Unfazed by IPO glut, buyout firms thrive in Brazil

RIO DE JANEIRO (Reuters) - Buyout firms in Brazil, in contrast to their counterparts around the world, are the least worried about a glut in initial public offerings that could hamper successful exits this year.

With their focus set on finding acquisition opportunities and raising money from investors, private equity bankers are sure this is not the time for divestitures in the stock market. Or, at least, the industry is in no need of cashing out gains for years.

The private equity situation in Brazil contrasts with buyout firms in the United States, where they are in urgent need of exiting investments to return cash to investors, said David Rubenstein, the co-founder and chairman of global giant Carlyle Group CYL.UL.

"It's the luxury that private equity firms have in this country, that for now they don't have to worry about the short term," Roger Leeds, head of industry group EMPEA, said of Brazil in an interview.

"Most funds haven't begun to scratch the surface for takeover opportunities. That will be the focus this year," he added.

The window for private equity exits in Latin America's largest economy reopened late last year after a short drought during the global credit crisis. But as volatility derailed the IPO market in recent months, some deals either priced below initial expectations or were postponed indefinitely.

Bankers gathered at an industry event in Rio de Janeiro earlier this week said that a recent spike in valuations, coupled with uncertainty stemming from the October presidential election in Brazil and doubts over the global economic recovery, were contaminating the pricing of some IPOs.

"The perception of valuations in Brazil probably cast doubts over how successful exits could be," said Cate Ambrose, head of the Latin American Venture Capital Association

(LAVCA).

Nine companies have held IPOs or secondary share sales in Brazil so far in 2010, raising a combined 10.9 billion reais ($5.5 billion). But only one in five IPOs this year priced within the expected range.

Arminio Fraga, who oversees $5.6 billion in assets, including private equity funds as chairman of Rio de Janeiro-based Gavea, said that jitters over a massive stock sale by state-oil company Petrobras (PETR4.SA)(PBR.N) could have investors on a wait-and-see approach that might be dampening interest on IPOs and hampering deals.

That creates opportunities for private equity firms to focus on structuring new investment vehicles, attracting new investors and looking for more interesting takeover targets.

DISCIPLINE

"Private equity thrives in shaky environments," Fraga told journalists at the event, hosted by the Brazilian Private Equity and Venture Capital Association, known as ABVCAP.

"Maybe what the IPO market needs is the discipline and thrift that is a hallmark of private equity," he noted.

Exits should not pose a problem for Brazil-based funds at all, said Fernando Gentil, managing director of Darby Overseas' private equity in Brazil. Private equity-backed companies are often favored by investors in IPOs because they are perceived as larger and more mature.

On one hand, a clogged IPO market gives funds more time to fine-tune the business for exit candidates, improving performance. On the other hand, that could allow buyout firms to tap other alternatives such as strategic sales or mergers.

An overhang in IPOs "could turn out to be a good development for the industry," Gentil said.

Bankers stressed that the current environment is better suited for speeding up the pace of acquisitions and marketing funds to investors.

LAVCA forecasts that private equity-led takeovers and fund-raising will probably rise to levels not seen since 2007, when ample global liquidity and a commodity-driven boom led investors to pour more money into emerging markets.

Funds could raise up to $15 billion from investors by year-end, compared with $5 billion in 2008, said ABVCAP President Sidney Chameh.

Opportunities linger in the consumer and industrial sectors as wages climb and companies are not highly leveraged, said Fernando Borges, head of Carlyle's Brazil operations.

Advent International, which on Monday raised the largest-ever Latin American fund for private equity investments at $1.65 billion, had to cancel the IPO of its International Meal Company Holdings restaurant unit in February as market conditions deteriorated. Instead of fretting over the failed deal, bankers focused on fundraising.

The decision to scrap the IPO "proved to be the best decision we could have ever made," Patrice Etlin, who heads Advent's operations in Brazil, said in an interview.

Still, raising funds is tougher these days, Carlyle's Rubinstein said. Advent spent 17 months on the road convincing investors to pour their money into its LAPEF V vehicle.

(Reporting by Guillermo Parra-Bernal, Editing by Elzio Barreto and Tim Dobbyn)