A Private Equity Firm Dares to Buy in Brazil Amid Recessionby and
General Atlantic invests $300 million while deals volume fall
Plan is to keep acquiring companies that “are not cheap”
General Atlantic LLC, the U.S. private equity firm that already invested more than 1 billion reais ($318 million) in Brazil this year, plans to keep buying stakes in companies that “are not cheap” even amid the country’s worst economic crisis in a century.
General Atlantic is among the few international private equity firms daring to acquire firms with Brazil mired in recession and political instability. While there are signs that dealmaking activity may have bottomed out, total announced acquisitions of Brazilian companies have fallen 34.9 percent year-to-date over the same period last year to $13.8 billion, according to data compiled by Bloomberg. Deals involving private equity firms were even more affected, with the total falling 72 percent to $729.5 million, the data show. The number of deals fell 49 percent to a total of 25 transactions.
General Atlantic is prioritizing unregulated industries that focus on middle-class and upper-class consumers, with key transactions including a larger stake in brokerage XP Investimentos CCTVM SA and an investment in drugstore chain Pague Menos. That has also meant staying away from infrastructure deals even though the Carwash corruption investigation has opened up investment opportunities by sidelining some of the dominant companies there.
“The companies we are looking at now are growing more than 20 percent but are not cheap,’’ said Martin Escobari, head of Latin America business for the private equity firm. “The real and stock exchange rally reflects better prospects for the median term, but in the short term Brazil is not a country for investors with a heart condition.”
General Atlantic’s purchase of an additional stake of 16 percent in the brokerage XP Investimentos, announced in April, is the biggest acquisition made by a private equity firm of a company operating in Brazil this year, at 450 million reais, the data show.
The fund is increasing its stake from 33 percent to 49 percent in Rio de Janeiro-based XP through a capital injection and the acquisition of a 10 percent stake held by Actis LLC. Thanks to General Atlantic’s investments, XP is growing aggressively, seeking a banking license in Brazil and also expanding in New York, Miami and Geneva, catering to higher net-worth investors while bank competitors have been retreating.
Brazil’s economy is expected to contract 3.5 percent this year after shrinking 3.8 percent in 2015. The Carwash corruption investigation involving giant state company Petroleo Brasileiro SA and major construction firms in the country helped to deepen a political crisis that has led to the suspension of President Dilma Rousseff. The turmoil has contributed to a reduction in the volume of deals, even as acting President Michel Temer has bolstered investor confidence, with the benchmark Ibovespa index up 67 percent in dollar terms this year. The real has gained 24 percent against the dollar, the biggest return among emerging markets currencies.
“It hasn’t been easy to close M&A deals with private equity firms as buyers this year because their investment committees didn’t want to take the political risk given the impeachment uncertainties and the high volatility on prices,” said Daniel Wainstein, co-head in Brazil for the New York-based investment banking boutique Greenhill & Co, which acted as adviser on four deals in the country this year.
“To invest in private equity you need to be more careful than to buy shares on the public market, where you have liquidity and can get out more easily,” Wainstein said.
General Atlantic, based in New York and in Greenwich, Connecticut, invested 440.1 million reais in new shares of Pague Menos, plus 160 million reais to buy shares from current holders, the Fortaleza-based drugstore chain said in a regulatory filing in December. The deal gives the private equity firm a 17 percent stake, Pague Menos said.
“The drugstore sector is still very fragmented, with 70 percent of companies independent, and consolidation is natural,” Escobari said. Drugmakers will also benefit from the resilience the health-care sector has against an economic slowdown, he said.
Patria Investmentos SA, the Brazilian private equity firm whose investors include New York-based Blackstone Group LP, also bought a stake in a drugstore chain, Farmacias Independente, in a transaction announced this year.
With private-equity investment still at a trickle in Brazil, the health-care industry has attracted much of the attention. Before Pague Menos, General Atlantic invested 200 million reais in Ouro Fino Saude Animal Participacoes SA in a deal announced in July 2014, betting on health products and drugs for livestock and pets. Escobari said he is still looking at health-related assets.
Miami-based HIG Capital LLC acquired a minority stake in the drug and hospital instruments producer Halex Istar Industria Farmaceutica, in a transaction announced in May.
Infrastructure remains a draw for some. Actis, the U.K.-based private equity firm that sold its XP stake to General Atlantic, said this month it plans to invest at least 1.4 billion reais to buy and expand renewable energy plants in Brazil. The firm announced in July it would buy the remaining 40 percent of Curitiba-based Atlantic Energias Renovaveis SA.
General Atlantic, meanwhile, is looking to make more investments in retail, betting that middle-class Brazilians increasingly prefer to shop at well established chains instead of street and market vendors.
“Before, it was tough to invest in the retail clothes and apparel sector in Brazil, because it was too informal,” Escobari said. “Now it is much better.”