choked off growth in the country, he said.

‘Dry Powder’

“We have plenty of dry powder in venture capital and private equity,” Figueiredo, who is also chief operating officer for Sao Paulo-based Rio Bravo Investimentos, run by former central bank President Gustavo Franco.

Target companies are demanding higher prices because they are aware private equity firms are loaded with cash throughout Latin America, said Mark Mobius, who manages $34 billion in emerging market assets at Singapore-based Templeton Asset Management Ltd.

“The word is out that there are considerable amounts of money looking for a home so the sellers tend to ask for high valuations,” Mobius said in an e-mail response to questions after returning from a trip to the region last month.

Valuations of publicly listed companies have also risen, sending the price-to-earnings ratio of stocks in the Bovespa index to 19.3 times reported earnings from 12.06 times a year ago, according to data compiled by Bloomberg.

Capital Group

The pickup in purchases already has begun. Los Angeles- based Capital Group Cos.’ private equity unit bought an undisclosed stake in Grupo Ibmec, which owns colleges in four Brazilian states, for 130 million reais, the university said last month. Cia. Energetica de Sao Paulo, the state-controlled utility known as Cesp, is considering selling a stake to a private equity firm, Relatorio Reservado newsletter reported Feb. 24. A telephone call to Cesp’s press department for comment wasn’t returned.

Pension Funds

New York-based JPMorgan Chase & Co., the second-largest U.S. bank by assets, has been in talks with Arminio Fraga about buying a minority stake in the former Brazilian central banker’s fund company Gavea Investimentos Ltda., according to a person with knowledge of the matter. Darin Oduyoy, a spokesman for JPMorgan, declined to comment. Fraga didn’t return calls seeking comment.

Duncan Littlejohn, who manages $1.6 billion in global private equity funds at Paul Capital in Sao Paulo, said he expects pension funds to step up investment after Rio de Janeiro-based Petroleo Brasileiro SA made the largest oil discovery in the Americas in the last three decades.

Brazil eased restrictions on pension funds last year, increasing the limit on non-fixed income investments to 70 percent from 50 percent of their more than 450 billion reais in assets.

Carlyle, based in Washington, is in preliminary talks to buy two more companies after purchasing a majority stake in tour operator CVC Brasil Operadora e Agencia de Viagens SA, Sterenberg said in a Jan. 7 interview.

Axxon may test the initial public offering market this year with Mills Estruturas e Servicos de Engenharia SA, a Rio de Janeiro-based maker of scaffolding and concrete forms for construction in which it owns a 14 percent stake, Wollak said.

“For both multinational strategic investors and private equity firms, Brazil has become a place where you have to have exposure going forward,” Wollak said.

Markets Last Week

The yield on the government’s zero-coupon bonds due January 2011 rose 20 basis points, or 0.2 percentage point, to 10.49 percent, according to Bloomberg data. Brazil’s real weakened 0.3 percent to 1.8076 per U.S. dollar.

The following is a list of events in Brazil this week:

Event                                 Date
FGV CPI IPC-S                      March 1
PMI Manufacturing                  March 1
Trade Balance- Monthly             March 1
Fipe CPI – Monthly                 March 2
CNI Capacity Utilization           March 3
Industrial Production              March 4
Vehicle Sales                      March 4
IBGE Inflation IPCA                March 5