Private Equity & Venture Capital in Brazil Roadshow on Infrastructure Projects
EUROPE – November 2008 Sidney Chameh, Vice Chairman ABVCAP
Agenda
I.
ABVCAP
II. Brazilian PE&VC Industry
III. Enabling Environment IV. Investing in Infrastructure
V. Conclusions
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ABVCAP
Who Are We
• The Association of the Brazilian PE & VC industry
Our Mission
• Promote and develop long-term investments in Brazil
Membership
• 130+ including PE & VC managers, LPs, invested companies and service providers
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Brazilian PE & VC Industry
Brief History
Mid 90‟s
1999
2004 45 managers in 2000 *
Future Renewed interest in PE & VC – By local investors – By entrepreneurs Several successful IPOs New vintage of funds – local LPs More stable Economy – Falling interest rates – Falling country risk Positive impact of the institutional changes – Corporate governance – Legal improvements
8 managers in 1994 – Real Plan – Privatizations – Dot-coms Mostly investment banks Followed by: – Global VC/PE funds – BNDES (1996) Brazil = key market for international investors – Investment peak
Economic slowdown – Global factors: Internet bubble burst Argentina default – Local factors: Devaluation (1999) Energy crisis (2001) Elections (2002)
Small investments, no exits Int‟l LPs divested too early Improvements in legislation and corporate governance
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Source: Private Equity and Venture Capital in Brazil – 1st Census – FGV / GVcepe; ABVCAP; Monitor Analysis * Includes only fund managers that existed in 2004
Brazilian PE/VC Industry
Limited Partners
• More than US$ 18 billion of committed capital
General Partners
• 110 + PE/VC firms • More than 1100 professionals (400 partners)
Companies
• 480 portfolio companies • 124 new investments between 2004 and 2008 • 32 IPOs between 2004 and 2008
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Brazil: An Enabling Environment…..
Favorable Macroeconomics
Developed Capital Markets
World-Class Corporate Governance
Attractive Investment Opportunities
Viable Exit Options
Developed Institutional & Regulatory Landscape
Qualified Human Resources
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Source: Monitor Analysis
Enabling Environment…..
Favorable Macroeconomics
Grade Stable economy de-linked from politics Falling interest rates and country-risk Social inclusion of low-income families
Source: BACEN; Social Security Ministry; IBGE ; CVM; Interviews with PE / VC specialists; BOVESPA; ANBID; BEST
Investment
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Brazilian Economy Overview
Improvement in the recent years, today Brazil is stronger and less vulnerable to external crises. • • • • • • • • • GDP grew 5.4% in 2007 and is expected to grow 5% + in 2008; Investment Grade; Inflation down, interest rates falling and the trade surplus; GFCF in 2007 at 17.6% (as % of GDP) and is expected to reach 21% around 2010, resulting in more than R$ 1,500 bi to be invested until 2011; International reserves are increasing and FDI is growing; Still needed adjustment of public accounts; Important legal and tax system reforms under discussion; Advanced capital markets regulations and corporate governance rules; The Federal Program, PAC (Growth Acceleration Plan), which projects to invest more than US$ 250 billion in infrastructure within the next 5 years;
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…..with typical challenges of emerging markets
Internal Debt and Interest Rates
Limited funds for PE & VC
Some companies still reluctant to good Corporate Governance
Labor laws
Slow legal system
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Enabling Environment…..
Developed Capital Markets
Pension Funds Assets (US$ billion)
Pension Funds Assets represents 16% of Brazilian GDP (2005) Alternative Investments mixed within the Equity and Real Estate classes Pension Funds may allocate up to 20% of total assets to alternative investments SPC Regulatory Review
Source: Social Security Ministry; CVM; Interviews; BOVESPA; Monitor Analysis
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Enabling Environment…..
World-Class Corporate Governance
• Stock Exchange • Regulation
• Private Institution
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Enabling Environment…..
World Class CG
„Novo Mercado‟
Stock Exchange Brazilian Securities & Exchange Commission Brazilian Institute for Corporate Governance
3 levels of world-class corporate governance standards (1, 2 and „Novo Mercado‟) Advanced regulation on disclosure and shareholders’ rights = Public Companies and PE & VC Funds
Highest Corporate Governance requirements in BOVESPA Information disclosure and standards – IFRS or US GAAP Protection to minority shareholders – 100% tag along – All stocks with voting rights – Minimum free float: 25% Mandatory use of arbitration
Established in 1995 by demand from the market Develops and Recommends CG programs
Most restrictive levels of CG represents 60% of the Market Cap and Daily Volume
Source: BOVESPA; CVM; Brazilian Institute for Corporate Governance (IBGC)
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Enabling Environment…..
Developed Institutional & Regulatory Landscape
• Independent Institutions • Legal System
• Financial Market Structure
• Coordinated Public and Private Efforts
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Enabling Environment…..
Developed Institutional & Regulatory Landscape
Independent Institutions
Central Bank and Securities Commission are autonomous Stock and Futures Exchanges are listed
Legal System
Legislation for investors fully reviewed (1999 / 2000) – Reduced legal and credit risk for investors – New “Bankruptcy Law” made investments safer
Favorable tax regime* for foreigner investors
Solid and safe financial infrastructure: around 2,500 institutions
Electronic payments system – compliance with BIS Brazil follows all 20 recommendations of G30 regarding custody, settlement, payments system and data security Fostering innovation and industrial development FINEP – Inovar Program BNDES – focused PE/VC department ABDI/MDIC – Productive Development Police (PDP)
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Financial Market Structure
Coordinated Public and Private Efforts
Source: ANBID; Bacen; BEST 2006; Brazilian Company for Custody and Liquidity (CBLC); CVM Note: *Except countries considered tax havens by Brazilian Tax Authority
Enabling Environment…..
Integrated Public and Private Effforts
Productive Development Police (PDP)
Reduce taxes on production investments
PDP (May 2008)
PDE (MEC)
PACTI (MCT)
Increase long term funding at attractive costs
PAC
Foster Innovation
Improve Legal Environment
PNQ(MTE) PROMINP (CNI)
Mais Saúde (MS)
Simplify foreign trade rules
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Enabling Environment…..
PDP Macro Goals
Enhance Fix Investments
INVESTIMENT/GDP
Increase R&D Private Investments
PRIVATE R&D/GDP
2010 Goal: 21% (R$ 620 billion)
Current: 17,6% (R$ 450 billion)
2010 Goal: 0,65% (R$ 18,2 billion)
Current: 0,51% (R$ 11,9 billion)
Expand exports
GLOBAL EXPORT MARKET SHARE
Increase SME‟s Foreign Insertion
Number of SME‟s with foreign sales
2010 Goal: 1,25% (US$ 208,8 billion)
Current: 1,18% (US$ 160,6 billion)
2010 Goal: 13.000 companies
Current: 11.792 companies
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Enabling Environment…..
Qualified
Human Resources
• Experienced and skilled Fund Managers
• Wide availability of qualified Managers and other personnel for Portfolio Companies
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Enabling Environment…..
Qualified Human Resources
Other Entrepreneur PhD >20 yrs >15 yrs
Graduate
Consultant >10 yrs
High Executive Master >5 yrs
Undergrad Financial Mkt / Auditor High School
Source: ANBID; MCT; IBGC; FGV; Monitor Analysis
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Attractive Investment Opportunities
Regional Growth
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SE
Sectors
Infrastructure - US$ 30 billion need Real Estate – Housing Deficit 8 million IT - US$ 19 billion in 2007 – IDG Biotechnology Tourism Telecom Retail Agribusiness
– – – – – Biomass Ethanol - 30 billion liter by 2010 Green Beef Grains Arable land and favorable conditions
12 10 8
GNP (%)
TO MT GO
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MS
MG
4 2 0
PA MA BA AM SC
RS PR RJ DF
ES
SP
-2 -4 0.1 1 10 100 1000
GNP (US$BB*) – logarithmic scale
Source: MCT; Merrill Lynch; IBGE; Global Entrepreneurship Monitor; IDG; Monitor Analysis * US$ constant 2000
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Viable Exit Options
Company Equatorial GOL TOTVS1 Sector Energy Airline IT Medical Services E-commerce Construction Airline Logistics Car rental IT Logistics Telecom IT Net Revenues Investment 2005 (US$ million) (US$ million) Time to Exit 273 1,100 90 217 172 202 2,317 70 350 n/a 137 353 n/a 11 26 16 100 83 78 77 202 49 2 years 1 year <1 year 5 years 6 years 9 years 8 years 7 years 8 years 4 years 7 years 4 years 6 years 32% 20% 12% 9% 130% 40% 38% 36% 26% 22% 242% 199% Estimated IRRs in US$
481%
IPOs
DASA Submarino Gafisa TAM ALL Localiza
Trade-Sale
Akwan Autotrac Atrium Microsiga2
n/a
2,5 20,5 7 20
Source: Press Clippings; Company websites; Interviews; Monitor Analysis; Brazilian Capital Markets and Private Equity (R. Freitas, P. Passoni); Note: 1 BNDESPar; 2) Buyback; 3) 2004 Infrastructure related investment
Infrastructure – Sample of Investing Funds
• ABN Real / R$ 940M / Energy and Water and Sewage • AG Angra / R$ 567M / Infrastructure • Banif & CEF / R$ 400M / Water & Sewage • BRZ / R$ 462M / Logistics
• Darby Stratus / R$ 400M / Infrastructure
• Green Capital / R$ 300M / Infrastructure and Agribusiness • UBS Pactual / R$ 740M / Energy
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Infrastructure – Sample of Investments
• AG Angra / TG Agroindustrial / Biofuel • AG Angra / Nova Agri / Logistic • Axxon / Mills / Real Estate Equipments
• Bradesco / ERSA / Energy (renewable)
• BRZ / Porto de Itapoá / Ports • BRZ / TGCS / Ports • BRZ / TESC – WRC / Ports
• BRZ / POIT Energia / Energy (temporary solutions)
• UBS Pactual / INTESA / Energy (transmission) • UBS Pactual / GERA / Energy (generation) • UBS Pactual / Bons Ventos / Energy (eolic)
• UBS Pactual / TEVISA / Energy (generation)
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Infrastructure – Sample of New Funds
• Manager A / R$ 486M / Renewable Energy • Manager B / R$ 600M / Infrastructure
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Conclusion
Brazil offers
an enabling environment for PE&VC • Favorable Macroeconomics • Developed Capital Markets • World Class Corporate Governance • Developed Institucional & Regulatory Landscape • Qualified Human Resources • In different regions • Across different sectors • Consolidation of fragmented sectors • Distressed assets • Economic inclusion • IPO • Trade Sale • at attractive returns
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with sound investment opportunities
and viable exits
Conclusion: Why Invest in PE & VC in Brazil Now?
Wide range of opportunities available New opportunities due to improved enabling environment Significant other opportunities to create value More developed market for exits
• Across diversified sectors and regions; • Strong entrepreneurial culture;
• Falling interest rates should allow LBOs; • Success of IPOs created awareness around PE & VC; • Distressed assets represent new opportunities; • Economic inclusion creates demand for consumer goods; • Consolidation of fragmented sectors; • High growth in some sectors / companies; • Significant financial leverage with falling interest rates;
• IPO, viable alternative; •Trade Sale
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Why Brazil Now
Brazil offers an enabling environment for
Private Equity & Venture Capital with sound investment opportunities,
and viable and sustainable exits,
for the benefit of better-positioned players.
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Source: Monitor Analysis
Thank You !
Sidney Chameh
Vice Chairman Associação Brasileira de Private Equity & Venture Capital schameh@abvcap.com.br www.abvcap.com.br