(Reuters) Private-equity funds will have a hard time divesting some of their Brazil investments through initial public offerings next year, an industry leader said Friday, in a sign that investors remain wary of the country’s flagging economy and capital markets.
Even as a weak economy has hurt company valuations, allowing buyout firms to shift their focus to investing their money, the prospects for divesting those investments remains “worrisome, to say the least,” Clovis Meurer, president of the Brazilian Private Equity and Venture Capital Association, ABVCAP, said in an interview.
Stung by a string of deals that failed to deliver the promised returns, investors are being extra cautious in Brazil, casting a dark cloud over $6 billion of potential initial public offering (IPO) transactions that are expected for this year and next.
The longer a buyout firm takes to exit an investment, the lower the rate of return on that investment, he said.
“Nobody feels too optimistic about 2014. Such an outlook means that equity investors could delay their investment decisions,” Meurer said at the sidelines of a financial industry event in the Brazilian resort of Campos do Jordão. “Buyout firms suffer when equity investors ponder a lot before allocating risk into new shares.”
So far this year, seven IPOs have been priced, compared with four in 2012, but a similar number of offerings have been called off, including that of Azul Linhas Aéreas Brasileiras SA, Brazil’s third-biggest airline, which counts among its shareholders Gávea Investimentos, the Rio de Janeiro-based asset management company controlled by JPMorgan Chase & Co. (JPM.N) and U.S. private-equity firm TPG.
MERGERS ON THE DECLINE
Indeed, bankers say the sector needs to see more exits in Brazil, so that investors in the buyout industry can make money and the typical fundraising-investment-exit cycle continues.
Exits, when buyout firms cash in gains in the companies, raised $3.8 billion in 44 deals in Latin America, including Brazil, in 2012, driven by robust mergers and acquisitions in the region, the Latin American Private Equity and Venture Capital Association, or LAVCA, said in March.
Concerns about a flagging economy and a state cap on investment returns in certain sectors dragged merger and acquisition activity in Brazil to the lowest since 2005 in the first six months of this year, clouding the outlook for buyout exits.
Meurer said private equity funds that are part of ABVCAP are concerned with Brazil’s high taxes and expect the government to help strengthen the capital markets, especially the equity market and the financial exchange sector.
“A more solid exchange market, that the government promotes in order to help fund private entrepreneurship, is going to translate into more listings, more access to financing, more successful exits for buyout firms,” he added.
As has been the rule for years, Brazil remains the largest recipient of buyout investments in Latin America, accounting for 72 percent of the total invested and 62 percent of all the deals, according to LAVCA said.
Brazil’s stock market this year has struggled with dwindling investor confidence amid higher inflation, greater state interference in the economy and a loss of growth momentum. The benchmark Bovespa stock index .BVSP has shed 18 percent of its value this year.