RR Phantom
Location : Wasted Space
Job/hobbies : Cayman Islands Actuary
 |  Subject: Via ANCAPS: Big in Brazil: leveraged buyouts without the leverage  Wed Mar 30, 2011 3:02 am | |
| SAO PAULO: ''We use zero leverage.''
Luiz Otavio Magalhaes, the founding partner of one of the most successful private equity firms in Brazil, was trying to explain his business model. His leveraged buyout firm, Patria, easily garners more than a 20 per cent return annually. That kind of performance attracted the attention of Steven Schwarzman, whose Blackstone Group bought a 40 per cent stake last year.
Yet this LBO fund is, uniquely, missing the ''L''.
''Zero,'' he said again, as if to underscore the point.
Billions of dollars are rushing into Brazil's economy. International private equity firms, like Blackstone and the Carlyle Group, are scrambling to capture a piece of this emerging market before it has fully emerged. JPMorgan Chase recently paid $US6 billion to buy 55 per cent of Gavea, a seven-year-old investment fund co-founded by Arminio Fraga, the former president of the central bank of Brazil from 1999 to 2002.
But perhaps the most unusual aspect of the private equity industry in Brazil is that its success thus far has had nothing to do with burdening its acquisition targets with heaps of debt. Indeed, this version of the private equity business is the opposite: improving a company's operations instead of turning to financial engineering to squeeze out performance. It is a mantra that many private equity firms in the US and Europe pay lip service to but do not follow in practice.
The reason that private equity firms in Brazil do not use debt is simple. In Brazil, money does not come cheap, Magalhaes explained over coffee in the firm's offices in downtown Sao Paulo.
A private equity firm looking for a loan from a bank in Brazil might have to pay as much as 20 per cent interest. A loan in the United States, on the other hand, might cost 5 per cent. The reason for the lack of leverage, at least for now, becomes obvious.
So how does Magalhaes's firm, with about $US4.3 billion under management, make such huge profits? For starters, he does not pursue elephant-size deals that are popular in America.
''There is always room for improvements in smaller companies. Family-owned companies, as we usually say, 'Their kitchen is a mess','' he said. ''Usually when you are talking about bigger companies, the room for improvements within the company are smaller because the company needs to be already better organised, otherwise they will not have survived.''
He also focuses almost exclusively on buying family-controlled businesses, which are often more difficult negotiations than with public companies. ''We had dinner with the wife of this guy because he wanted her to know the guys with whom he would be associating,'' Magalhaes said about a recent target. ''It's fair that she wants to know us.'' He added, ''These companies are still under the radar, they do not mandate JPMorgan or Goldman Sachs to find me.''
If his principles sound like what the fledgling private equity industry circa the 1970s in the US pursued, that's because they are. Magalhaes isn't bidding for companies in auctions or forming consortiums with other firms. He spends years developing relationships with small companies until they are willing to sell to him.
He bought a medical diagnosis company in 2000 that had 18 outlets with $90 million in revenue. By 2009, when Patria exited, the company had more than 300 shops with $1.6 billion in revenue.
Among his other attributes, Magalhaes is uncharacteristically casual for a private equity boss. Forget about pinstripes; he is dressed in jeans and a work shirt. To prepare for a meeting with Schwarzman last year, he hurriedly reminded his staff the day before to come in a dark suit.
Magalhaes made a deal with Schwarzman after a courtship that is similar to the one he often has with his own targets, as it took almost a decade before a deal was reached. For Blackstone, the deal allows the firm to tap into Brazil's fast-growing market using local expertise. Patria's $US4.3 billion under management includes money allotted for traditional private equity, real estate, infrastructure, a small hedge fund and a small advisory business. It is, in other words, a mini-Blackstone.
The big question facing Magalhaes and others in his industry is whether they can sustain their performance as bigger players enter the market, looking for bigger prey.
For now, Magalhaes says he is not worried. With the Brazilian economy growing at a rapid clip, the wind is at his back.
But he and Fraga acknowledge that the business is becoming more competitive. As the cost of debt comes down, they worry that Brazil's private equity industry may resemble the buyout shops in the US.
''There will be more leverage for sure,'' Fraga said. ''Hopefully, we won't do anything too stupid when the opportunity becomes real.''
ANCAPS: ANARCHO-CAPITALISTS |
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