Brazilian private equity market still full of lucrative opportunities

26 October 2017 4 min. read

Brazil remains a strong candidate for private equity firm investment, according to a new study from BCG. The country, which is projected to experience steady growth in the coming years, has a relatively mature market with a low level of penetration.

The private equity industry has seen stellar growth over the past decades, with wealth under its management having grown to $3 trillion globally, while the number of firms active in the sector has exploded to more than 4,700.

A new report from The Boston Consulting Group (BCG) considers opportunities for the industry in Brazil. The report is based on the firm’s recent analysis into the Brazilian economy.

Economic boom

Market dynamics

Brazil enjoyed near-explosive growth between 2001 and 2011. The country's economy rose from the world’s 11th to 6th largest, on the back of consumer debt and workforce expansion. Since 2013, however, the country fell into a period of protracted decline, punctuated by a series of political scandals and crises. As it stands, the country has all but run out of the fuel that saw its initial growth spurt, and continues to be hammered by lower global commodity prices. As a result, growth is set to remain relatively modest at 1.8% till 2021.

In terms of growth by industry, a mixed bag was noted, with some industries such as mining and quarrying seeing rapid expansion between 2009 and 2012, at 43.7% CAGR, before crashing to -34.3% CAGR between 2013-2016. Construction has seen a significant drop too, as has transportation during the same period. Financial services and utilities are the only industries to have seen gains during the period. Relatively high levels of inflation across both periods put a further dampener on real growth rates.Spenging in consumer segmentsThe study also considered the different segments of the market that have enjoyed the highest level of growth during the crisis years, from 2013 until 2015, relative to the years before the crisis from 2010 to 2013. Interestingly, while spending in various segments was relatively consistent, gas stations, super markets and pharmacies all enjoyed relatively high and resilient levels of growth. Other areas of the economy saw slowdowns.

Consumers were particularly less keen on durable goods such as consumer electronics, apparel, department stores and furniture and home décor. Within the latter category in particular, spending growth fell from more than 12% CAGR to around 3%. While the economy saw contraction, the report notes that, for a large part, growth in consumer goods spending remained relatively robust during the crisis years.Global PE interest in Brazil

Private equity market potential

According to BCG, the Brazilian PE market has growth potential. The firm notes that as a % of GDP, PE activity represents around 0.31%, substantially below activity in the US of 1.41% and the UK of 1.91%. Competition remains relatively fierce, however, as a range of global players enter the market, attracted by relative maturity and lower levels of penetration.

Median deal sizes in the country also tend to be relatively lower than that of developed markets, with key players investing only comparatively low amounts per deal in the country; in total, around 63% being in the $50 million to $200 million range, compared to 47% for the US in the same period. The large number of deals in the low range, therefore, reflects tighter competition for deals.Investment activity and exists.The research also looked at PE and VC activity in Brazil over the six years, in terms of investments, dry power and other (reinvestments in companies, operating expenses and returns to shareholders).

Total investment, saw an increase even during the down period, hitting $53.9 billion in 2014, before falling slightly to $45.9 billion in 2015 and $41 billion last year. The largest segment by far was investment, followed by dry power.

Value creation has increasingly been derived from revenue growth and margin improvement, at 50% and 33% respectively in 2014, as compared to 2011 when they stood at 45% and 25% of growth respectively. Relatively low gains from leverage were reflected in the relatively high interest rate in the country.

Finally, exit activity has remained relatively steady, even while investment flows have declined considerably – falling by 39% between 2015 and 2016. Exits were predominantly from strategic buyers (45%), followed by IPO (19%).

Commenting on the result, the firm’s Heitor Carrera, a BCG partner and co-author of the report, said, “That combination of factors puts Brazil in the sweet spot for companies willing to invest in emerging economies. Over the next decade, the country will offer a rare opportunity to both global firms that want to add emerging markets to their portfolios and local firms in Brazil that want to step up their investments there.”