private equity & venture capital in brazil: state of the industry and opportunities nyc –...

Private Equity & Venture Capital in Brazil: Private Equity & Venture Capital in Brazil: State of the Industry and OpportunitiesState of the Industry and Opportunities

NYC – September 25th, 2006NYC – September 25th, 2006

The Brazilian Private Equity and Venture Capital AssociationThe Brazilian Private Equity and Venture Capital Association

Amsterdam Beijing Chicago Emeryville Hong Kong JohannesburgCambridge Frankfurt

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Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 2EQT-CAP-Apresentacao-25-09-06-PF Copyright © 2006 Monitor Company Group, L.P. — Confidential — SAO

ABVCAPABVCAP

The AssociationThe Association of of the Brazilian PE & VC industrythe Brazilian PE & VC industryWho Are WeWho Are We

Our MissionOur Mission

MembershipMembership

Promote and develop Promote and develop long-term investments in Brazillong-term investments in Brazil

Over 100 membersOver 100 members, including fund managers, , including fund managers, entrepreneurs and service providersentrepreneurs and service providers

Copyright © 2006 by Monitor Company Group, L.P.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means — electronic, mechanical, photocopying, recording, or otherwise — without the permission of Monitor Company Group, L.P.

This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion.


This presentation is an excerpt from a study by the Monitor Group,This presentation is an excerpt from a study by the Monitor Group,

a member institution, a member institution,

hired to assist ABVCAP in its creation of a roadmap for the futurehired to assist ABVCAP in its creation of a roadmap for the future

of the Private Equity and Venture Capital in Brazilof the Private Equity and Venture Capital in Brazil

ABVCAP wishes to thank FINEP and the Brazilian GovernmentABVCAP wishes to thank FINEP and the Brazilian Government

for their support in this initiativefor their support in this initiative


ObjectivesObjectives

Summarize the state of the PE & VC industry in Brazil

Illustrate the attractiveness of its investment opportunities

Present alternatives to viable exits

Discuss key elements of the enabling environment for PE & VC

– Macroeconomics

– Capital Markets developments

– Global standards of Corporate Governance

– Institutional & Regulatory landscape

– Quality of the Human Capital


Brief History of the Brazilian PE & VCBrief History of the Brazilian PE & VC

* Includes only fund managers that existed in 2004Source: Private Equity and Venture Capital in Brazil – 1st Census – FGV / GVcepe; ABVCAP; Monitor Analysis

Over US$ 4BN invested, 400+ deals, during the past 10 years

As of today: 250+ portfolio companies, additional US$ 5BN committed capital

Over US$ 4BN invested, 400+ deals, during the past 10 years

As of today: 250+ portfolio companies, additional US$ 5BN committed capital

19991999 FutureFuture

From 8 fund managers in 1994 to 45 in 2000 *– Real Plan– Privatizations– Dot-coms

Mostly local investment banks, and their international competitors

Followed by:– Global VC/PE funds– BNDES (1996)

Brazil = key market for international investors– Investment peak

Economic slowdown– Global factors:

Internet bubble burst Argentina default

– Local factors: Devaluation (1999) Energy crisis (2001) Elections (2002)

Almost no sizeable PE investments nor exits

International LPs divested too early

Improvements in legislation and corporate governance standards

Renewed interest in PE & VC– By local investors– By entrepreneurs

Several successful IPOs

New vintage of funds– local pension funds LPs

More stable Economy– Falling interest rates– Falling country risk

Full impact of previous institutional changes– Corporate governance– Legal improvements

20042004Mid 90’sMid 90’s


The Brazilian PE & VC Industry in NumbersThe Brazilian PE & VC Industry in Numbers

as a % of GDP (2004) Investments in US$ million

1) Includes 2 mezzanine investmentsNote: Includes data from 57of a total of 65 fund managers with local offices in BrazilSource: Private Equity and Venture Capital in Brazil – 1st Census – FGV / GVcepe; Monitor Analysis

Software& IT

Telecom Retailers

ManufacturingBiotech

Other

Transp /Logistics

Portfolio by Sector (2004)Number of Invested Companies according to

the Stage of Development (2004)

MBO

Seed

Start-up

Expansion1

Later Stage

AcquisitionFinance

BridgeFinance

Turnaround

Brazilian PE & VC has already proved itself in multiple sectors, and shows strong potential for growth

Brazilian PE & VC has already proved itself in multiple sectors, and shows strong potential for growth

6

36

7298

42

5 3 1

35%

16%11%

6% 6% 4%

22%

1.11

0.64 0.570.37

0.14 0.13 0.10 0.04 0.02

UK Canada SouthAfrica

SouthKorea

Argentina India China Brazil Mexico

456379

281 261 256 253

1999 2000 2001 2002 2003 2004


Source: Monitor Analysis

The FundamentalsThe Fundamentals

Enabling EnvironmentEnabling Environment

AttractiveAttractiveInvestmentInvestment

OpportunitiesOpportunities

Viable ExitViable ExitOptionsOptions

Favorable Macroeconomics

DevelopedInstitutional &

RegulatoryLandscape

DevelopedCapital Markets

World-ClassCorporate

GovernanceStandards

QualifiedHuman

Resources


The BasicsThe Basics

Two key strengths of the Brazilian PE & VC equationTwo key strengths of the Brazilian PE & VC equation

Enabling Environment

AttractiveAttractiveInvestmentInvestment


Viable ExitViable ExitOptionsOptions


Attractive Investment OpportunitiesAttractive Investment Opportunities ExamplesExamples

Established Global CompaniesEstablished Global Companies Emerging Global CompaniesEmerging Global Companies

Electric engines Founded in 1961 5 plants and 19

subsidiaries worldwide Revenues: US$ 1.0 BN

Airline Created in 2001 2nd highest profitability

in the world Revenues: US$ 1.1 BN

Automotive (bus) Created in 1949 Plants in 6 countries Revenues: US$ 0.7 BN

Cosmetics Created in 1969 Revenues: US$ 0.9 BN

Aerospace Founded in 1969 Among world’s top 3 in

commercial airplanes Revenues: US$ 3.8 BN

Petrochemicals Consolidation of 6

companies in 2002 LATAM leader Revenues: US$ 4.8 BN

Brazilian track record in creating successful global playersBrazilian track record in creating successful global players

Note: Revenues = Net Revenues for 2005 @ US$ 1 = R$ 2.42


Attractive Investment OpportunitiesAttractive Investment OpportunitiesDiversity of the EconomyDiversity of the Economy

Note: * Constant 2000 US$Source: Science & Technology Ministry; Merrill Lynch; IBGE; Global Entrepreneurship Monitor; IDG; Monitor Analysis

Attractive SectorsAttractive SectorsRecent Regional GDP GrowthRecent Regional GDP Growth

GDP

Growth

2000 - 2003

(%)

GDP (US$ billion*) – logarithmic scale

DF

SE

TOGO

MT

MS

PAMA

AMSC

ES

RSBA

PR

MG RJ

SP

Infra-Structure– Investment gap: US$ 25 – 30 billion

Real Estate– Housing deficit: 7.2 MM houses– Demand will increase with population ageing

IT– “IT investments will increase 15% in Brazil in

2007, reaching US$ 18.6 billion(...)higher growth when compared to China” – IDG

Biotech– Full domain over gene-sequencing technology

Agribusiness– Leading technology for ‘green’ / biomass fuels– Ethanol demand could reach 26 billion liters

until 2010 (63% increase)-4

-2

0

2

4

6

8

10

12

14

0.1 1 10 100 1000


Attractive Investment OpportunitiesAttractive Investment OpportunitiesOther FactorsOther Factors

Elements Description

Source: ABVCAP; Sebrae; Global Entrepreneurship Monitor; CVM; Monitor Analysis

Increasing trend for professional management

– 40 among top 50 Brazilian corporations are professionally managed

– Family ownership still widespread: 73% of 5 million SMEs

Professional Professional Management in Management in Family-Owned Family-Owned

CompaniesCompanies

One of the 7 most entrepreneurial countries (GEM report)

over 15 million entrepreneurs Over 200 incubators – more than 3,000 companies Over 450,000 new companies established yearly

Entrepreneurial Entrepreneurial CultureCulture

Repressed demand in consumer goods LBOs Distressed assets (e.g. Parmalat, Varig) Increased interest by entrepreneurs

Enabling Enabling Environment Environment Unleashes Unleashes


Fragmented Fragmented SectorsSectors

Fragmented sectors are opportunities for consolidation


Increasingly Liquid Exit OptionsIncreasingly Liquid Exit Options

Note: 1) Considers primary and secondary offers separately, even when offered jointly – up to April 2006Source: CVM; PE and VC in Brazil – 1st Census – FGV / GVcepe; Monitor Analysis

Most Common Exit Mechanisms(1999 – 2004)

IPO

Trade-sale

Secondary-sale

BuyBack

Write-off

Number of PE-backed Public Offerings1

Falling interest rates, developed capital markets and strong corporate governance all point towards sustainability of IPOs as a viable option

Falling interest rates, developed capital markets and strong corporate governance all point towards sustainability of IPOs as a viable option

9

12

21

2004 2005 2006

52330

37

215

40

198

45106

183 904

9 56

Quantity Amount (US$ MM)


Recent Successful PE & VC ExitsRecent Successful PE & VC Exits

9%

242%

199%

40%

38%

36%

26%

22%

481%

Construction

Energy

Sector

Airline

IT

Medical Services

E-commerce

Airline

Logistics

Car rental

Time to Exit

2 years

1 year

<1 year

5 years

6 years

9 years

8 years

7 years

8 years

Net Revenues 2005 (US$ million)

273

1,100

90

217

172

202

2,317

70

350

Equatorial

Company

GOL

TOTVS1

DASA

Submarino

Gafisa

TAM

ALL

Localiza

Investment (US$ million)

11

26

16

100

83

78

77

202

49

12%

130%

32%

20%

IT

Logistics

Telecom

IT

4 years

7 years

4 years

6 years

n/a

137

353

n/a

Akwan

Autotrac

Atrium

Microsiga2

n/a

2,5

20,5

7

IPO

sIP

Os

Tra

de-

Sal

eT

rad

e-S

ale

ExamplesExamples

Estimated IRRs in US$

Note: 1) BNDESPar; 2) Buyback; 3) 2004Source: Press Clippings; Company websites; Interviews; Brazilian Capital Markets and Private Equity (R. Freitas, P. Passoni); Monitor Analysis



AttractiveInvestment

Opportunities

Viable ExitOptions

Favorable Macroeconomics

DevelopedInstitutional &

RegulatoryLandscape

DevelopedCapital Markets

World-ClassCorporate

GovernanceStandards

QualifiedHuman

Resources

Brazilian PE & VC industry meets stringent Global StandardsBrazilian PE & VC industry meets stringent Global Standards



Enabling EnvironmentEnabling EnvironmentOverviewOverview

Favorable Favorable MacroeconomicsMacroeconomics

Developed Capital Developed Capital MarketsMarkets

Stable economy de-linked from politics Falling interest rates and country-risk Investment grade expected in 2007 / 2008 Social inclusion of low-income families

Market Characteristics Positive Factors Challenges

Bovespa 116 years old, US$ 581 billion market cap

Futures exchange among world’s top 5 Pension funds increase allocations to

alternative investments Active representation by ABVCAP IPOs attract interest of entrepreneurs

High interest rates hamper LBOs and limit access to debt markets

Growing but still limited funds for PE & VC in Brazil– Still limited exposure by

foreign investors– Low exposure of local

investors to PE & VC model

Although falling, interest rates are still high, limiting investment opportunities

Qualified Human Qualified Human ResourcesResources

Experienced and skilled fund managers Wide availability of qualified managers

and other personnel for portfolio companies

Brazilian labor laws

Source: BACEN; Social Security Ministry; IBGE ; CVM; Interviews with PE / VC specialists; BOVESPA; ANBID; BEST; Monitor Analysis


Enabling EnvironmentEnabling EnvironmentOverviewOverview

World-Class World-Class Corporate Corporate

Governance Governance StandardsStandards

Developed Developed Institutional & Institutional &

Regulatory Regulatory LandscapeLandscape

Source: BACEN; Social Security Ministry; IBGE ; CVM; Interviews with PE / VC specialists; BOVESPA; ANBID; BEST; Monitor Analysis

World-class CG standards are increasingly applied in Brazil– Market driven standards, best practices– Transparency and protection for

minority shareholders– 23 out of 30 recent IPOs adopted most

restrictive levels of CG

Autonomous / independent regulatory agencies

More reliable environment / new legislation– Reduced legal and credit risk– Increased investor protection– “Bankruptcy Law” = safer investments

Arbitration

Tax exemptions for foreign investors

Still pervasive culture of mixing personal and company funds

Majority of public companies still not adopting restrictive CG levels

Complex and slow legal system

Regulation in some sectors – not fully developed – may increase risks

Red tape to set up and shut down companies

Market Characteristics Positive Factors Challenges


Challenges for Growth of the PE & VC Industry in BrazilChallenges for Growth of the PE & VC Industry in Brazil

High interest rates and limited access to debt markets

Limited capital availability

Global Corporate Governance still not widely applied

Complex and slow legal system

Regulation in some sectors not fully developed

Main Challenges Mitigating Factors / Outlook

Falling interest rates, stable economy with little spill-over from politics

Increasing interest by local pension funds ABVCAP roadshows coming of age Ex-ante-partnership, and shareholders’

agreements; top advisors; arbitration Access to arbitration; new bankruptcy Law

protects investors Opportunity to shape the future

Enabling Environment

Closing a Deal and Creating

Value

Exiting Alternatives for exits

Low exposure of PE & VC concepts and models by entrepreneurs

Informality

Creating the ex-ante-partnership Rigorous due diligence and local expertise Availability of capable managers

More developed IPO market



Conclusion: Why Invest in PE & VC in Brazil Now?Conclusion: Why Invest in PE & VC in Brazil Now?

Across diversified sectors and regions Strong entrepreneurial culture


New opportunities New opportunities due to improved due to improved

enabling environmentenabling environment

Significant other Significant other opportunities to opportunities to

create valuecreate value

More developed More developed market for exitsmarket for exits

Wide range of Wide range of opportunities opportunities

availableavailable

IPOs, viable alternative

Falling interest rates should allow LBOs Success of IPOs created awareness around PE & VC Distressed assets represent new opportunities Economic inclusion creates demand for consumer goods

Consolidation of fragmented sectors High growth in some sectors / companies Significant financial leverage with falling interest rates


Brazil offers Brazil offers unique, valuableunique, valuable

PE & VC opportunitiesPE & VC opportunities and, on the back of a and, on the back of a

much-improved investment environmentmuch-improved investment environment, is , is

positioned for positioned for fast growth to thefast growth to the benefit of the benefit of the

better-positioned playersbetter-positioned players


Appendix: HyperlinkAppendix: Hyperlink


Note: *Emerging Markets Bond Index (EMBI+)Source: Central Bank of Brazil; IBGE; Clippings; JP Morgan; Monitor Analysis

Brazil is expected to reach investment grade in 2007 – 2008Brazil is expected to reach investment grade in 2007 – 2008

Real Interest Rate & Country-risk*Real Interest Rate & Country-risk*

Market Estimates

Real interest rate – left-hand scale

% /

yea

r

Bas

is p

oin

ts

1999 devaluation

2002 presidential

election

Despite the presidential election this year, interest rates are expected keep decreasing

Enabling EnvironmentEnabling EnvironmentFavorable MacroeconomicsFavorable Macroeconomics

Country Risk (EMBI Brazil spread of Treasury bonds) –

right-hand scale

0%

5%

10%

15%

20%

25%

30%

35%

40%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006E 2007E 2008E 2009E 2010E

0

200

400

600

800

1,000

1,200

1,400

1,600


Source: Social Security Ministry; CVM; Interviews with Private Equity Players / Stakeholders; BOVESPA; Monitor Analysis

Brazilian institutionals turn to alternative investments due to falling interest ratesBrazilian institutionals turn to alternative investments due to falling interest rates

Other CharacteristicsOther Characteristics

116 yr old Stock Exchange– 342 listed companies – US$ 581 billion market cap

Futures exchange is 5th largest worldwide (BM&F)

Free flows of equity– Brazil has never restricted

dividend flows

Limited access to debt markets– Bank spreads still high– Sovereign crowds out Private

Emerging LPs: Pension FundsEmerging LPs: Pension Funds

Total Assets (US$ billion)Total Assets (US$ billion)

70,7

66,2

60,5

71,5

87,9

122,5

136,3

Pension Fund Assets represent 16% of

Brazilian GDP (2005)

Pension Fund Assets represent 16% of

Brazilian GDP (2005)

Enabling EnvironmentEnabling EnvironmentDeveloped Capital MarketsDeveloped Capital Markets

37.1 44.554.7

76.8 83.816.820.7

26.4

37.2

43.4

4.0

3.7

4.0

4.8

5.23.9

3.7

2.9

2.6

2.6

2000 2001 2002 2003 2004 2005 2006

Fixed Income Equities Real Estate Others


* Amcham is the American Chamber of Commerce in BrazilSource: BOVESPA; CVM; Brazilian Institute for Corporate Governance (IBGC)

Main Corporate Governance AgentsMain Corporate Governance Agents

Stock Stock ExchangeExchange

Stock Stock ExchangeExchange

Brazilian Brazilian Securities & Securities & Exchange Exchange

CommissionCommission

Brazilian Brazilian Securities & Securities & Exchange Exchange

CommissionCommission

Brazilian Brazilian Institute for Institute for Corporate Corporate

GovernanceGovernance

Brazilian Brazilian Institute for Institute for Corporate Corporate

GovernanceGovernance

Established in 1995 by demand from the market

Develops and Recommends CG programs

Advanced regulation for public co’s and PE & VC funds on disclosure and shareholders’ rights

Out of 33 IPOs since 2004, 23 compliant with ‘Novo Mercado’, 6 other with Level 2Out of 33 IPOs since 2004, 23 compliant with ‘Novo Mercado’, 6 other with Level 2

Enabling EnvironmentEnabling EnvironmentWorld-Class Corporate Governance StandardsWorld-Class Corporate Governance Standards

3 levels of world-class

corporate governance

standards (1, 2 and ‘Novo

Mercado’)

Principles of ‘Novo Mercado’Principles of ‘Novo Mercado’

Highest Corporate Governance requirements in BOVESPA

Information disclosure and standards– IFRS or US GAAP

Protection to minority shareholders– 100% tag along– All stocks with voting rights– Minimum free float: 25% of

shares

Incentives for using arbitration


Note: *Except countries considered “low-tax jurisdictions” by Brazilian Tax Authority – usually tax havensSource: ANBID; Bacen; BEST 2006; Brazilian Company for Custody and Liquidity (CBLC); CVM

Legislation for investors fully reviewed (1999 / 2000)– Reduced legal and credit risk for investors– New “Bankruptcy Law” made investments safer

Favorable tax regime* for foreigner investors

Independent Independent InstitutionsInstitutions

Independent Independent InstitutionsInstitutions

Legal SystemLegal SystemLegal SystemLegal System

Financial Market Financial Market StructureStructure

Financial Market Financial Market StructureStructure

Other institutional and legal environment improvements are expected in the near future (e.g. Tax Reform)

Other institutional and legal environment improvements are expected in the near future (e.g. Tax Reform)

Solid and safe financial infrastructure: around 2,500 institutions Electronic payments system – compliance with BIS Brazil follows all 20 recommendations of G30 regarding custody,

settlement, payments system and data security

Capital markets institutions are independent Central Bank and Securities Commission are autonomous Stock and Futures Exchanges are self-regulated

Significant improvements in the past few years established more comprehensive and stable environment for investments

Enabling EnvironmentEnabling EnvironmentDeveloped Institutional & Regulatory LandscapeDeveloped Institutional & Regulatory Landscape


Source: ANBID; Science & Technology Ministry (MCT); IBGC; 1st Brazilian Census of Private Equity and Venture Capital – FGV; Monitor Analysis

Financial Market /Auditor

CEO / Director

Consultant

Entrepreneur

Other

Post-Graduated

Master /MBA / LLM

PHD “… great availability of talented and qualified managers to run businesses”

Brazilian Institute of Corporate Governance has already trained over 1,200 executives

270,000 researchers, including 40,000 PHDs

Brazilian companies invest hundreds of millions of US dollars on innovation every year

>20 years

>15 years

>10 years

>5 years

– PE fund manager

Basis: 233 managers in 65 firms

Non-Graduated

Graduated

Experienced Professionals for PE & VC ManagementExperienced Professionals for PE & VC Management Human CapitalHuman Capitalfor Portfolio Companiesfor Portfolio Companies

Enabling EnvironmentEnabling EnvironmentQualified Human CapitalQualified Human Capital

36%

1%

48%

21%

25%18%

15%

19%13%

58%

8%

23%

4%12%

Fund ManagersExperience

Fund ManagersEducation

% of Funds byExperience of Most

Senior Manager

private equity & venture capital in brazil: state of the industry and opportunities nyc –...

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