Private-equity funds made investments of R$11.6 billion in Brazilian companies in the first quarter, up 8.4% year over year. The faster pace, this time, appears among the portfolios that invest in more mature companies, with R$5.2 billion, compared to R$1.9 billion in the same period in 2021. The venture capital portfolios, which focus on projects in early stages, allocated R$6.4 billion from January to March, with a drop of 27.3% compared to 12 months ago.
The data are from a quarterly survey held by KPMG and the Brazilian Private Equity and Venture Capital Association (Abvcap) unveiled to Valor.
The seasonal comparison may say little of what is happening in the venture capital segment as a whole, said Roberto Haddad, a partner and leader for private equity and venture capital at KPMG in Brazil. “In the last two years, it has grown enormously, doubled in size. That’s an important indicator, but in the middle of the road there are fluctuations,” he said. “The big indicator, the main one in my view, is the strength of this fund industry within the context of acquisitions and the dynamics of the Brazilian economy.”
Mr. Haddad points out that in the first quarter of 2020 the industry had invested R$5.7 billion in private-equity and venture-capital funds, but it is not possible to link the weaker performance to the Covid-19 pandemic, which entered the radar for real as of March.
The apparent strength shown by private-equity funds in the first quarter may not extend into the year, said Piero Minardi, head of Abvcap. The executive, who also leads Warburg Pincus in Brazil, believes that the segment tends to be more sensitive to issues related to the election and the macroeconomic environment. “The moment the political picture is defined, regardless of who wins [the presidential election], and there is a clear path ahead, volatility disappears. The private-equity segment invests in longer cycles, it is difficult to position today because of the risk of a setback for a certain macro policy.”
In any case, privatizations, businesses in the infrastructure segment and in more basic segments such as chemicals and petrochemicals have attracted funds with large sums of money. For Mr. Minardi, depending on the agenda, sanitation and port projects have a lot of potential. The consumer industry is also usually followed by private-equity managers with attention.
“There is a factor that can be important: the interest rate itself. The companies have to finance themselves again at a cost of 20% a year. This puts pressure on cash flow, it is a problem for those who have long-term debt, it is a factor for companies to consider selling some equity to have a better capital base and avoid the interest rate trap.”
In venture capital, the assessment is that strong activity will prevail, running somewhat independently from the economic cycles. “If innovation is good, it will do well in any situation. Great brands have emerged in crises, like Uber in 2008,” Mr. Haddad points out. “There is a giant movement in fintechs. The financial market has always been very strong and has shown strength in acquisitions. There are new banks, but also the big ones incorporating the smaller ones to get up to speed,” he notes. The insurance, health and logistics segments also tend to continue growing and attracting money.
The higher interest rates, however, may hinder funding by new companies in reais because once again the pension funds have no motivation to migrate from fixed income, that pays 5% or 6% real interest, to a higher risk asset, Mr. Haddad said.
The executive says he is already seeing a return to rationality, especially in growing and in late-stage businesses. “In the ‘A’ and ‘B’ [early] rounds, investors are also more careful. They want to know whether the company has passed the test or not.”
With R$2.5 billion invested in 15 companies, Kinea is completing the raising of its fifth fund, which totaled R$2.4 billion last year. “It was a period in which the sector suffered a lot, but we were a exception,” said Cristiano Lauretti, the company’s private-equity manager, referring to the fact that venture-capital portfolios led the investments in 2021, something unthinkable in his more than 20 years of professional career.
The operation so far was anchored by local investors, who profited from previous funds (average of 20% per year) and were encouraged to participate, despite the interest rate hike and elections in the second half. “In the past, they didn’t understand this class and when they started to understand the importance of having a certain share in variable income and within it, a certain amount in illiquid assets, they started to see the relevance of this in the different cycles that Brazil has experienced whether in recession or in good phases.”
With the new money, he says that the plan is to have eight to 10 more investments, with contributions between R$200 million and R$300 million, by minority shares. Health, education, agribusiness and technology are among the preferred industries, Mr. Lauretti said.
The venture-capital wave in Brazil was fueled by giant competitors such as Softbank, but private equity also advances at an accelerated pace, said Gabriel Felzenszwalb, a partner at Vinci Partners, an asset management company that carried out three deals in the last 12 months.
The executive considers that the cooling down seen abroad with the venture-capital thesis will also materialize here, but he sees a good moment for venture capital ahead. With Brazil well positioned to take advantage of a new commodities cycle, this impulse reaches other sectors of the economy. “With the geopolitical difficulties, global investors may eventually take a bit out of Asia and look more at Latin America and Africa; it’s an old move.”
Source: Valor International