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Private Equity & Venture Capital in Brazil: State of the Industry and Opportunities NYC – September 25th, 2006 The Brazilian Private Equity and Venture.

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Presentation on theme: "Private Equity & Venture Capital in Brazil: State of the Industry and Opportunities NYC – September 25th, 2006 The Brazilian Private Equity and Venture."— Presentation transcript:

1 Private Equity & Venture Capital in Brazil: State of the Industry and Opportunities NYC – September 25th, 2006 The Brazilian Private Equity and Venture Capital Association AmsterdamBeijingChicagoEmeryvilleHong KongJohannesburg Cambridge Frankfurt LondonLos AngelesMadridManilaMilanMoscowMumbaiMunichNew YorkPalo Alto ParisSan FranciscoSão PauloSeoulShanghaiStockholmTokyoTorontoZurichSingapore

2 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 2 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAOABVCAP The Association of the Brazilian PE & VC industry The Association of the Brazilian PE & VC industry Who Are We Our Mission Membership Promote and develop long-term investments in Brazil Promote and develop long-term investments in Brazil Over 100 members, including fund managers, entrepreneurs and service providers Over 100 members, including fund managers, entrepreneurs and service providers

3 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. Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 3 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO 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

4 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 4 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAOObjectives 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

5 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 5 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Brief History of the Brazilian PE & VC * Includes only fund managers that existed in 2004 Source: 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 1999 Future 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 2004 Mid 90’s

6 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 6 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO The Brazilian PE & VC Industry in Numbers as a % of GDP (2004) Investments in US$ million 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 Software & IT TelecomRetailers Manufacturing Biotech Other Transp / Logistics Portfolio by Sector (2004) Number of Invested Companies according to the Stage of Development (2004) MBO Seed Start-up Expansion 1 Later Stage Acquisition Finance Bridge Finance Turnaround Brazilian PE & VC has already proved itself in multiple sectors, and shows strong potential for growth 6 36 72 98 42 5 3 1 35% 16% 11% 6% 4% 22% 1.11 0.64 0.57 0.37 0.14 0.13 0.10 0.04 0.02 UKCanadaSouth Africa South Korea ArgentinaIndiaChinaBrazilMexico 456 379 281 261 256 253 199920002001200220032004

7 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 7 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Source: Monitor Analysis The Fundamentals Enabling Environment Attractive Investment Opportunities Viable Exit Options Favorable Macroeconomics Developed Institutional & Regulatory Landscape Developed Capital Markets World-Class Corporate Governance Standards Qualified Human Resources

8 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 8 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO The Basics Two key strengths of the Brazilian PE & VC equation Enabling Environment Attractive Investment Opportunities Viable Exit Options

9 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 9 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Attractive Investment Opportunities Examples Established Global Companies Emerging Global Companies Electric engines Founded in 1961 5 plants and 19 subsidiaries worldwide Revenues: US$ 1.0 BN Airline Created in 2001 2 nd 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 players Note: Revenues = Net Revenues for 2005 @ US$ 1 = R$ 2.42

10 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 10 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Attractive Investment Opportunities Diversity of the Economy Note: * Constant 2000 US$ Source: Science & Technology Ministry; Merrill Lynch; IBGE; Global Entrepreneurship Monitor; IDG; Monitor Analysis Attractive Sectors Recent Regional GDP Growth GDP Growth 2000 - 2003 (%) GDP (US$ billion*) – logarithmic scale DF SE TO GO MT MS PA MA AM SC ES RS BA 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 0.11101001000

11 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 11 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Attractive Investment Opportunities Other Factors ElementsDescription 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 Management in Family-Owned Companies 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 Culture Repressed demand in consumer goods LBOs Distressed assets (e.g. Parmalat, Varig) Increased interest by entrepreneurs Enabling Environment Unleashes Opportunities Fragmented Sectors Fragmented sectors are opportunities for consolidation

12 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 12 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Increasingly Liquid Exit Options 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 Most Common Exit Mechanisms (1999 – 2004) IPO Trade-sale Secondary-sale BuyBack Write-off Number of PE-backed Public Offerings 1 Falling interest rates, developed capital markets and strong corporate governance all point towards sustainability of IPOs as a viable option 9 12 21 200420052006 52 330 37 215 40 198 45 106 183904 9 56 QuantityAmount (US$ MM)

13 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 13 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Recent 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 TOTVS 1 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 35 3 n/a Akwan Autotrac Atrium Microsiga 2 n/a 2,5 20,5 7 IPOs Trade-Sale Examples Estimated IRRs in US$ 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

14 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 14 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Enabling Environment Attractive Investment Opportunities Viable Exit Options Favorable Macroeconomics Developed Institutional & Regulatory Landscape Developed Capital Markets World-Class Corporate Governance Standards Qualified Human Resources Brazilian PE & VC industry meets stringent Global Standards Enabling Environment

15 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 15 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Enabling Environment Overview Favorable Macroeconomics Developed Capital Markets 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 FactorsChallenges 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 Resources 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

16 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 16 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Enabling Environment Overview World-Class Corporate Governance Standards Developed Institutional & Regulatory Landscape 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 FactorsChallenges

17 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 17 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Challenges 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 ChallengesMitigating 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 Source: Monitor Analysis

18 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 18 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Conclusion: Why Invest in PE & VC in Brazil Now? Across diversified sectors and regions Strong entrepreneurial culture Source: Monitor Analysis New opportunities due to improved enabling environment Significant other opportunities to create value More developed market for exits Wide range of opportunities available 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

19 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 19 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO 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

20 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 20 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Appendix: Hyperlink

21 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 21 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO 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 – 2008  Real Interest Rate & Country-risk* Market Estimates Real interest rate – left-hand scale % / year Basis points 1999 devaluation 2002 presidential election Despite the presidential election this year, interest rates are expected keep decreasing Enabling Environment Favorable Macroeconomics Country Risk (EMBI Brazil spread of Treasury bonds) – right-hand scale 0% 5% 10% 15% 20% 25% 30% 35% 40% 19961997199819992000200120022003200420052006E2007E2008E2009E2010E 0 200 400 600 800 1,000 1,200 1,400 1,600

22 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 22 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Source: Social Security Ministry; CVM; Interviews with Private Equity Players / Stakeholders; BOVESPA; Monitor Analysis Brazilian institutionals turn to alternative investments due to falling interest rates Other Characteristics 116 yr old Stock Exchange –342 listed companies –US$ 581 billion market cap Futures exchange is 5 th 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 Funds 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) Enabling Environment Developed Capital Markets 37.1 44.5 54.7 76.8 83.8 16.8 20.7 26.4 37.2 43.4 4.0 3.7 4.0 4.8 5.2 3.9 3.7 2.9 2.6 2000200120022003200420052006 Fixed IncomeEquitiesReal EstateOthers

23 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 23 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO * Amcham is the American Chamber of Commerce in Brazil Source: BOVESPA; CVM; Brazilian Institute for Corporate Governance (IBGC) Main Corporate Governance Agents Stock Exchange Brazilian Securities & Exchange Commission Brazilian Institute for Corporate Governance 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 2 Enabling Environment World-Class Corporate Governance Standards 3 levels of world-class corporate governance standards (1, 2 and ‘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

24 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 24 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO 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 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 Institutions Legal System Financial Market Structure 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 Environment Developed Institutional & Regulatory Landscape

25 Copyright © 2003 Monitor Company Group, L.P. — Confidential — XXXCAS-COD-Prez-Date-CTL 25 EQT-CAP-Apresentacao-25-09-06-PFCopyright © 2006 Monitor Company Group, L.P. — Confidential — SAO Source: ANBID; Science & Technology Ministry (MCT); IBGC; 1 st 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 Management Human Capital for Portfolio Companies Enabling Environment Qualified Human Capital 36% 1% 48% 21% 25% 18% 15% 19% 13% 58% 8% 23% 4% 12% Fund Managers Experience Fund Managers Education % of Funds by Experience of Most Senior Manager


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