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For Private Equity Firms Looking to Expand into Emerging Markets, Brazil Is Ready for Its Close-Up

Brazil Is Settling In to a Period of Steady Economic Growth, and Many Industries Are Ripe for Private Equity Investments. PE Firms Need to Understand the Market and Apply the Right Strategies    

SÃO PAULO—As Brazil’s economy takes important steps toward stabilization after a major boom and a two-year correction, it is becoming attractive to private equity (PE) firms that want to diversify into emerging markets. The continuing recovery, probusiness reforms, and growth in key industries are combining to create a clear opportunity for PE firms. These key findings are presented by The Boston Consulting Group (BCG) in its report Private Equity Strategies for Brazil’s New Economic Reality, which is being released today.

Brazil’s economy is more mature than those of other emerging markets. About one-third of Latin America’s population lives in Brazil, yet the country attracted nearly half of all PE investments in the region from 2008 through 2015. Compared with developed markets such as the US, there is still significant room for growth. “That combination of factors puts Brazil in the sweet spot for companies willing to invest in emerging economies,” says Heitor Carrera, a BCG partner and coauthor of the report. “Over the next decade, the country will offer a rare opportunity to both global firms that want to add emerging markets to their portfolios and local firms in Brazil that want to step up their investments there.”

Steady Growth and an Increasingly Friendly Business Climate

Most economists predict that, despite some volatility in the first half of 2017, Brazil’s GDP will settle into a period of slower but steadier growth—about 1.8% a year through 2021, which is faster than that of the G7 countries. In addition, Brazil’s government has introduced a series of economic reforms—such as reducing the paperwork required to file some taxes or start a new company—aimed at promoting a more business-friendly environment.

Although the recent economic correction hit some industrial sectors hard, many others—particularly in consumer segments such as food and health—continued to expand at double-digit rates, and that growth will likely continue. These industries are now prime candidates for the kind of value creation strategies that PE firms can apply.

Five Strategies for Adapting and Thriving

Success in Brazil requires a deep understanding of the unique aspects of its PE market. For example, the average deal size in Brazil is smaller than that in many other markets, and even large global firms compete for smaller deals. In addition, IPOs are relatively scarce, and firms are more likely to sell their portfolio companies to strategic, nonfinancial buyers.

Given these factors, five strategies are crucial for PE firms aiming to compete in Brazil:

• Look beyond conventional targets—where competition is stiff—and consider investing in early-stage companies or even launching new companies from scratch.

•  Revamp the screening process for a slow-growth environment. Identify small pockets of growth or buy assets from companies in trouble.

•  Leave no stone unturned in creating value. Given that overall growth will be tougher in the future, firms will need to focus on profit margins and other approaches.

•  Bring industry-specific expertise to the table. In a market where local expertise is critical, firms need to build strong teams that can make the operational improvements needed to create value in their portfolio companies.

• Protect against exchange rate volatility in Brazilian currency, potentially by setting long-term investment periods.

“Brazil has given investors a wild ride over the past decade,” says Carrera, “but as it now enters a period of slower growth, it presents PE firms with both challenges and strong opportunities. Firms that build the right foundation, understand the local market, and adopt a long-term view will set themselves up to take advantage.”

A copy of the report can be downloaded here.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

ABOUT THE BOSTON CONSULTING GROUP

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 85 offices in 48 countries.

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