Growing interest from private equity sector in Brazilian market


Despite frequent reports in the media about disappointing economic growth and social and political unrest in Brazil, private equity firms are looking at the country with great interest.

Author: Niels Bot, Head of ResearchGrowing interest from private equity sector in Brazilian market

It wasn't that long ago that rising prices in Brazil scared most private equity investors off from investing in the Brazilian market. Now, the devaluation of the Brazilian currency, slow economic growth, and a sharp drop in share prices have rekindled interest in the country.

Big names in the private equity world like Patria Investimentos Ltda., Blackstone, Advent International, KWB, and Bain Capital have all lately expressed interest in dramatically expanding a number of investments in the Brazilian market, to the tune of billions in investments. Data vendor Dealogic Ltd. has indicated that the total value of the private equity contracts announced in Q1 2014 is higher than at any time since 2010.

It takes a creative approach to succeed in Brazil

Investing in a market with low economic growth demands a creative approach. Just take a look at Brazil's biggest bank, Itaú. Its private equity arm recently described its plans to look beyond the traditional areas of business and industry. Itaú is now increasingly looking at new growth regions in Brazil, like the northeast and central west.

Nothing but growth potential in underdeveloped regions

One of the most common misconceptions about Brazil is that it is a single, homogeneous unit. Nothing could be further from the truth. Brazil is nearly as big as the USA, and is made up of twenty-seven states grouped in five regions. And the economic and social differences between these regions and states are, in many cases, dramatic. But since President Luiz Inácio Lula da Silva took office on October 27, 2002, the standard of living of the broad base of the country's population has been steadily rising. Millions of Brazilian households have crawled their way into the middle class, which in the period 2002-2012 has grown by more than 40% to a full 52% of the Brazilian population. In relative terms, growth has been most impressive in the densely-populated northeast. Here, in 2002, fully three-fourths of the population belonged to the poorer segments of the population.

But since then, the economy in the region has grown well above the national average, and its growth potential is still huge. In 2013, nearly 30% of the Brazilian population lived in the northeast, even though this region accounted for only 13.5% of the country's gross domestic product.

Real estate market turning heads

The growing demand for property in Brazil, in combination with high yields, have fueled interest in the market on the part of national and international investors in recent years. Private equity firm Momentum Capital in Amsterdam (through its local partner Urbania International) has been successfully active in the property market in northeast Brazil since 2010.

More recently (June 2013), it was announced that Blackstone Group LP, one of the world's biggest private equity firms, and a partner have taken a 70% stake in Brazil's biggest residential real estate developer, Alphaville Urbanismo.

Shortage of housing increasing

Despite increasing investor interest in the Brazilian property market, the challenge of meeting the growing demand for housing remains big. In 2013, the shortage of housing in the country was estimated at eight million homes. With continuing income growth and the fast-rising number of households, that shortage is certain to grow. According to the Brazilian Chamber of the Construction Industry (CBIC), in the period up to 2022 Brazil will need 27 million new homes.