Dearth of IPOs, mature market stimulate deals between asset managers
08/26/2023
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Piero Minardi — Foto: Silvia Zamboni/Valor
Amid a sluggish capital market scenario, marked by a nearly two-year dearth of IPOs, asset trading among private equity funds is on the rise this year. Although in its early stages in Brazil, this type of operation accounts for about a third of deals in the United States and is common in Europe, according to insights from asset managers interviewed by Valor.
Statistics from the Brazilian Private Equity and Venture Capital Association (ABVCAP), an organization encompassing asset managers active in this market, underscore the demand for this type of transaction. According to the latest data, secondary purchases accounted for 11.1% of transactions in the second quarter of the year. In the first three months of the year, it was 8.7%, compared to a historical average of 4.2%.
While still developing, transactions between funds has been increasingly observed in the local market. Just two weeks ago, the IG4 asset manager sold the Opy Health hospital company to a BTG Pactual fund. In July, the Starboard investment firm acquired 38% of the stake of the American fund EIG in Gás TransBoliviano (GTB). Another significant deal was the sale of the consortium administrator Ademicon, owned by Treecorp, to 23S Capital.
There have been eight transactions conducted this year until August, reaching the entire volume for 2022, according to market data compiled by Pátria. Between this year and the previous, these operations amount to around $3 billion even in a year that’s relatively slower for mergers and acquisitions, with many funds opting to postpone both company purchases and divestitures.
Traditionally, a private equity fund seeks an exit from an investment after five to seven years of business maturation. In Brazil, the most common exit strategies involve either an IPO or private sale, said Piero Minardi, director at Warburg Pincus, a leading firm active in Brazil, and vice president of ABVCAP.
“A company that already has a fund as an investor is theoretically well-prepared. Another private equity fund might acquire the business, believing that the invested company still has greater growth potential due to its belief in the project,” said Mr. Minardi. “Not always does a private equity fund offer the best price for the asset, as fund managers tend to be more conservative in valuing assets than a strategic buyer.”
However, the number of such operations is growing within the broader private equity market. Hans Lin, co-head of Bank of America’s Investment Banking Division in Brazil, explains that asset sales between funds are becoming more frequent as this industry develops in a given market.
“As the market develops, these types of transactions become more common,” he commented. He explained that this is because as more funds of different sizes investing in various companies emerge, with distinct value “checks,” the shifting of ownership between funds after the growth of invested companies becomes logical. Mr. Lin also noted that this growth is partly due to the lack of IPO-based divestments, which are a preferred exit route for local private equities.
Carlos Eduardo Martins, a partner at Vinci, sees Brazil gradually maturing for this type of transaction. Mr. Martins highlights that the country’s weak capital market and high interest rates favor these asset trading negotiations among private equity funds. “This volume isn’t larger primarily because there are only a few investment firms operating in Brazil.”
In recent years, the number of firms has decreased, said Mr. Martin, citing ABVCAP data. “Abroad, this kind of ‘sponsor to sponsor’ transaction accounts for nearly 30% of deals. In Brazil, investment firms exit via the stock exchange or to strategic buyers,” he added.
A study by the Pitchbook platform reveals that in the second quarter of this year, inter-fund sales amounted to $26.2 billion, constituting 30% of the industry’s activity during that period. One transaction to be included in the American statistics for the third quarter involves the steakhouse chain Fogo de Chão, from Rhône Capital to Bain, a highly successful deal for the American fund.
In 2016, Vinci itself sold a portion of Burger King to the American investment firm Capital Group. The firm is considering other similar transactions for some of its investments. “This exit strategy will play a larger role as the private equity market matures and gains further depth,” Mr. Martins said.
Another form of sale, with a similar rationale, occurs when a certain manager sells an asset to another fund within its portfolio, providing liquidity to the older fund and transferring the company to one with a longer term. This was the case with the sale of food service company Delly’s to the giant CVC. In this operation, Pátria migrated its investment from fund V to fund VII, which was raised last year.
Ricardo Scavazza, private equity manager at Pátria, states that the management company is investing in the asset and sees growth potential in this business, which is not yet in a mature stage for an IPO in the short term. The Prisma asset manager also invested in Elfa Medicamentos. “Renewing the shareholder base through this process is common. It’s as natural a move as selling (to a strategic buyer), for instance. The volume of transactions here in Brazil isn’t as extensive as in the U.S.,” said Mr. Scavazza.
Private equity expert and Insper professor Andrea Minardi notes that selling to another fund already constitutes the most profitable divestment strategy in the venture capital industry, which invests in startups. “Many funds operate in different markets and at different stages,” she commented. According to her, sales between funds occur at attractive values, as the buyer is a new manager that sees new potential gains in the target company.
*Por Fernanda Guimarães, Mônica Scaramuzzo — São Paulo
Source: Valor International