Brazil’s private capital markets, despite being the largest in Latin America (the country represented 50.5 percent of the deals made in the region through H1 2021, according to the Association for Private Capital Investment in Latin America) is too small and volatile to keep the attention of international secondaries buyers. Nonetheless, two local players have carved out a niche in the region.
Through H1 2021, private equity and venture capital investments in Brazil totalled $5.7 billion, according to LAVCA – more than for the whole of 2020. This was the highest investment volume yet in the country.
Venture capital, with its focus on financial services and fintech, is leading the charge and attracting some serious global players. Seventeen investors, including CPP Investments, Advent International and GIC, invested $425 million in a Series D round for Brazilian digital real estate platform Loft in March. Private equity fund managers committed $1.6 billion through H1 2021, an 82 percent increase over H1 2020.
In contrast to robustly capitalised developed financial markets, Brazil is capital-scarce. Because of this, co-investment is significantly easier to access than in markets such as the US. Another key difference from most other PE markets is the make-up of the LP base.
Public entities in Brazil stopped investing in 2014-16, and then began divesting in response to onerous regulatory standards passed to combat the corruption that had previously been rampant, according to Ricardo Kanitz, senior partner at Brazilian secondaries buyer Spectra Investments.
Wealthy family offices stepped in and now comprise nearly 80 percent of primary commitments to Brazilian GPs, up from basically zero percent in 1994, Kanitz adds.
Kanitz’s firm – one of the region’s two most active local investors – has been helping LPs such as state-backed pension plan Petros unload their positions. In June, Petros sold stakes in seven private equity funds to Spectra Investments for 86 million reals ($17 million; €14 million), The Wall Street Journal reported.
Spectra, founded in 2011, has done about 70 deals. Most of these were bilateral and done at deep discounts. Secondaries Investor reported in 2018 that 26 of Spectra’s transactions from the preceding three years priced at an average discount of 41 percent. Deals brokered by international firms have fared better, trading at 10-20 percent discount versus NAV. Spectra’s most recent fund, Spectra Latin America Private Equity Feeder V, which launched in July, is targeting $400 million.
“The vast majority of deals that we lose is because the seller decides not to sell at the price that we have,” says Kanitz. “It takes roughly one to two years for those processes within the pension funds to convince them to sell, because you have to first explain what is the concept of selling, why it makes sense… as well as how to value and structure a process.”
Furthermore, the region is inherently risky. “Within a four-year [holding] period, we’ve got to have unforeseen volatility, because that’s the way the region operates, especially Brazil,” says Kanitz. The key, he believes, is to take this into account in pricing and strategy: “Frankly, it’s not rocket science. You diversify throughout vintages. You do not trade too much in a single deal.”
Kanitz has heard chatter over the past two years that public institutions want to re-engage with primary markets – some have come to Spectra for advice – but, until now, such activity has remained theoretical. Public institutions are absent in the current boom in private capital activity. He admits the opportunity set his firm defined has mostly concluded “because we bought everything, or the old funds have been slowly divested”.
He adds: “There’s a few more transactions to be done. But I would not expect it to last much longer than next year.”
The other local secondary buyer of note, which has done about half as many deals as Spectra, according to Kanitz, started as the Brazil outpost for Hamilton Lane in 2011. In July 2020, the head of that group, Ricardo Fernandez, acquired Hamilton Lane’s Brazilian operations, including the existing two vehicles, and rebranded them Signal Capital. In December 2020, the firm sold a minority stake to Latin American investment bank BTG Pactual.
The firm is now raising its third fund, which will consist of 15 percent primary commitments and 85 percent secondaries (LP and GP-led) and co-investments. It is targeting around $100 million, and has done at least one secondaries deal already.
Lexington and HarbourVest also have offices in Brazil. Lexington declined to comment for this piece, and HarbourVest noted that the country is not an area of focus.
Fernandez says Signal tries to access positions from both high-net-worth clients and private institutional investors that are looking to “reshuffle” their portfolios: “I’m really targeting high-quality assets where, for some reason, the seller is the one in distress, not the asset in distress – where I can buy something with a reasonable discount.”
This includes the GP-led opportunity. “We’re trying to be very creative and proactive in proposing those transactions to the GPs,” says Fernandez. Signal aims to capitalise on the rolodex it has built over the past decade to source deals, recruit co-investors and, with the help of large players like BTG, take down larger-ticket GP-led transactions. Unlike the LP deals in Brazil, GP-led deals can become sizeable – up to $400 million. Fernandez hopes to see international capital starting to look and participate in these deals, as it is currently stymied by the risk inherent to the region and by Jair Bolsonaro’s presidency.
To be sure, there are global players with a boots-on-the-ground presence. However, as Kanitz points out, for a group like Lexington, for example, a sub-$50 million dollar deal in a low-returning, risk-fuelled region is not generally worth pursuing: “It just doesn’t pay off for them.”
There are a few recent, local entrants raising funds of funds, including fintech firm XP Investimentos and Banco Bradesco, both of which will do some secondaries. However, Fernandez says the other local players “are not serious”. He thinks this attitude is a risk for the asset class as a whole, though he and Kanitz both acknowledged the respect they have for each other’s firms.
As primary activity in Brazil increases, inevitably this will create new opportunities, be they in the form of family offices that have stepped into the shoes of public pensions or foreign tech investors arriving to take part in the country’s VC boom.