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The Brazilian Private Equity and Venture Capital Association
Private Equity & Venture Capital in Brazil:
State of the Industry and Opportunities
NYC – September 25th, 2006
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ABVCAP
Who Are We

The Association of the Brazilian PE & VC industry
Our Mission

Promote and develop long-term investments in Brazil

Over 100 members, including fund managers,
entrepreneurs and service providers
Membership
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This presentation is an excerpt from a study by the Monitor Group,
a member institution,
hired to assist ABVCAP in its creation of a roadmap for the future
of the Private Equity and Venture Capital in Brazil
ABVCAP wishes to thank FINEP and the Brazilian Government
for their support in this initiative
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.
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Objectives

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
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Brief History of the Brazilian PE & VC
Mid 90’s




From 8 fund managers in
1994 to 45 in 2000 *
– Real Plan
– Privatizations
– Dot-coms
1999
2004

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
Future

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
Over US$ 4BN invested, 400+ deals, during the past 10 years
As of today: 250+ portfolio companies, additional US$ 5BN committed capital
* Includes only fund managers that existed in 2004
Source: Private Equity and Venture Capital in Brazil – 1st Census – FGV / GVcepe; ABVCAP; Monitor Analysis
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The Brazilian PE & VC Industry in Numbers
Investments in US$ million
as a % of GDP (2004)
1.11
456
379
281
261
256
0.64
253
0.57
0.37
0.14
1999
2000
2001
2002
2003
UK
2004
0.13
Canada South South Argentina India
Africa Korea
0.10 0.04
0.02
China Brazil Mexico
Number of Invested Companies according to
the Stage of Development (2004)
Portfolio by Sector (2004)
98
35%
72
22%
16%
Software
& IT
11%
Telecom
Manufacturing
42
36
6%
6%
4%
Retailers
Transp /
Logistics
5
Other
Seed
Biotech
3
1
6
Expansion1
Start-up
Acquisition
Bridge
Finance
Finance
Later Stage
Turnaround
MBO
Brazilian PE & VC has already proved itself in multiple sectors, and shows
strong potential for growth
1) Includes 2 mezzanine investments
Note: Includes data from 57of a total of 65 fund managers with local offices in Brazil
Source: Private Equity and Venture Capital in Brazil – 1st Census – FGV / GVcepe; Monitor Analysis
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The Fundamentals
World-Class
Corporate
Governance
Standards
Developed
Capital Markets
Favorable
Macroeconomics
Attractive
Investment
Opportunities
Viable Exit
Options
Developed
Institutional &
Regulatory
Landscape
Qualified
Human
Resources
Enabling Environment
Source: Monitor Analysis
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The Basics
Attractive
Investment
Opportunities
Viable Exit
Options
Enabling Environment
Two key strengths of the Brazilian PE & VC equation
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Examples
Attractive Investment Opportunities
Established Global Companies












Emerging Global Companies
Electric engines
Founded in 1961
5 plants and 19
subsidiaries worldwide
Revenues: US$ 1.0 BN




Automotive (bus)
Created in 1949
Plants in 6 countries
Revenues: US$ 0.7 BN



Aerospace
Founded in 1969
Among world’s top 3 in
commercial airplanes
Revenues: US$ 3.8 BN




Airline
Created in 2001
2nd highest profitability
in the world
Revenues: US$ 1.1 BN
Cosmetics
Created in 1969
Revenues: US$ 0.9 BN
Petrochemicals
Consolidation of 6
companies in 2002
LATAM leader
Revenues: US$ 4.8 BN
Brazilian track record in creating successful global players
Note: Revenues = Net Revenues for 2005 @ US$ 1 = R$ 2.42
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Attractive Investment Opportunities
Diversity of the Economy
Recent Regional GDP Growth
Attractive Sectors

14
– Investment gap: US$ 25 – 30 billion
SE
12

Real Estate
– Housing deficit: 7.2 MM houses
– Demand will increase with population ageing
10
TO
8
GDP
Growth
2000 2003
(%)
Infra-Structure
6
MT
GO

– “IT investments will increase 15% in Brazil in
2007, reaching US$ 18.6 billion(...)higher
growth when compared to China” – IDG
MS
4
MA
PA
BA
AM
SC
2
RS
PR

MG
0
SP

-2
-4
10
100
Agribusiness
– Leading technology for ‘green’ / biomass fuels
– Ethanol demand could reach 26 billion liters
until 2010 (63% increase)
DF
1
Biotech
– Full domain over gene-sequencing technology
RJ
ES
0.1
IT
1000
GDP (US$ billion*) – logarithmic scale
Note: * Constant 2000 US$
Source: Science & Technology Ministry; Merrill Lynch; IBGE; Global Entrepreneurship Monitor; IDG; Monitor Analysis
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Attractive Investment Opportunities
Other Factors
Elements
Professional
Management in
Family-Owned
Companies
Fragmented
Sectors
Entrepreneurial
Culture
Enabling
Environment
Unleashes
Opportunities
Description

Increasing trend for professional management
– 40 among top 50 Brazilian corporations are professionally managed
– Family ownership still widespread: 73% of 5 million SMEs

Fragmented sectors are opportunities for consolidation

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

Repressed demand in consumer goods

LBOs

Distressed assets (e.g. Parmalat, Varig)

Increased interest by entrepreneurs
Source: ABVCAP; Sebrae; Global Entrepreneurship Monitor; CVM; Monitor Analysis
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Increasingly Liquid Exit Options
Most Common Exit Mechanisms
(1999 – 2004)
183
45
Number of PE-backed Public Offerings1
904
106
Write-off
21
198
40
BuyBack
215
37
52
Trade-sale
9
IPO
Quantity
12
Secondary-sale
9
330
56
Amount (US$ MM)
2004
2005
2006
Falling interest rates, developed capital markets and strong corporate governance all
point towards sustainability of IPOs as a viable option
Note: 1) Considers primary and secondary offers separately, even when offered jointly – up to April 2006
Source: CVM; PE and VC in Brazil – 1st Census – FGV / GVcepe; Monitor Analysis
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Examples
Trade-Sale
IPOs
Recent Successful PE & VC Exits
Net Revenues
Investment
Time to Exit
2005 (US$ million) (US$ million)
Company
Sector
Equatorial
Energy
273
11
2 years
GOL
Airline
1,100
26
1 year
TOTVS1
IT
90
16
<1 year
DASA
Medical Services
217
100
5 years
40%
Submarino
E-commerce
172
83
6 years
38%
Gafisa
Construction
202
78
9 years
TAM
Airline
2,317
77
8 years
ALL
Logistics
70
202
7 years
Localiza
Car rental
350
49
8 years
Akwan
IT
n/a
n/a
4 years
Autotrac
Logistics
137
2,5
7 years
Atrium
Telecom
353
20,5
4 years
IT
n/a
7
6 years
Microsiga2
Estimated IRRs in US$
481%
242%
199%
36%
26%
22%
9%
130%
32%
20%
12%
Note: 1) BNDESPar; 2) Buyback; 3) 2004
Source: Press Clippings; Company websites; Interviews; Brazilian Capital Markets and Private Equity (R. Freitas, P. Passoni); Monitor Analysis
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Enabling Environment
World-Class
Corporate
Governance
Standards
Developed
Capital Markets
Favorable
Macroeconomics
Attractive
Investment
Opportunities
Viable Exit
Options
Developed
Institutional &
Regulatory
Landscape
Qualified
Human
Resources
Enabling Environment
Brazilian PE & VC industry meets stringent Global Standards
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Enabling Environment
Overview
Market
Characteristics
Favorable
Macroeconomics
Positive Factors





Developed
Capital Markets





Qualified Human
Resources

Challenges
Stable economy de-linked from politics
Falling interest rates and country-risk
Investment grade expected in 2007 / 2008
Social inclusion of low-income families

Although falling, interest rates are
still high, limiting investment
opportunities
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
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
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Enabling Environment
Overview
Market
Characteristics
World-Class
Corporate
Governance
Standards
Developed
Institutional &
Regulatory
Landscape
Positive Factors



Challenges
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

Still pervasive culture of mixing
personal and company funds

Majority of public companies still
not adopting restrictive CG levels
Autonomous / independent regulatory
agencies

Complex and slow legal system

Regulation in some sectors – not
fully developed – may increase
risks

Red tape to set up and shut down
companies
More reliable environment / new legislation
– Reduced legal and credit risk
– Increased investor protection
– “Bankruptcy Law” = safer investments

Arbitration

Tax exemptions for foreign investors
Source: BACEN; Social Security Ministry; IBGE ; CVM; Interviews with PE / VC specialists; BOVESPA; ANBID; BEST; Monitor Analysis
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Challenges for Growth of the PE & VC Industry in Brazil
Main Challenges
Closing a Deal
and Creating
Value
Exiting
Mitigating Factors / Outlook


Creating the ex-ante-partnership
Rigorous due diligence and local expertise
Availability of capable managers

Low exposure of PE & VC
concepts and models by
entrepreneurs
Informality

Alternatives for exits

More developed IPO market

High interest rates and limited
access to debt markets

Falling interest rates, stable economy with
little spill-over from politics

Limited capital availability

Increasing interest by local pension funds
ABVCAP roadshows coming of age



Enabling
Environment

Global Corporate Governance
still not widely applied

Ex-ante-partnership, and shareholders’
agreements; top advisors; arbitration

Complex and slow legal
system

Access to arbitration; new bankruptcy Law
protects investors

Regulation in some sectors
not fully developed

Opportunity to shape the future
Source: Monitor Analysis
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Conclusion: Why Invest in PE & VC in Brazil Now?
Wide range of
opportunities
available
New opportunities
due to improved
enabling environment






Significant other
opportunities to
create value
More developed
market for exits
Across diversified sectors and regions
Strong entrepreneurial culture
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

IPOs, viable alternative


Source: Monitor Analysis
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Brazil offers unique, valuable
PE & VC opportunities and, on the back of a
much-improved investment environment, is
positioned for fast growth to the benefit of the
better-positioned players
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Appendix: Hyperlink
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Enabling Environment
Favorable Macroeconomics
Despite the presidential election this year, interest rates are expected keep decreasing
Real Interest Rate & Country-risk*
1,600
Country Risk (EMBI Brazil
spread of Treasury bonds) –
right-hand scale
35%
1999
devaluation
30%
% / year
25%
800
Market
Estimates
15%
10%
5%
1,200
1,000
2002
presidential
election
20%
1,400
600
400
Real interest rate –
left-hand scale
0%
1996
1997
1998
1999
2000
Basis points
40%
200
2001
2002
2003
2004
0
2005 2006E 2007E 2008E 2009E 2010E
Brazil is expected to reach investment grade in 2007 – 2008
Note: *Emerging Markets Bond Index (EMBI+)
Source: Central Bank of Brazil; IBGE; Clippings; JP Morgan; Monitor Analysis
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Enabling Environment
Developed Capital Markets
Emerging LPs: Pension Funds
Other Characteristics
Total Assets (US$ billion)
122,
3.75
Pension Fund Assets
represent 16% of
Brazilian GDP (2005)
70,7
71,5
66,2
60,5 2.6 3.7
2.6
4.0
16.8
2000
2001
Fixed Income
2002
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
37.2
4.0
26.4
20.7
83.8
76.8
37.1

5.2
43.4
87,9
116 yr old Stock Exchange
– 342 listed companies
– US$ 581 billion market cap
136,
3.93
4.8
2.9

44.5
2003
Equities
54.7
2004
Real Estate
2005
2006
Others
Brazilian institutionals turn to alternative investments due to falling interest rates
Source: Social Security Ministry; CVM; Interviews with Private Equity Players / Stakeholders; BOVESPA; Monitor Analysis
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Enabling Environment
World-Class Corporate Governance Standards
Principles of ‘Novo Mercado’
Main Corporate Governance Agents

Stock
Exchange
3 levels of world-class
corporate governance
standards (1, 2 and ‘Novo
Mercado’)
Advanced regulation for
public co’s and PE & VC
funds on disclosure and
shareholders’ rights
Brazilian
Securities &
Exchange
Commission

Brazilian
Institute for
Corporate
Governance

Established in 1995 by
demand from the market

Develops and Recommends
CG programs

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
Out of 33 IPOs since 2004, 23 compliant with ‘Novo Mercado’, 6 other with Level 2
* Amcham is the American Chamber of Commerce in Brazil
Source: BOVESPA; CVM; Brazilian Institute for Corporate Governance (IBGC)
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Enabling Environment
Developed Institutional & Regulatory Landscape
Significant improvements in the past few years established more comprehensive and stable
environment for investments
Independent
Institutions

Capital markets institutions are independent

Central Bank and Securities Commission are autonomous

Stock and Futures Exchanges are self-regulated

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

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
Legal System
Financial Market
Structure
Other institutional and legal environment improvements are expected in the near
future (e.g. Tax Reform)
Note: *Except countries considered “low-tax jurisdictions” by Brazilian Tax Authority – usually tax havens
Source: ANBID; Bacen; BEST 2006; Brazilian Company for Custody and Liquidity (CBLC); CVM
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Enabling Environment
Qualified Human Capital
Human Capital
for Portfolio Companies
Experienced Professionals for PE & VC Management
4%
12%
Other
13%
Entrepreneur
18%
21%
58%
Consultant
Master /
MBA / LLM
8%
>20 years
19%
>15 years
25%
23%
1%
Fund Managers
Experience
PostGraduated
48%
Financial
Market /
Auditor

>5 years
Graduated
“… great availability of talented
and qualified managers to run
businesses”
– PE fund manager

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
>10 years
CEO /
Director
15%
36%
PHD
Non-Graduated
Fund Managers
Education
% of Funds by
Experience of Most
Senior Manager
Basis: 233 managers in 65 firms
Source: ANBID; Science & Technology Ministry (MCT); IBGC; 1st Brazilian Census of Private Equity and Venture Capital – FGV; Monitor Analysis
CAS-COD-Prez-Date-CTL
EQT-CAP-Apresentacao-25-09-06-PF
25
Copyright
©©
2003
Monitor
Company
Group,
L.P.
——
Confidential
——
XXX
Copyright
2006
Monitor
Company
Group,
L.P.
Confidential
SAO