New investments fell by 8%, while company exits plummeted by 80% year-on-year from January to the first week of May

05/17/2024

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Priscila Rodrigues — Foto: Gabriel Reis/Valor

Private equity funds, which buy equity stakes in companies, are experiencing one of the most challenging periods in recent years. The scenario is caused by volatility and the fact that the IPO market has been stuck for almost three years, narrowing the door to exit investments. Economic uncertainties have also made new investments more complex. Even so, the report is of more movement in the sector, something that should be reflected in the figures ahead.

In the year to the first week of May, asset sales by managers operating in Brazil totaled $105 million, and investments—disbursements to acquire stakes in companies—totaled $997 million. According to Dealogic data collected at Valor’s request, this is the worst start to the year, on both counts, since 2020, when the outbreak of the pandemic closed the markets.

The drop was significant compared to 2023 when the beginning of the year was marked by the revelation of the accounting fraud at the retailer Americanas, which abruptly closed both the variable and fixed income markets in an unprecedented way. In terms of new investments, there was an 8% drop year-on-year. In exits, the decline was even more intense, at around 80%, on the same basis of comparison.

The difficult start to 2024 comes after two equally weak years for the activity of these funds around the world. Higher interest rates damaged the financing of acquisitions and narrowed the exit door for investments via the capital markets. However, with many funds still capitalized and cash on hand, the pressure for disbursements to return to shareholders is growing.

Among the investments made in 2024, the American company Advent remained active and bought the cosmetics company Skala for undisclosed sums. It also invested R$1 billion, alongside Canada’s CPPIB, in the Inspira basic education network. Atmos, Warburg Pincus, and Mission invested in the Salta group. Among the assets currently looking for a buyer are, for example, Odontocompany, by LCatterton, and Gran Coffee, by Pátria, both of which already have financial advisors in place. Among the divestments made, Pátria sold shares in Hidrovias do Brasil to Ultrapar in the meantime.

According to data from the Brazilian Private Equity and Venture Capital Association (ABVCAP), the association that brings together private equity funds operating in Brazil and uses a broader base than Dealogic, investments in the first quarter reached R$5 billion, compared to R$9 billion in the fourth quarter and R$5.8 billion in the same period in 2023.

Priscila Rodrigues, president of ABVCAP, points out that the sector’s aim is to “put money to work” and that she has seen funds with cash in hand looking for opportunities. Those who start investing earlier, she points out, will be able to get more attractive prices. “What hinders divestments is what benefits allocation,” said Ms. Rodrigues, who is also one of the main partners of private equity manager Crescera.

Piero Minardi, from Warburg Pincus, predicts a slightly better 2024 for funds, given the degree of uncertainty in the economy. However, he believes that the funds already have mature investments in their portfolios and that divestments will, therefore, occur even though the IPO window remains closed. “If the funds carry these investments for another year, the internal rate of return begins to dilute,” he said.

Although the figures for the beginning of the year show less activity in the period, Ricardo Madrona, a partner at Madrona Fialho, says private equity funds are more active on the trading desks and will start investing. “Since March, April, these funds have been more active to start allocating,” he said. However, the closing of these transactions, which began to be worked on in recent months, will only appear in the figures later on.

Mr. Madrona says, for example, that of the 15 M&A (mergers and acquisitions) mandates on his desk, six are from funds. He says another four private equity mandates are currently being negotiated.

UBS BB director Anderson Brito says that the bank’s pipeline of private equity transactions is quite significant at the moment, including “buy side” operations—where they are on the buying end. “We’re seeing a sustainable movement, and the funds have significant ‘dry powder’ [cash to invest],” says the executive. He points out that, despite the more challenging scenario, the funds are managing to raise funds. “We see this in a positive light, and in an uncertain environment, it’s one of the best times to bet on this asset class,” he points out. “In addition, with the capital market closed, there is less competition,” he recalled.

Mr. Brito also states, on the other hand, that negotiations are taking longer to complete, and for this reason, the movement is not yet reflected in this year’s transaction figures.

Pedro Muzzi, director of Goldman Sachs in Brazil, says that M&A talks are more active at the moment and that private equity funds will have a prominent position in this recovery. “Private equity is part of this ecosystem and will be present at both entry and exit,” he said.

At igc Partners, which advised cosmetics company Skala on its sale to Advent, private equity funds are still among the contenders for the assets, but with a more significant presence of foreigners, while the locals are more distant, according to Daniel Milanez, a partner at igc. “The foreign funds have no problem with dry powder,” he comments. According to Mr. Milanez, as of next year, with the improvement in economic conditions, local funds will once again occupy a larger space on the buying side.

*Por Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/