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Overview of Private Equity & Venture Capital in Brazil Breakfast Seminar New York – November 2008 Luiz Eugenio Junqueira Figueiredo, Chairman ABVCAP Agenda I. ABVCAP II. PE&VC – Economic Importance III. Brazil: An Enabling Environment IV. Brazilian PE&VC Industry V. Conclusions 2 ABVCAP Who Are We • The Association of the Brazilian PE & VC industry Our Mission • Promote and develop long-term investments in Brazil Membership • 100+ including PE & VC managers, LPs, invested companies and service providers 3 PE&VC Economic Importance - USA 4 Fonte: NVCA PE&VC Economic Importance - USA 5 Fonte: NVCA Brazil: An Enabling Environment….. Favorable Macroeconomics Attractive Investment Opportunities Viable Exit Options Developed Institutional & Regulatory Landscape Qualified Human Resources 6 Source: Monitor Analysis World-Class Corporate Governance Developed Capital Markets …..with typical challenges of emerging markets Internal Debt and Interest Rates Limited funds for PE & VC Some companies still reluctant to good Corporate Governance Slow legal system Labor laws 7 Enabling Environment….. Favorable Macroeconomics Investment Grade Stable economy de-linked from politics Falling interest rates and country-risk Social inclusion of low-income families Source: BACEN; Social Security Ministry; IBGE ; CVM; Interviews with PE / VC specialists; BOVESPA; ANBID; BEST 8 Enabling Environment….. Favorable Macroeconomics Improvement in the recent years, today Brazil is stronger and less vulnerable to external crises. • Investment Grade • GDP growth; • Inflation down, interest rates falling and trade surplus; • International reserves are increasing and FDI is growing; • Still needed adjustment of public accounts; • Important legal and tax system reforms under discussion; • The Federal Program, PAC (Growth Acceleration Plan), which projects to invest more than US$ 250 billion in the infrastructure sector in the next 5 years; 9 Enabling Environment….. Developed Capital Markets Pension Funds Assets represents 16% of Brazilian GDP (2005) Alternative Investments mixed within the Equity and Real Estate classes Pension Funds may allocate up to 20% of total assets to alternative investments SPC Regulatory Review Pension Funds Assets (US$ billion) Source: Social Security Ministry; CVM; Interviews; BOVESPA; Monitor Analysis 10 Enabling Environment….. World-Class Corporate Governance • Stock Exchange • Regulation • Private Institution 11 Enabling Environment….. World Class CG Stock Exchange Brazilian Securities & Exchange Commission Brazilian Institute for Corporate Governance ‘Novo Mercado’ 3 levels of world-class corporate governance standards (1, 2 and ‘Novo Mercado’) Advanced regulation on disclosure and shareholders’ rights = Public Companies and PE & VC Funds 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% Mandatory use of arbitration Most restrictive levels of CG represents 60% of the Market Cap and Daily Volume Source: BOVESPA; CVM; Brazilian Institute for Corporate Governance (IBGC) 12 Enabling Environment….. Developed Institutional & Regulatory Landscape • Independent Institutions • Legal System • Financial Market Structure • Coordinated Public and Private Efforts 13 Enabling Environment….. Developed Institutional & Regulatory Landscape Independent Institutions Central Bank and Securities Commission are autonomous Stock and Futures Exchanges are listed 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 Fostering innovation and industrial development FINEP – Inovar Program BNDES – focused PE/VC department ABDI/MDIC – Productive Development Police (PDP) Legal System Financial Market Structure Coordinated Public and Private Efforts Source: ANBID; Bacen; BEST 2006; Brazilian Company for Custody and Liquidity (CBLC); CVM 14 Note: *Except countries considered tax havens by Brazilian Tax Authority Enabling Environment….. Qualified Human Resources • Experienced and skilled Fund Managers • Wide availability of qualified Managers and other personnel for Portfolio Companies 15 Enabling Environment….. Qualified Human Resources Other Entrepreneur PhD >20 yrs Graduate >15 yrs Consultant >10 yrs High Executive Extension >5 yrs Undergrad Financial Mkt / Auditor High School Source: ANBID; MCT; IBGC; FGV; Monitor Analysis 16 The Enabling Environment in Brazil Favorable Macroeconomics Attractive Investment Opportunities Viable Exit Options Developed Institutional & Regulatory Landscape Qualified Human Resources 17 Source: Monitor Analysis World-Class Corporate Governance Developed Capital Markets Attractive Investment Opportunities Regional Growth Sectors 14 Infrastructure - US$ 30 billion need 12 Real Estate – Housing Deficit 8 million 10 IT - US$ 19 billion in 2007 – IDG Biotechnology Tourism Telecom Retail Agribusiness SE 8 GNP (%) TO MT GO 6 MS 4 PA MA BA AM 2 MG RS PR SC 0 ES RJ DF – – – – – SP -2 -4 0.1 1 10 100 1000 GNP (US$BB*) – logarithmic scale Source: MCT; Merrill Lynch; IBGE; Global Entrepreneurship Monitor; IDG; Monitor Analysis * US$ constant 2000 18 Biomass Ethanol - 26 billion liter by 2010 Green Beef Grains Arable land and favorable conditions Trade-Sale IPOs Viable Exit Options Net Revenues Investment 2005 (US$ million) (US$ million) Time to Exit 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 Source: Press Clippings; Company websites; Interviews; Monitor Analysis; Brazilian Capital Markets and Private Equity (R. Freitas, P. Passoni); Note: 1 BNDESPar; 2) Buyback; 3) 2004 19 Estimated IRRs in US$ 481% 242% 199% 36% 26% 22% 9% 130% 32% 20% 12% Brazilian PE & VC Industry Brief History Mid 90’s 8 managers in 1994 – Real Plan – Privatizations – Dot-coms 1999 2004 45 managers in 2000 * Economic slowdown – Global factors: Internet bubble burst Argentina default – Local factors: Devaluation (1999) Energy crisis (2001) Elections (2002) Mostly investment banks Followed by: – Global VC/PE funds – BNDES (1996) Brazil = key market for international investors – Investment peak Small investments, no exits Int’l LPs divested too early Improvements in legislation and corporate governance Source: Private Equity and Venture Capital in Brazil – 1st Census – FGV / GVcepe; ABVCAP; Monitor Analysis 20 * Includes only fund managers that existed in 2004 Future Renewed interest in PE & VC – By local investors – By entrepreneurs Several successful IPOs New vintage of funds – local LPs More stable Economy – Falling interest rates – Falling country risk Positive impact of the institutional changes – Corporate governance – Legal improvements Brazilian PE & VC Industry Main Figures Limited Partners • US$ 16,72 billion of committed capital (Jul/07) General Partners • 89 PE&VC firms • 153 funds • 984 professionals (357 partners) Companies • 404 portfolio companies • 194 new investments between 2004 and 2007 • 28 IPOs between 2004 and 2007 21 Brazilian PE & VC Industry US$ bn Impressive Recent Growth 18 16 14 12 10 8 6 4 2 0 16.72 3x 3.71 1999 4.95 5.02 4.7 2000 2001 2002 . 4.79 2003 Source: GV-CEPE 22 5.58 2004 2005 2006 1H07 Brazilian PE & VC Industry Surprising updated figures to be released in two weeks 23 Brazilian PE & VC Industry Attractive Pos-IPO Performance 117% 46% . Non PE/VCbacked Source: GV-CEPE 24 PE/VCbacked Brazilian PE & VC Industry Well Positioned Source: LAVCA 25 Conclusion Brazil offers an enabling environment for PE&VC • Favorable Macroeconomics • Developed Capital Markets • World Class Corporate Governance • Developed Institutional & Regulatory Landscape • Qualified Human Resources with sound investment opportunities • In different regions • Across different sectors • Consolidation of fragmented sectors • Distressed assets • Economic inclusion and viable exits • IPO • Trade Sale • at attractive returns 26 Thank You ! Luiz Eugenio Junqueira Figueiredo Chairman Associação Brasileira de Private Equity & Venture Capital www.abvcap.com.br