By Paulo Winterstein
February 16, 2011– The first six weeks of Brazilian President Dilma Rousseff’s administration have been encouraging to private-equity investors and may drive investment volumes to new highs after a record last year, the Latin American Venture Capital Association said Wednesday.
After raising more than $7 billion for Brazilian private-equity and venture-capital investments in 2010, funds this year may once again see massive inflows to Latin America’s biggest economy, LAVCA President Cate Ambrose told Dow Jones in Sao Paulo. The boost in inflows is partly a result of pent-up demand following the global financial crisis, but comments and moves by Rousseff have also served to create a more welcoming environment for investors, Ambrose said.
“When I talk to investors about Brazil, they are optimistic, even if they are skeptical about excessive regulation and whether the government will follow through with planned projects,” Ambrose said. “But Dilma has shown herself to be very practical and sensitive to the needs of this industry. Some of the things she’s been saying have shown a balance and made investors a bit more hopeful.”
According to Ambrose, one of the welcome changes–which was actually put in place on Dec. 31, one day before Rousseff received the presidential sash from outgoing president Luiz Inacio Lula da Silva–was the reduction of the so-called IOF tax on private-equity investments.
The government raised the financial operations tax, or IOF, last year on foreign purchases of local assets in order to cool the Brazilian real’s appreciation. However, the government later excluded private equity from the higher tax rate in an effort to boost availability of longer-term financing.
Meanwhile, more recently, Rousseff promised to reduce federal spending by 50 billion Brazilian reais ($30 billion) this year as part of a move to ease pressure on rising consumer prices. Rousseff said that infrastructure spending won’t be reduced or postponed.
The necessity of massive investments in Brazil and the relative underpenetration of private-equity funds in the country are a big draw for investors, Ambrose said. While asset prices are “expensive” now as investors compete for projects, the country’s tremendous growth potential still makes Brazil attractive, she said.
Brazil’s private-equity and venture-capital industry totaled about $34 billion at the end of 2009, according to domestic industry group ABVCAP, or about 0.2% of GDP. However, some say that data is inflated as it includes funds that operate regionally.
Most private-equity funds in Brazil are being directed to export-based commodity producers, to domestic consumer companies that serve the growing middle class, and to business service providers that count on the spreading use of technology among the region’s companies, Ambrose said.
“Brazil is seen a place where there are many big opportunities,” Ambrose said. “I don’t think investors see Brazil as a bubble.”
One cause of asset price inflation is the perceived bottleneck in getting proper authorizations for projects from the government. Many investors shun greenfield projects in order to avoid government bureaucracy when setting up new companies or securing environmental licenses, Ambrose said. Arcane tax systems and employment laws are also perceived as an obstacle by investors.
Those factors may determine the long-term interest of some investors to stay in the country or opt for other opportunities in the region such as in Argentina, Chile, Colombia or Mexico.
“Brazil is the flavor of the month and it will be interesting to see how that hyperactivity plays out,” Ambrose said.
By Paulo Winterstein, Dow Jones Newswires; 55-11-3544-7073; [email protected]