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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 Amsterdam London Paris Beijing Los Angeles San Francisco Cambridge Madrid São Paulo Chicago Manila Seoul Emeryville Milan Shanghai Moscow Frankfurt Mumbai Singapore Hong Kong Munich Stockholm Tokyo Johannesburg New York Toronto Palo Alto Zurich 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 2 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 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 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. CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 3 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 4 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 5 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 6 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 7 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO The Basics Attractive Investment Opportunities Viable Exit Options Enabling Environment Two key strengths of the Brazilian PE & VC equation CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 8 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 9 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 10 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 11 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 12 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 13 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 14 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 15 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 16 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 17 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 18 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 19 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO Appendix: Hyperlink CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 20 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 21 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 22 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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) CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 23 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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 CAS-COD-Prez-Date-CTL EQT-CAP-Apresentacao-25-09-06-PF 24 Copyright ©© 2003 Monitor Company Group, L.P. —— Confidential —— XXX Copyright 2006 Monitor Company Group, L.P. Confidential SAO 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