Brazilian private equity market still attractive, says BCG

26 October 2017

Brazil remains an ideal target for private equity (PE) firm investment, according to a new study from The Boston Consulting Group (BCG). The emerging economy, which is projected to rebound from a two-year recession with steady growth over the coming years, has a relatively mature PE market with low penetration compared to its Latin American peers.

The global private equity industry has grown rapidly over the past decades. Wealth under its management has swollen to $3 trillion worldwide, while the number of active firms in the private equity industry has rocketed to more than 4,700.

A new report from The Boston Consulting Group (BCG) – based on the firm’s recent in-depth analysis of the Brazilian economy – considers future prospects for private equity in the South American country.

Economic boom

Recession market winners and losers

Brazil enjoyed explosive growth between 2001 and 2011, with its economy rising from the world’s 11th to 6th largest, fueled by consumer debt and workforce expansion. Since 2013, however, the country has suffered a period of economic decline, punctuated by a series of political scandals and crises. Currently, the economic fuel that spurred the country’s wild growth seems to be exhausted: high commodity prices have crashed, demographic shifts which vastly expanded the workforce have tapered off, and household debt has decreased. Economists, however, expect the economy to begin growing again at a modest rate of 1.8% till 2021.

The Brazilian recession has depressed growth in all but two industries: utilities and financial service. Mining, which experienced a stratospheric 44% compound annual growth rate between 2009-2012, has been crushed by low commodity prices, seeing a -34% CAGR from 2013-2016. Construction also was hit by a significant decrease in growth, falling from a rate of 19.7% to 1.6%, while growth in the transportation industry fell from 18.7% to 5.5%. Meanwhile, utilities’ growth rate increased by about 10%, and financial services experienced a growth rate increase of 7%.

Spending in consumer segments

The report also examines which consumer goods segments enjoyed the highest level of growth during the years of recession (2013-2015) compared to the years immediately before (2010 to 2013). While spending in most segments declined (e.g. consumer electronics, apparel, jewelry), spending at gas stations, super markets, pet supply stores and pharmacies all enjoyed relatively high, resilient levels of growth. These rather recession-proof segments maintained good growth, as hard-hit consumers did not cut back on food and drugs for themselves and their animal companions, instead preferring to limit spending on less essential products.

Brazilian consumers spent particularly less money on durable goods such as consumer electronics, apparel, and furniture and home décor. Within the furniture and décor category, spending growth fell precipitously, from more than 12% CAGR to a lowly 3%. While the Brazilian economy obviously contracted between 2013-2015, BCG notes that growth in consumer goods spending still managed to remain relatively robust during recession years.

Global PE interestin Brazil

Brazilian private equity market

According to BCG, the Brazilian PE market has major potential for growth. PE activity represents around 0.31% of GDP in Brazil, substantially lower than the US proportion of 1.41%, and the UK mark of 1.91%. Competition between PE firms in Brazil remains relatively fierce, however, as a substantial amount of global players are entering the country, enticed by relative maturity and lower levels of penetration.

Average PE deal sizes in the country also tend to be smaller than those of developed markets, with firms investing relatively small amounts per deal in the country. From 2006-2015, 63% of Brazilian PE deals were in the $50 million to $200 million range, as opposed to 47% for the US during the same period. Correspondingly, 2.3% of deals in Brazil exceeded $2 billion, compared to 9.7% in the US. According to BCG, the large number of deals in the low range signals tighter competition on a smaller playing field – where even huge firms like Blackstone and The Carlyle Group compete for smaller deals.

Investment activity and exists

The research also looked at PE and VC activity in Brazil over the past six years, in terms of investments, dry powder (highly liquid uninvested assets), and other categories (reinvestments in companies, operating expenses, and returns to shareholders).

Total investment increased even during the recession period, reaching $53.9 billion in 2014, before dipping to $45.9 billion in 2015 and then $41 billion in 2016. The largest segment by a long shot was investment, followed by dry powder.

Value creation in portfolios in Brazil has increasingly been derived from revenue growth and margin improvements, with 50% and 33% of returns, respectively, in 2014; in 2011 returns attributed to revenue growth and margin improvements were a lower 45% and 25%, respectively. Additionally, Brazil’s high interest rates have served to keep leverage in an insignificant position with regard to value creation. 

Lastly, exit activity has remained relatively stable, even while investments have declined considerably – falling by 39% between 2015 and 2016. Exits were primarily effected by strategic buyers (45%), followed by IPOs (19%).

“[A] combination of factors puts Brazil in the sweet spot for companies willing to invest in emerging economies,” concluded report co-author Heitor Carrera, BCG Partner. “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.”

Colony Capital acquires Abraaj's Latin American private equity arm

29 January 2019

The Middle East’s largest private equity firm, Abraaj Group, has sold its private equity business in Latin America to Colony Capital, a US headquartered investment management firm. The deal comes months after Colony Capital already acquired Abraaj’s fund-management businesses in Latin America, as well as in Sub-Saharan Africa, North Africa and Turkey.

Founded 16 years ago by former Arthur Andersen accountant Arif Naqvi, up until the start of 2018 Abraaj Group was one of Middle East’s most illustrious companies, having grown into the region’s most influential emerging-market investor and private equity dealmaker with assets under management of over $13 billion. The investment firm enjoyed a  large global backing – investors, family offices, foundations, sovereign wealth funds and pension funds, including the likes of the World Bank, CDC Group, Proparco Group, Philips and the Bill & Melinda Gates Foundation, the world’s private philanthropic organization. 

In the space of just six months however, the Dubai-based firm’s fortunes took a dramatic turn following allegations that money in the company’s $1 billion health fund had been misused. Reports also surfaced about Abraaj’s fraudulent financial figures. A report released by PwC months later found that the company’s main revenues hadn’t covered its operating costs for years. The firm had structurally borrowed new funds to fill the gaps, and owed creditors over $1 billion. The revelations brought Abraaj under immense pressure, and in June last year the company filed for provisional liquidation in the Cayman Islands, where the firm formally is registered.

Colony Capital acquires Abraaj's Latin American private equity arm

Since then, Abraaj Group has become one of the Middle East’s largest restructuring and bankruptcy cases in history. Several consultancies were brought in to guide the process, including two AlixPartners (which oversaw the separation of the health-fund) and Alvarez & Marsal (to recover funds) – both firms are restructuring specialists and rank among the top consulting firms for turnaround globally, including in Brazil. Meanwhile, Big Four giants Deloitte and PricewaterhouseCoopers (PwC) were appointed by the court to oversee Abraaj’s restructuring and divestments to interested buyers.

Abraaj’s Latin American private equity business

One of the deals which emerged out of Abraaj’s separation was the sale of Abraaj's key funds in Latin America, Africa and Turkey to Colony Capital, a New York headquartered investment manager with over 400 employees across 17 locations globally. Among the funds acquired by Colony Capital were the Abraaj Latin America Fund II, which has assets of $545 million, the Abraaj Turkey Fund I with $526 million, the Abraaj North Africa Fund II with assets of $375 million, and the Abraaj Africa Fund III, which has assets of $990 million. “We’re delighted to have crafted this comprehensive global solution for Abraaj and its stakeholders and sincerely hope that this can enable the process of rebuilding on all sides,” said Colony Capital’s Executive Chairman Tom Barrack in the statement. 

Now, seven months down the line, Colony Capital has made a second swoop for part of Abraaj's business – this time round the US business has acquired the firm’s private equity unit in Latin America. Since establishing in the region in 2006, Abraaj's unit has deployed over $700 million across 22 investments, and currently manages over $500 million of assets. The company focuses on growth equity investments in middle-market companies, with Mexico, Colombia, Peru and Chile the main countries targeted. “The business has established itself as a premier private equity investor across Latin America,” remarked Justin Chang, Managing Director and Global Head of Private Equity for Colony Capital.

As part of the deal, which was supported by liquidators Deloitte and PwC, Abraaj's senior management team in Latin America – Miguel Angel Olea Sisniega, Hector Martinez Fry, Gerardo Mendoza Llanes and Eduardo Cortina Murrieta – will transfer to Colony Capital and continue to lead the operations. “We are confident that our partnership with Colony Capital is the best decision for the company, our investors and for our professional growth,” said Sisniega.

Related: M&A forecasted to slow in unstable Latin America political climate.