Research

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Brazilians have a saying: “Brazil is the country of the future—and always will be.” To what extent is this adage true of the country’s private capital industry? In light of a tumultuous few years defined by economic volatility and political scandal, are fund managers in Brazil in a position to fully realize the market’s potential? With Brazil now on a clear trajectory of economic recovery and improving capital market conditions, this EMPEA Brief examines how key developments in Latin America’s largest market are contributing to the evolution of its private investment landscape. Fund managers and institutional investors considering Brazil’s prospects may find that the recent crisis has begun to promote positive changes in the country’s private capital industry and that current conditions provide ample opportunity for investment.

In Summary

• In spite of its recent economic recession and the Lava Jato scandal, Brazil remains an attractive strategic market that is too large for investors with global mandates to ignore. A country like Brazil that has historically been prone to economic peaks and troughs demands sustained commitment on the part of both local and international investors in order to capture value in down periods.
• Capital raised for Brazil-focused private capital vehicles bloomed early in the decade, but has fallen off at a time when deal pricing looks attractive by global standards. While some local managers who raised capital during the last boom will not raise new funds, those who remain report ample opportunities in the country, in part stemming from the prevalence of family-owned businesses, high industry fragmentation and relatively low productivity. Recent deal activity has been concentrated in recession-resilient sectors such as health care and education, as well as new verticals in technology and consumer services.
• While Brazilian pensions have proven less active in private capital since the recession as they shore up their balance sheets, the current low-interest rate environment will likely draw greater amounts of local capital to alternative investments in the coming years. Moreover, lessons learned during the crisis will encourage local institutional investors to align with international LP standards by moving away from involvement in investment committees and improving their fund selection processes. These changes can help promote a more sustainable industry moving forward.
• Equity capital markets in Brazil experienced a revival in 2017, and GPs took advantage through listings that have generated much-needed liquidity for their investors. However, the fickle nature of these windows suggests that fund managers must be able to execute their value creation plans quickly in order to be ready to exit at the right moment. As a result, GPs investing at the larger end of the market may increasingly favor investment targets that need less transformation.
• Despite continued political uncertainty, the Lava Jato investigations and the fallout for Brazil’s political classes and leading corporations have led to a realignment toward
  more pragmatic policy initiatives in the country. While many proposed reforms will face an uphill battle, local observers doubt that there will be any substantial shift away from this new orientation following the October 2018 elections.