While analysts are describing Private Equity as a victim of private equity credit crunch, the Ernst & Young (E & Y) published recently an optimistic assessments about the prospects for the sector since the crisis began.
Brazil, China and India will get more attention
Less affected by the global nancial crisis and rebounding faster than the developed world, emerging markets are viewed by many as increasingly attractive investment targets. We’ve pro led three of the largest, fastest-growing markets — China, Brazil and India — ranked the rst, second and third most attractive emerging markets among PE investors in a recent survey by Coller Capital.
With M&A activity in these markets up dramatically in the last decade, PE is increasing its investments.
Brazil’s economy could expand by 5% to 7% in 2010, with household spending expected to rise to nearly 4% and industrial output to 8%, while in ation should remain below 5%. Brazil’s highly regulated banking industry, with its relatively low leverage, was largely shielded from the nancial meltdown. Public debt is expected to fall from 44% of gross domestic product (GDP) in 2009 to 43% in 2010 and 41% in 2011. Currently PE acquisitions by target country: 2000–2009 all three US rating agencies granted Brazil an investment grade rating on its debt.
Foreign direct investment in Brazil fell more than 40% last year, to $26 billion, while the estimated value of announced PE transactions declined more precipitously, from $1.8 billion in 2008 to $722 million last year. However, Brazil’s government
expects 2010 in ows to equal the 2008 record of $45 billion, and PE investments are expected to mirror this trend.
The top PE investments in 2009
The top three PE investments in 2009 were Carlyle’s $250 million acquisition of CVC Brasil Operadora e Agencia de Viagens, a leading travel agency, and Advent International’s purchase of CETIP, Latin America’s largest asset clearing house, and Pitagoras, a professional services firm, for $171 million and $142 million, respectively. There were three notable exits last year: Great Hill Partners’ sale of online publisher BuscaPe.com for $342 million, Linzor Capital Partners’ sale of Cinemark Brasil for an undisclosed amount and the IPO of nancial services rm CETIP, which raised $450 million just ve months after Advent International purchased a 30% stake for $171 million.
What to expect in 2010
Transactions should increase this year, as several large firms have announced their intent to make more investments in Brazil. Grupo Santander Brazil and San Francisco-based Paul Capital Partners have announced they are looking to make investments in companies that will benefit from the World Cup and Olympics. Axxon Group of Rio de Janiero is considering oil services, health care and media investments, while the Carlyle Group has announced plans to invest $1.2 billion in Brazil over the next ve years. With so much capital expected to pour in, the biggest challenge Brazil faces is in relation risk policy.
Recovery in the last six months
E & Y points to a recovery of 88% in value of equity purchases in the last six months over the previous period, led by the return of activity to the debt markets, the embryo recovery in the economy and the resumption of the stock markets.
9 IPOs in March
The report says that an increase of starting capital is helping private equity funds out of business, repay debt and return capital to investors. The private equity firms raised US$ 3.7 billion with nine IPOs in March. This is more than was captured in January and February combined.
Globally, fund-raising will continue to be a challenge for the next 12 to 18 months.
With Preqin reporting that PE rms had US$500 billion in uncommitted capital waiting to be deployed at the end of 2009, one of the biggest challenges may be nding quality targets. That said, rms closed US$234.9 billion worth of funds, 60% less than in 2008.4 As limited partners continue to demand better returns and more transparency, competition among general partners will heat up, even as investors — who sat on the sidelines last year — prepare to commit more capital, according to a recent Preqin study. Mid-sized buyout, distressed debt, secondary, and emerging market funds focused on China, India and Brazil may garner increased interest. In fact, the second-largest fund to close in 2009, the $8.8 billion First Reserve Fund XII, is focused on energy and natural resources in Brazil, China and India, while the 18th-ranked Mount Kellett Fund I is focused on Asia.
What might get into the way..
Nevertheless,it is not all good news. New capital adequacy rules for banks may restrict new lending agreements for private equity in the UK.
Elsewhere, the planned regulation of hedge funds and private equity can reach the industry hard.The report says: “If its more controversial provisions are approved, the policy of Europe you can isolate and reduce the size of its private equity.”
(Sources: Jornal Valor, E&Y)