Brazil’s Hot Alternative Investments

 

Private equity firms and hedge fund managers are finding this year’s investments in Brazil. Brazil’s exchange is now the fourth-largest in the world by market value. Hedge funds trading liquid instruments, and private-equity firms cashing out their investments via IPOs are seeing big bonuses in Brazil.

BM&FBOVESPA, Brazil’s main stockmarket summed up Brazil’s booming investments earlier this month.

 

Private equity firms and hedge fund managers are finding this year’s investments in Brazil. Brazil’s exchange is now the fourth-largest in the world by market value. Hedge funds trading liquid instruments, and private-equity firms cashing out their investments via IPOs are seeing big bonuses in Brazil.

BM&FBOVESPA, Brazil’s main stockmarket summed up Brazil’s booming investments earlier this month.

 José Carlos Reis de Magalhães, boss of local private-equity firm, Tarpon celebrated the successful Arezzo (Brazil’s largest shoe retailer) IPO. Tarpon personally owns 25 percent stake in Arezzo – bought for US$43.8 million in 2007, and has seen its share price quintuple in three years.

 Tarpon’s own share price is up by 143 percent from last year.

Other Brazil private-equity and hedge-funds have also attracted international attention.

Blackstone, a private-equity firm, paid $200m to take a 40 percent stake in Pátria Investimentos, a local private-equity firm in September.

And in October JPMorgan Chase’s Highbridge hedge fund, the world’s largest, bought a majority stake in Gávea Investimentos, a $6 billion Brazilian fund.

Brazil is said to be the most attractive emerging market right now by an unnamed American private-equity firm.

Compared to bigger economies where investments may pose politically riskier, the Brazilian government is more forthcoming in its attitudes toward private, and foreign, investment.

The last time people declared a golden age for private-equity investment in Brazil was in the 1990s when foreign firms and banks flocked to Brazil.

However in 1999, when shocks from the Asian crisis pulsed through the country, Brazil devalued the currency, scaring off these investors.

Local firms who survived the bloodshed include GP Investments, and a handful of others from the 1990s.

The global firms that left, didn’t come back until 2006, when investment activity started to flourish again.

Today, they are returning to a bigger, more resilient economy.

While OECD countries saw their GDP decline by 2.7 percent between 2008 and 2009; Brazilian GDP grew by 4.9 percent during that time – and 7.5 percent last year alone.

Now the world’s eighth-largest economy, Brazil could overtake Britain, France and Italy and take fifth spot by the end of this decade.

Attributing factors to Brazils growth are maturing of the country’s capital markets and laws protecting minority shareholders’ rights. Plus, a decline in interest rates – 11.25 percent versus 26.5 percent in 2003.

Greater competition has less effect on the hedge-fund industry, since there are many trading opportunities. But for private-equity firms, where the number of deal opportunities is smaller, there are huge consequences. Prices for deals have already gone up in the past year—although most investors say that companies are still not as expensive as they are in China or India, where there is even more competition.

Some worry that the new entrants’ preference for big leveraged buy-outs (LBOs) could damage the industry’s reputation.

Private-equity deals in Brazil are mostly unleveraged, and often involve minority positions in medium-sized companies as high interest rates make debt too costly—the average rate for a commercial business loan is 29 percent.

Although Brazil’s equity markets are liquid, concentration remains a problem for hedge funds.

Eight companies account for more than 50 percent of the market value of the BM&FBOVESPA.

Shorting the shares of smaller firms is expensive because it is hard to find shares to borrow. Larger funds have to be patient when building up positions. Luis Stuhlberger of Credit Suisse Hedging-Griffo, Brazil’s largest hedge fund, says it is like being “an elephant in a bathroom. You have to move very slowly, otherwise you break everything.”

Funds must also comply with strict requirements for transparency and liquidity: Brazilian hedge funds must report their net asset values daily and their positions on a monthly basis for public access on the CVM website.

Due to the country’s long experience of volatility and inflation, most investors do not agree to long lockup periods for their money. As a result, many funds offer daily liquidity, which means they do not have much flexibility with their strategies and cannot take illiquid positions.

In emerging markets, inflation remains a concern, and Brazil’s battle to keep down the value of the real has led to other capital controls on top of the tax on foreign investment.

The BOVESPA index has declined by 6 percent in the past month. But Brazilian alternative-investment managers remain calm as they have been through rocky markets many times before. “They’ve basically taken as much chemotherapy as you can take and survived it,” says a foreign fund manager.

Many managers in China and other emerging markets are familiar only with good times, so some investors worry that they might not perform well if the economy stumbled. Arminio Fraga, a former central-bank governor who founded Gávea, thinks the volatile global economic environment will play to Brazilian managers’ strengths in the coming years: “There are a lot of things out there that look familiar to us, given Brazil’s history.”

Read the full article from The Economist.