Current Page:1 Against the Tide: Brazil’s Private-Equity Market Matures11-03-2009 | Source: IFLR1000 People & Companies in the News Like their foreign counterparts, the recession has forced Brazilian lawyers to adapt to a market with fallen demand for lending and capital markets practices. Yet, as transactional declines epitomise much of last year for corporate lawyers, Brazilian firms see potential where many of their foreign colleagues do not – growth in the country’s private-equity market.
On the heels of Brazil’s initial public offering (IPO) boom in 2006 and 2007 came a subsequent wave of strategic consolidations. As recently as mid-2008, Brazilian lawyers predicted this trend to continue through the coming years as a necessary regrouping of overpopulated domestic industries. But that was before the financial crisis. And now, only a year after the spectacular collapse of Lehman Brothers, many companies face the prospect of fundraising against cautious lenders and public investor bases, a scenario that has shifted the advantage to private-equity investors.
“[Private equity] came to fill the vacuum that was left by the capital markets,” says Alexandre Bertoldi, managing partner of the Brazilian firm Pinheiro Neto. Bertoldi argues that the high number of Brazilian companies who had planned IPOs before the economic crisis set the stage for the current upswing in private-equity investments.
With companies developing themselves to the public offering level, corporate visibility improved to standards comfortable for private funds. “The funds are coming to Brazil with much higher expectations in terms of corporate governance ... it’s a much more hands-on approach than they used to have in the past,” says Bertoldi.
Observers trace the recent uptick in private-equity transactions to early 2009, following the typically dormant business period in Brazil surrounding carnival. Active sectors since the beginning of the year include real-estate, infrastructure, food service, and, most recently, agribusiness.
Brazilian agribusiness has driven a large part of foreign private equity interests this year, capitalising on fragmented ethanol and forestry markets specifically. “Private equity will be a motor behind consolidation of companies and markets,” says José Setti Diaz, a partner with Demarest e Almeida’s corporate group. “I think this certainly is an effect of the world crisis last year.”
Renewed interest in Brazilian assets has been hindered, however, as the country’s deflated capital markets have made the valuation of targets an increasingly difficult task. Because of this, proposed deals have faced the hurdle of extended timelines similar to those seen in elsewhere in distressed M&A. “Owners had to adjust to the new reality,” says Pinheiro Neto’s Bertoldi. “They were holding on to figures that were pre-crisis. At first that was a psychological barrier for them.”
Though some domestic funds have expanded their presence in Latin America and the Caribbean in recent years, their development is seen as holding a more laggard pace in the face of international competition. “The domestic [private equity] firms are certainly benefited by the economic conditions of Brazil. They are settled here, and so they understand the market and what is going on,” says Demarest’s Diaz. “That puts them in an advantaged position to foreign players. But we’ve seen a lot of caution from their end, especially since the year’s end.”
The resurgence of private-equity activity could prove a bellwether for the return of capital markets activity in Brazil. After digesting cheap investments through the recession, a host of planned IPOs for portfolio companies would not be unexpected. This scenario is further encouraged by the Novo Mercado, Brazil’s newly graduated trading platform that combined the country’s commodity and futures exchange with the São Paulo stock exchange in 2008.
Because of the market shift, Brazilian M&A departments have been forced to display their versatility in recent months. While many of their American and British counterparts were forced to rebrand themselves as restructuring lawyers during the recession, some Brazilian M&A lawyers faced a similar transition into private-equity work. This transition, however, doesn’t include fund formation work, which lawyers predict will not be in demand from local firms for some time.
However the Brazilian market matures, observers say that the recent past has cemented private equity’s prominence in the overall corporate agenda of law firms in the country. “I think what is permanent is the continued growth of private-equity deals in Brazil,” says Demarest’s Diaz. “However, I think that the strategic players will come back at a certain point when things settle down. They will come back. Private-equity firms are buying cheap and the strategic players will buy from them at a high in the future.”
Pinheiro Neto’s Bertoldi sees a similar road to recovery for the country’s corporate and legal communities. “Brazil, in the past, has been on the brink of becoming a giant with a stable economy ... and then, at least in the past 20 years, some external factor would come and bring us back to ground zero,” he says.
“Now there is a general mood of confidence that this situation is going to stay for quite a few years in the future because things seem so right here. I think that the firms are prepared to grow for the next five or six years.”
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