Brazil Growth Attracts Private Equity

Although many well-known foreign companies, from cosmetics giants L’oreal to car maker Fiat, Spanish telecommunications giant Telefonica and global energy groups such as Shell have been increasing investments in Brazil, there is a less recognized, but growing, foreign investor presence emerging – private equity groups.

Private equity has a long history of buying and selling companies in developed markets but its impact in emerging economies, particularly Latin America, has been negligible.

Private equity firms raise pools of money – known as funds – from investors such as pension funds, banks and insurance companies.

With these funds – the biggest of which can be many billions of dollars in size – private equity groups buy companies and after a few years sell them at a profit. In the U.S. many global household name companies such as Chrysler, Toys R Us and Hilton Hotels are owned by private equity.

In 2010 private equity groups investing in Latin America raised a record US$8.1 billion, more than twice the previous year. Of this capital, 76 percent was invested in Brazil, according to data provider Preqin.

Consistent growth, which the IMF estimates will range between 4.5 to 5 percent through 2011-2014, alongside the increased purchasing power of a burgeoning middle class have done much to tempt foreign private equity investors to Brazilian shores.

In January last year U.S. private equity giant the Carlyle Group bought Latin America’s largest tour operator, the Brazil-based CVC, and in August invested in Scalina, Brazil’s largest manufacturer and retailer of women’s lingerie.

Another U.S. private equity group, Advent International, raised US$1.65 billion to invest in Latin America and owns Frango Assado, the highway restaurant chain. Most recently, the British private equity group 3i announced it was opening an office in Brazil.

Despite this activity, there are clouds on the horizon. The Brazilian Reais (Real) has soared against the dollar and inflation has reached 6.3 percent, some distance ahead of the Brazilian central bank’s 4.5 percent target. In a bid to cool rising inflation, the central bank last month raised interest rates to 11.75 percent. These developments threaten to dampen private equity investment.

“The way the government deals with the inflation and the currency problems could impact private equity deals,” said Carlos Asciutti, an adviser in the São Paulo office of accountant firm Ernst & Young. “Everyone wants to see interest rates falling toward global levels in the long term.”

At a conference organized by the Brazilian private equity association this month, Marcelo di Lorenzo, head of Brazil private equity at 3i, said that because Brazil “is not cheap…macroeconomic conditions are so important to make an investment decision. Inflation or the currency are as important as valuations (when making decisions).”

If inflation and interest rates keep rising and consumer spending slows, these decisions may become increasingly difficult.