Carlyle Braves Brazil Crisis as Private Equity Bucks M&A Slump

  • Fund already announced 2.45 billion reais in deals this year
  • Companies agree to `downsize protections' amid downturn

It’s a buyers’ market in Brazil, and Carlyle Group LP is in the mood to do business.

After two “very frustrating years," Carlyle has announced 2.45 billion reais ($628 million) of acquisitions this year in Latin America’s largest economy and is looking for more, said Fernando Borges, Carlyle’s co-chief executive officer for the country. With initial public offerings all but dead this year in Brazil, many companies are eager to find private-equity partners and willing to agree to "downsize protections," such as performance targets or payments in tranches that can guard against currency devaluations, he said.

"You end up with much better deals -- safer," Borges said in an interview at his Sao Paulo office. "We’re negotiating with very good companies that would have never talked to us years ago and would have gone straight to an initial public offering."

Carlyle joins other private-equity firms with dollar funds dedicated to the region, such as Advent International Corp., that are taking advantage of low valuations after a sweeping corruption scandal crippled the economy and helped wipe out $290 billion in the market value of publicly traded companies this year. Announced deals involving private-equity firms and including real estate properties surged to $7.6 billion this year in Brazil, from $4.5 billion in the same period last year, a rare bright spot in a market where IPOs have totaled just $229 million in 2015 and total mergers and acquisitions are at a decade low, according to data compiled by Bloomberg.

Driving the trend is the need to consolidate to fuel growth in an economy that’s sinking, Borges said. Analysts in a central bank survey released Monday are predicting the economy will shrink 3 percent this year and 1.22 percent next year, which would be the longest recession since the Great Depression. The real fell 36 percent in the past year, making Brazilian companies cheaper for investors with dollars in hand. The currency rose 0.8 percent to 3.8567 per dollar at 10:37 a.m. in Sao Paulo.

Pricey Loan Market

In a bad economy, “where organic growth is going to be very difficult because the consumption is slowing down, you need to grow through consolidation,” he said. “Good companies buy their competitors, and they are using private-equity firms as partners since credit from banks is very expensive and scarce."

Interest rates on corporate loans in Brazil have surged to a record 20.3 percent per year in August, driving down new loans for companies by 4.7 percent in the year through August, the central bank said.

Carlyle said in August it plans to acquire control and take private Tempo Assist, which provides auto, home and personal assistance, in a deal that could fetch about 700 million reais. The Washington, DC-based buyout firm also bought an 8.3 percent stake in hospital-chain operator Rede D’Or Sao Luiz SA for 1.75 billion reais, in a deal announced in April. It’s the firm’s second-largest acquisition in Brazil by value. Carlyle is in talks to acquire a 1 percent to 2 percent stake in Rede D’Or from Grupo BTG Pactual, said people familiar with the talks who asked not to be identified discussing a private matter. Carlyle and BTG declined to comment.

Carlyle-backed companies are also in the mood to make acquisitions. Rede D’Or is considering buying part of Grupo Fernandes Vieira, which owns two hospitals in the northeastern Brazilian city of Recife, according to people familiar with the matter. Rede D’Or and Grupo Fernandes Vieira declined to comment. Travel agency CVC Brasil Operadora & Agencia de Viagens SA, in which Carlyle owns a stake, said in August in a statement it concluded the acquisition of 51 percent of three companies -- Advance Viagens & Turismo SA, Rextur Viagens & Turismo SA and Reserva Facil Tecnologia SA -- and of 100 percent of Submarino Viagens Ltda.

Regional Funds

Carlyle, which has 700 million reais in a Brazil-dedicated fund that’s a partnership with Banco do Brasil SA and another $800 million for Latin America, mostly invested in Brazil, has spent $2.5 billion in the country since it started here in 2008.

Advent, the Boston-based private equity fund that raised a $2.1 billion Latin American fund last year, said last month it bought a 13 percent stake in medical-lab operator Fleury SA. It’s also considering a bid for a unit of Cia. Siderurgica Nacional SA, the Brazil steelmaker that’s selling assets to rein in debt, a person with knowledge of the matter said earlier this month. CSN, as the company is known, is seeking to raise as much as 1 billion reais with the sale of port-terminal operator Sepetiba Tecon SA, a person familiar said in August. Advent and CSN declined to comment at the time.

“If you’re over-leveraged, if you want to invest in a new plant, private equity funds are a much better alternative than bank loans," Borges said.

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