exame the buyers

7/27/2019 Exame the Buyers

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UP TO THE END OF LAST YEAR,FERNANDO BORGES FROM GOIS hadno more than a supporting role in theBrazilian business scenario. Head of thelocal operation of the American investmentfund Carlyle, Borges commanded a teamof seven people and shared with a bankthe 12th floor of a building at Faria LimaAvenue, the financial heart of So Paulo.

The most important transaction in his

rsum was the successful purchase of aslice of the airliner Gol for 26 milliondollars, in 2003. Eleven months and threechecks later, Borges' situation isdramatically different. In J anuary, hebought the control of the biggest travelagency in the country, CVC. Six months

later, he purchased the health plan manager Qualicorp. Next, he bought the socks andlingerie manufacturer Scalina, owner of the TriFil brand. It is calculated that Borges andCarlyle invested about 2.5 billion reais in the three purchases. It seems too much for justone year, but Borges apparently thinks it is little.


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EXAME found out that he tried to purchase the information company GRV Solutions forabout 2 billion reais - but ended up losing the dispute to Cetip in the beginning ofDecember. Despite the recent defeat, one can say that Borges has categorically leftbehind the condition of supporting role. From his half-floor at Faria Lima, he currentlycontrols companies that together rake in 4.5 billion reais and employ 12,000 employees.

This is more than traditional companies like Alpargatas, Klabin and Lojas Renner.

Funds like Carlyle, specialized in the purchase and sale of entire companies or part ofthem, have once been called capitalists in pure state". Its objective on controlling acompany is one, and only one: to increase its value. Other variables are not important.

There are no emotions at play, like in family-based companies. Or varied pressures fromstockholders with conflicting interests, as in the case of public companies. Or the use ofsectarian and political conveniences, as in state-owned companies. The sudden wave ofpurchases led by Fernando Borges is one of the signs that the power of these personageshas never been so great in Brazil. Like him, the market made up of private equity funds (asthey are known) has moved from supporting role to the lead role of our economy.

According to a study recentlyconcluded by Fundao GetulioVargas, these funds currently have17.8 billion dollars available for thepurchase of Brazilian companies ahistorical record. It is enough money togive the economy a capitalisminjection. During the first nine monthsof the year, a total of 3.8 million dollarswas invested in the country, and thelast quarter was able to keep up thepace. In December, a fund group ledby GIC, from Singapore, bought for 1.8billion dollars an 18-% share in theinvestment bank BTG Pactual. EXAMEfound out that two more relevanttransactions were about to beconcluded. The Advent fund wasconcluding the purchase of half thecapital of the Paranagu Container

Terminal, in Paran, for 750 million

reais. And the Argentinean SouthernCross was negotiating the last details to purchase the cosmetics division of Grupo Bertin,owner of the OX brand, for 500 million reais. (Sought out by EXAME, Bertin denied theinformation.)

What is most impressive, however, is the certainty that this growth curve is far from itspeak. Private equity funds depend on the appetite of foreign investors to make purchases.Its managers raise funds with big global institutions pension funds, for example, and usethe money to buy companies. The promise, which is not always met, is to give largereturns when returning this money to investors.


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In exchange, the funds managers obtain a management fee of 2% per annum and about20% of the profit obtained from the sale of companies. If everything works out, therefore,

the investor ends up having a good return, and the manager, pocketing one-fifth of theprofit, becomes rich. For the wheel to turn, however, there must be foreigners willing toinvest in Brazil for a term that may reach up to ten years. This is exactly what is happening


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today. Brazil is one of the three most attractive markets in the world for investors like us,Urs Wietlisbach, from Switzerland and founder of the Partners Group, one of the biggestprivate equity investors in the world, told EXAME. Together with his partners, Wietlisbachadministers 26 billion dollars and invests 2 to 3 billion dollars every year in funds.

"In addition to investing directly in companies in Latin America, we are in six fundsdedicated to the region, and we want to raise this number to 15 by the end of 2011." ThePartners Group is opening an office in So Paulo to follow up on the performance of itsinvestments closely.

The euphoria of investors like Wietlisbach is causing commotion in Brazil. Never beforehas so much money been raised as nowadays. A year ago, Brazilian managers wastedplenty of time selling the economic virtues of the country when they the donation bag infront of international investors. Today, the panorama is different. The person responsiblefor Advent in Brazil, Patrice Etlin, accompanied this change in real time when he raised itsfund from 1.65 billion dollars, between 2008 and the beginning of 2010. More than 500meetings were held in 14 countries. Up to J anuary 2010, he had obtained only 800 milliondollars, still far from the initial goal of 1.3 billion. This was when everything started tochange: the perception that Brazil had survived the crisis relatively well awakened theappetite of the same investors who had ignored Etlin months before. From J anuary toMarch, Advent had demand to raise another sum in the amount of 2.2 billion dollars.Today, no one needs to sell Brazil any longer, says Etlin, who has 2 billion dollars athand to invest. "Never before has there been so much interest in the country." Accordingto a survey conducted at EXAMEs request by the financial information company Preqin,


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21 funds are being raised by managers interested in investing in Brazil. The amount theyintend to raise is eye-widening: 9.2 billion dollars. Gvea, founded by Armnio Fraga andhis cousin Luiz, intends to conclude in the first quarter of 2011 the raising of the biggestprivate equity fund dedicated exclusively to Brazil, which will have 1.5 to 2 billion dollars.

"TODAY, NO ONE NEEDS TO SELL TOBRAZIL ANY LONGER, SAYS ETLIN, FROMADVENT. "NEVER BEFORE HAS THERE

BEEN SO MUCH FOREIGN INTEREST IN THECOUNTRY"

Until recently, the Brazilian privateequity market was made up of a littleworld dominated by funds like GP,Advent, Gvea and Ptria. Theprofessionals were the same of old andthe rivalries as well - one of the biggestspecialties of Brazilian private equitymanagers is to badmouth thepurchases of others. The current torrent

of foreign money is causing amultiplication of competitors neverbefore seen in the country "today,private equity manager is the professionen vogue in the national financialmarket. This multiplication is dividedinto two aspects. The first is made up ofnational companies that are creatingtheir first funds, in some cases withouttheir managers having any experiencein the venerable art of making money bybuying and selling companies. BTGPactual, of Andr Esteves, is raising 1billion dollars. So is Vinci Partners, ledby Gilberto Sayo, former controller ofPactual. Ita intends to raise half abillion dollars for its new manager,Kinea. Rodolfo Landim, formerpresident of OGX, of Eike Batista, hasplans to raise 2 billion reais to invest inoil and gas companies. And so it goes.

The second aspect is made up of thelarge foreign funds, which today, past


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the years of promises, have decided todisembark in Brazil.

Today, these funds have more than halfa trillion dollars to invest and the wholeworld to choose. With the sudden

economic braking of the rich countries,the developing countries emerge as theobvious option Brazil, as the recentpurchases of Carlyle show, has enteredthis course for good. In September,Blackstone, biggest private equity fundin the world, bought a 40-% share inPtria, for 200 million dollars. "As ofnow, our life changes, since we can domuch bigger business using resourcesfrom global funds from Blackstone",

says Alexandre Saigh, one of Ptriasfounders.

EXAME found out that the new partnershave already made a bid of 500 milliondollars for a share in the capital ofOdebrecht Oil & Gas, but they lost theauction to the sovereign fund Temasek,from Singapore. In October, theAmerican bank J .P. Morgan bought 55%of Gvea, for 270 million dollars. Otherfunds, like General Atlantic, Actis andWarburg Pincus, have decided to openoffices in the country and hire localteams. "We want to buy medium andlarge-sized companies and invest atleast 100 million dollars in eachbusiness", says Alain Belda, responsiblefor Warburg Pincus office in Brazil. Atthe age of 67 years and after a careerspanning 16 years in the American

mining company Alcoa, Belda is one ofthe new faces of the Brazilian market. He hopes to invest 1.5 billion reais in five years.KKR, founded by American magnate Henry Kravis, is the only one out of the global mega-funds that did not make its attack in Brazil. Sought out by EXAME, KKR informed that it is"seeking opportunities and is drawing its strategy for the country.

Historically, sectors like that of food and beverages, real estate and financial services arethe ones that attracted the most private equity investments. The new lot, however, has amuch more encompassing range of targets - health, education, power and consumption

are among those most cited by managers. "We are operating at the limit, says Borges,from Carlyle. "Our team is always evaluating between ten and 12 purchases, not morethan this." In a typical month, a large private equity fund receives about 20 business


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proposals, usually brought by banks hired by companies seeking a partner or a buyer.Advent has a non-remunerated team of 250 people who work as pointers in the hunt forcompanies. They are executives or former bankers who can use their relationshipnetworks to find good targets. In case Advent buys a company brought by one of thepointers, they can make up to 1% of the total amount of the purchase. "They sniff out thebusiness and make the bridge to the companies", says Etlin.

In an economy thirsty for capital like the Brazilian, the arrival of foreign funds is highlywelcome. For medium-sized companies especially those that are not part of the selectclub of the BNDES (Brazilian Development Bank), access to resources is still scarce inBrazil. Borrowing is expensive. To open capital is difficult. Who will the one in need of 200million reais call? Private equity gives capital to those who lack it", says Luiz Fraga, fromGvea, which has relevant investments in 12 companies. The record shows that beingassociated with a fund can be the key for a company to raise its level and distance itselffrom competitors. There are several examples. Diagnsticos da Amrica, of Ptria, in thelaboratory market, and BR Malls, of GP, in the shopping mall sector, are two of them. Inboth cases, the companies no longer have the funds as partners. The entrepreneur Carlos

Wizard Martins, founder of the Mlti group, from the English course network Wizard,intends to follow a similar path. In November, he sold a share of about 15% to Kinea, ofIta, for 200 million reais. "We were sought out by ten funds, he says. The Mlti groupmade five purchases in 2010. The biggest one for 100 million reais. Now, with the newpartner, Martins states that he will dream bigger - with purchases of up to 700 million reais."We can boost our ambition, he says

BEING ASSOCIATED WITH A PRIVATEEQUITY FUND CAN BE THE KEY FOR A

COMPANY TO RAISE ITS LEVEL ANDDISTANCE ITSELF FROM COMPETITORS

Access to capital, however, is only partof the story. In the obsession toincrease the value of companiespurchased, private equity funds usemanagement improvement as one ofthe main points of attack in the words

of a manager, "to transform family-based companies into excellentcompanies" is the key to catapultreturns. A recent case of atransformation of this type occurred inCVC, bought by Carlyle in January.

A remuneration package linked to the performance of stocks in a possible opening ofcapital helped attract a group of executives led by Luiz Fogaa, the new financial vice-president, formerly from Coca-Cola. Cutback in costs and efficiency joined the order of theday: the profit margins went from 5% to 9%. The company sought out new sources of

growth and started opening four stores per week. In J anuary, there were 400. InDecember, there were 580. CVC should open capital in the second half of 2011.


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"THEY ARE PAYING HIGH BECAUSE THEYMUST SHOW THAT THEY ARE MAKING BIG

DEALS IN BRAZIL, SAYS ONE MANAGER.AND THIS IS THE WRONG REASON"

For the veterans of the private equity market - that is, those with over a decade ofexperience in the field, the current moment has dangerous similarities with the euphoria ofthe 90s. At the time, big foreign funds were also the protagonists of a wave of investmentsin local companies. But Brazil set them a trap. The economy did not grow, the fixedexchange skyrocketed, the stock exchange did not prove to be a feasible way out forinvestments. In short, it was a fiasco.

Investments in soccer clubs were the height of the madness in those times. The AmericanHicks Muse became a partner of the Corinthians soccer club in the end of the 90s,


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invested 60 million dollars and promised to build a new stadium for 45,000 fans. The teameven went well, but the investments were disastrous and the partnership ended in 2003(the stadium, as we all know, never left the drawing board). Another cause for trauma inthe 90s was the relationship of banker Daniel Dantas with Brazilian pension funds. DantasOpportunity was a private equity fund manager that united money from pension funds andfrom Citigroup. Both sides ended up disagreeing; the fight to remove Dantas from the

management entered the history books of national capitalism. In view of this combination,the private equity market experienced what was agreed to be called "nuclear winter.Between 2001 and 2005, the level of business was minimal. Traumatized, national andforeign investors did not want to put their money in the hands of funds set up in Brazil.

The faux pas of the 90s reminds of the old maxim of the financial market - it is in the bestof times that the worst deals are made: with sky-high prices, any economic jolt can renderthe obtainment of decent returns difficult. There are more recent examples. In 2007,amidst the euphoria that preceded the burst of the world asset bubble, GP loaned moneyto make the biggest purchase in its history - the purchase of the oil company San Antonio,for 1 billion dollars. Since then, the market has turned, the price of oil has dropped by half

and GP was forced to negotiate the debt. Will it be different this time around? Will thecurrent wave of purchases become a wave of profits in the next decade? These, of course,are the billion-dollar questions.


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It is at least curious to note that, amidstso many purchases and with so muchmoney being raised to buy Braziliancompanies, the three most traditional

funds in the country have adopted aclearly careful stance in 2010. Adventand GP did not make any investmentthis year. Ptria spent only 150 milliondollars in four businesses. We haveseen this film a couple of times, saysSaigh, from Ptria.

With prices at the current level, we must really be cautious." There is a kind of consensusthat the time of bargains has been left behind. Two recent businesses did not proceedbecause the funds deemed the price charged too high. The event organizer, Time for Fun,

was unable to obtain proposals at the desired level and will move on to opening its capital.The same occurred with the health plan operator, Intermdica, probed by several funds inthe second half of the year. The price asked 1.4 billion reais - scared off potential buyersand the business cooled off.


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Private equity managers use a system of multiples to calculate a companys worth. Thecalculation base is the Ebitda, number that measures the cash generation. The lower themultiple, the cheaper the company. Five years ago, it was common to find companiesworth four times their cash generation. That era is no more. The two biggest purchases ofthe year are exactly the ones that attract the most skepticism from the competition. It isestimated that Carlyle has evaluated Qualicorp for over ten times its cash generation. And

the American Apax, which does not yet have an office in Brazil, bought control thetechnology service company Tivit for almost ten times its Ebitda, evaluating the companyat 1 billion dollars. These guys are paying high just to show that they are making big dealsin Brazil", says one competitive manager". And this is the wrong reason."

The purchases of Qualicorp and Tivit, be theyexpensive or cheap, show that the market is

becoming sophisticated. Both companies hadamong their main private equity fund stockholders:Ptria and Votorantim Novos Negcios, in the caseof Tivit, and General Atlantic, in the case ofQualicorp. The fact that they sold the companies tocompetitors shows that there are in the Brazilianmarket funds with distinct objectives and differentlevels of hunger for risk. The local market,however, is still far from the complexity seen inother countries. Although it has grown at a fastpace, the number of private equity funds in operation in Brazil is very small compared, for

instance, to the purchasing fury we have seen for years in China and India. As shown inthe table page 29, the penetration of private equity funds in both countries is much greaterthan in Brazil. It is estimated that over 3,000 funds are being operated in China; here, thenumber does not reach 200. For those who are optimistic, data like this help show thegrowth potential of the local market. "Brazil has many medium-sized family-basedcompanies.

The market is still very fragmented", says Urs Wietlisbach, from Partners Group. For thosewho are pessimistic, foreign funds will quit Brazil as soon as things improve in the richcountries or the moment the local economy hiccups. At 47 years of age and with 16 yearsof experience in the sector, Etlin, from Advent, has a piece of advice for newcomers. "This

is a profession where we learn by doing", he says. And, in the end, you will be coveredwith scars."

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