Brazil’s Maturing Private Markets Attract U.S. Investment Firms
Brazil’s private-capital industry continues to mature and is attracting U.S. asset managers looking to expand in new regions, as investment risks increase in other markets such as China.
Brazil’s private-capital industry continues to mature and is attracting U.S. asset managers looking to expand in new regions, as investment risks increase in other markets such as China.
Publicly traded U.S. firm Ares Management, which oversees about $395 billion mostly in private credit operations, recently formed a partnership with Brazilian private-equity manager Vinci Partners that involves marketing new funds offered by both firms. As part of the deal, Ares invested $100 million in Rio de Janeiro-based Vinci.
“We’ve known the Vinci team for over a decade and are excited to collaborate on distribution, product development and other business opportunities in Brazil and across Latin America,” Michael Arougheti, Ares chief executive, said during an earnings call with analysts. “We believe that the Latin American markets are in the very early stages of shifting capital into the private markets, particularly within private credit.”
In another deal, Claure Group, the investment firm of former SoftBank Group senior executive Marcelo Claure, acquired a stake in eB Capital, a private-equity firm in São Paulo, the firms said last month. Claure is joining eB Capital as vice chairman and managing partner. He is also technology-driven apparel supplier Shein Group’s Latin America chairman and executive chairman of Bicycle Capital, a recently established growth investment firm focused on the region.
International investor interest in Brazil, Latin America’s largest economy, has varied in recent decades as the country went through economic growth and recessionary cycles and had governments of different political leanings while weathering corruption scandals. Many offshore investors have retreated from the country in recent years, leading to a shortage of capital that increased potential returns for those who stayed, said Ricardo Kanitz, a managing partner at Brazilian private-markets firm Spectra Investments.
As of last December, Brazil’s private-investment funds raised from 1994 to 2022 generated an average profit of 2.2 times invested capital, including from unrealized investments, and produced a 12.7% mean net internal rate of return, according to a study from Spectra and the Insper Institute of Education and Research, a São Paulo university.
The study, published in August, showed private-equity and venture-capital funds combined had paid out an average of 0.84 times invested capital to their limited-partner investors as of last December.
The Spectra-Insper study was done in collaboration with the Brazilian Private Equity and Venture Capital Association.
The results show that the entire Brazilian private-capital industry has already returned to investors nearly the same amount of money it called out from them so far, a sign of its positive evolution, Kanitz said.
“It shows that the industry is maturing,” he said.
Brazilian fund managers also point to a proliferation of credit and special-situations fund managers in recent years as another sign of maturity, along with an expanding secondary market for private fund stakes. They also note investment interest from wealthy local families and individuals who embraced alternative strategies during years of low interest rates.
Brazil continues to pose risks and present potential pitfalls for investors, particularly those who are unfamiliar with the local market, said Karyn Koiffman, a partner with the Akerman law firm who works in its mergers and acquisitions and private-equity practices. Koiffman, who also specializes in Latin America, cited government red tape, the complicated legal system and costly tax policies in the country as examples.
“Bureaucracy can make it difficult to do business in Brazil,” she said.
But she pointed to some encouraging developments, such as tax changes pending approval by Brazil’s National Congress. “I think everybody was waiting for that,” she said.
The idiosyncrasies of Brazil’s investment landscape often compel international asset managers looking to expand into the country to partner with a local firm, as Ares has, fund managers said.
Fluctuating currency values present another hindrance that plagues investment in Brazil. The real lost more than twice its value against the dollar in the past decade, undermining local asset values.
As a result, the performance of private-equity funds in Brazil over the past decade declines markedly when measured in dollars, with the proportion of funds that produced losses rising to 37% in dollar terms, versus 22% with the real as the basis for measurement, according to the Spectra-Insper study.
“Brazil’s currency depreciation scared international investors,” said Andrea Minardi, a senior research fellow and professor of corporate finance at Insper.
But the opportunity to buy businesses at bargain prices and expand them at a faster rate than overall economic growth can help private-equity firms overcome potential currency concerns, Minardi said. And she said opportunities abound.
“There are a lot of overlooked companies,” she said.
Write to Luis Garcia at luis.garcia@wsj.com
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Business NewsSpecial ReportBrazil’s Maturing Private Markets Attract U.S. Investment Firms
First Published:20 Nov 2023, 05:48 PM IST
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