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Private Equity Venture Capital Guide

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					The World Bank = The International Monetary Fund = The Brookings Institution



THE ROLE OF PRIVATE EQUITY IN
THE DEVELOPMENT OF DOMESTIC
      CAPITAL MARKETS
5th Annual Financial Markets and Development Conference



                           Álvaro Gonçalves
                      Washington, DC = April, 2003
                        Agenda

• Introduction
  – The 'recent' start of Private Equity (PE) in Brazil
• PE in the capital markets ecosystem
  – An evolutionary approach!
• The new investment environment in Brazil
  – Significant achievements; still room for improvement
• Closing remarks: time to invest!



                                                           2
          Introduction

the 'recent' start of PE in Brazil




                                     3
                 Introduction:
      1) PE is a recent practice in Brazil
• First fund in 1993; wave of fund raising in 97/98
• 300+ portfolio companies (including early stage)
• Worldwide crises after year 2000 restricted exit
  alternatives; initial realizations only in 2002/03
• International PE firms (mainly banks) have
  ridden the downward cycle: 1998-2002
• Regional funds hurt by the national differences:
  difficult monitoring and market timing on a
  regional basis.

                                                       4
     Introduction:
2) Fund raising pattern




                          5
     Introduction:
3) Investment activity




                         6
      A sample of solid portfolio companies
     (despite difficult exit conditions since the year 2000)

•   Cardsystem; Diagnósticos da América; UOL
•   Dixie-Toga; Telemar; Submarino; IT-Mídia
•   Multicanal/NET*; Suape Têxtil; Drogasil*
•   Editora Peixes; Optiglobe; Casa Cor; Chronos
•   Sé Supermercados*; Jornal Lance!*; Camil
•   Gafisa; Método; Odontoprev; Siciliano; Mr Clean
•   Santos-Brasil; América Latina Logística
•   Spring Wireless; Allelyx; Condominio; Microsiga
    * - PE already divested.
                                                               7
PE in the capital markets ecosystem:

     an evolutionary approach!




                                       8
The ecosystem: segments can only achieve
 full performance if all pieces are installed

                                                                                                   PIPE*
                                                                                                 (liquidity)


                                                                        Mezzanine


                                                                           Private Equity


                                           Venture Capital


            Seed
            Capital
                                                                                                   Public Markets;
                                                  Development/              Pre-market stage       ownership maturity;
                Start up                          Expansion                                        competitiveness



                                                             Corporate Development / Evolution
 * Private Investment in Public Equities



                                                                                                                         9
The new investment environment in Brazil

 significant achievements; still room for
               improvement




                                            10
      Recent measures: a silent reform

• New corporate law: 2001
  – Stronger minority shareholder rights
• Novo Mercado - BOVESPA: 2001
  – New listing segment with requisites of governance
    practices; arbitrage; tag along rights; etc.
• New regulation for Pension Funds: 2001
  – Transparency; consistent asset segmentation
  – Carteira de Participações: the alternative assets class



                                                         11
 Recent measures: a silent reform (cont'd)

• CVM: upgrading the Brazilian SEC
  – Organizational improvements: shorter decision
    process from 2000 on
  – Independence: 2002 (officers with 5-year mandates)
  – Release of the corporate governance guide: 2002
  – Broad revision of funds regulation (updating;
    compatibility among classes): 2002/2003
  – Fundo de Participações: regulatory conditions for
    installing the proper PE segments (Venture Capital,
    PE, Mezzanine, PIPE, Fund of Funds): 2003; under
    public hearing since January.
                                                      12
           Developing the PE cluster

• The local PE community is getting better organized
  – Brazilian VC association founded in 2000
  – LAVCA: the Latin American VC association was launched
    in 2002 to integrate players and experiences
  – Hearing process of the new PE regulation: 40+
    practitioners involved; pension funds, banks and law
    firms: hundreds of suggestions; practice dissemination!
  – Corporate Venture also playing its role: Votorantim
    Ventures, Promon Ventures, Intel Capital, Eastman
  – CEPE-FGV: new center of PE/VC studies inaugurated in
    2003 - research and academic support!
                                                      13
                    Pending issues

• Capital markets taxation
  – Taxation on equities' capital gains: 20% (both private
    and public equities; same for fixed income)
• Pension funds performance disclosure
  – Similar discussion of major markets: "how to measure
    interim PE performance ?"
  – Cultural drive:
     • Long term allocations V short term interest rates




                                                           14
              Pending issues (cont'd)

• Macro unbalances; interest rates (25+% p.a.!)
  – Social security system reform under discussion (main
    driver of government deficits)
  – Recent Congress vote paved the way for Central
    Bank independence and other important measures
  – Rising inflation still a threat
  – Restructuring of strategic sectors require intense
    capital allocation
     • Airlines; electricity; other infrastructure




                                                      15
       Closing remarks: time to invest!

• Installation of the capital markets ecosystem is
  under way in Brazil!
• Achievements and lessons learned to be better
  explored, disseminated and consolidated!
• Private Equity roots already strong in Brazil; delay
  in exits will be proven in line with LPs' interest!
• However, establishing PE track record in
  emerging markets is not an obvious game
    Good practices / Long term commitment / Intense
    monitoring / Local team / International connection.
                                                          16
Stratus Investimentos is an independent
  Private Equity / Venture Capital firm,
   specialized in investments in Brazil


          www.stratusbr.com
           +55-11-3044-4177
            São Paulo (SP)



                                           17
The World Bank = The International Monetary Fund = The Brookings Institution



THE ROLE OF PRIVATE EQUITY IN
THE DEVELOPMENT OF DOMESTIC
      CAPITAL MARKETS
5th Annual Financial Markets and Development Conference



                           Álvaro Gonçalves
                      Washington, DC = April, 2003

				
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