(Dow Jones) April 28, 2011 – Private equity is flooding into Brazil, with some 18 funds currently raising money, and there could be some $10 billion in “dry powder” waiting to invest by year-end, according to Advent International.
“There are probably around 50 active funds in Brazil, of which 18 funds are fund raising as we speak,” said Patrice Etlin, Advent’s managing partner for Latin America.
Nonetheless, the size of the Brazilian private equity industry remains small compared with other emerging giants such as China and India, Etlin said, speaking at an event on the sidelines of the World Economic Forum on Latin America.
Despite the optimism surrounding Brazil, Etlin struck a note of caution, saying that there’s a lack of funding for private equity operations in Brazil, and that the economic outlook may not be quite as rosy as everyone is expecting.
“Leverage in Brazil is still expensive,” Etlin said.
The maximum length of loans in Brazil is six to seven years, compared with the eight- to 10-year financing which Advent prefers, he said. Loans often have to start to be repaid almost immediately, rather than at the end of the loan, he said.
And the cost is prohibitively expensive. With Brazil’s benchmark interest rate at 12%, funding is often available at 15%, he said. All that makes Brazilian financing very different from the private equity loan packages available in the U.S.
“While interest rates are high, a product like that will never exist,” Etlin said.
One alternative would be to borrow at cheaper rates in dollars, but that would require taking on the risk of currency volatility, and Eltin said Advent prefers to avoid that. Removing the volatility by hedging currency exposure is also too expensive, he said.
“The best hedge is growth,” Etlin said. Companies have to be able to grow local currency revenues fast enough to compensate for volatility, he said.
That all means leverage in Brazil remains very low. Etlin said that on average, the companies that Advent invests in borrow the same proportion as their earnings before interest, tax, depreciation and amortization, and at a maximum, some companies can get up to 2.5 or 3 times EBITDA.
“The maths doesn’t work. You don’t want to end up working for the bank, that’s the problem there,” Etlin said.
Etlin said that he’s a bit more bearish about the Brazilian economy than some, but that Advent has been able to make money “in much more difficult environments.”
“There are very interesting sectors and very good companies,” Etlin said.
By Matthew Cowley
