Brazil: The next hotbed of venture capital and private equity?

Posted by: Spencer Ante on June 26, 2009

Yesterday, I attended a packed conference about investing in Brazil. The event, which was sponsored by the Brazilian-American Chamber of Commerce, drew more than 100 investors, executives and technologists at the Palace Hotel in New York City.

There were several good panels but the one on venture capital and private equity really caught my attention. Luiz Figueiredo, president of the Brazilian Association for Private Equity and Venture Capital, told the audience that as of the end of 2008 investors had committed $28 billion in venture and private equity capital to Brazil. That is up from $6 billion in 2004, amounting to an incredible 50% compound annual growth rate over the last four years. To date, 500 Brazilian companies have received venture capital or private equity investments, and there is $12 billion left to invest over the next few years from that $28 billion kitty.

The conference was capped by two big announcements. On June 25, the Brazilian stock exchange Bovespa hosted the world’s largest IPO of the year, a $4.3 billion offering by Brazil credit card processor VisaNet. On the same day, Boston-based private equity firm Advent International announced that it bought a 50% stake in Brazilian holding company PAP for $142 million. PAP control Kroton Educational, a fast-growing education company. It was Advent’s 15th investment in Brazil since 1997.

An April 2009 survey by Coller Capital found that investors plan to increase their exposure to emerging markets, and that Brazil’s stock was rising. In the survey, Brazil ranked as the second most attractive choice for private equity investment, behind China and ahead of India. Last year, Brazil ranked fourth.

Why is Brazil such a hotbed for investment? Figueiredo pointed to several factors. Among them: A large and stable economy, a solid and modern financial system that escaped the financial crisis, an improving legal system, a strong local investor base, and robust capital markets, including the country’s Bovespa stock exchange.

More than 50% of the growth in capital came from the nation’s pension funds. In Brazil, pension funds are allowed to invest up to 20% of their funds in alternative investments such as private equity and venture capital. “The industry is getting new money and we are ready for it,” says Figueiredo. “We are really well positioned to attract foreign capital.”

One of those new foreign investors is Draper Fisher Jurvetson. In May 2007, the Silicon Valley firm launched a partnership with a Brazil-based firm called FIR Capital. The two firms launched a $170 million fund. Marcus Regueira, a founding partner of FIR Capital who was on the panel, said that his firm is looking to invest in information technology, mining technology and agribusiness. “We’ve never had the quality of entrepreneurs that we have now,” said Regueira, a former executive at Bank of America who received an MBA from the Wharton School of the University of Pennsylvania.

Brazil has yet to produce a breakout technology startup that is a leader on the global scene. But Regueira says the influx of new capital will help the country reach that next level. As an example, he cited the experience of Akwan Information Technologies, a Brazilian search engine that FIR invested in. In 2005, Google bought Akwan Information Technologies and used it to set up a research and development center for Latin America. Regueira says Akwan and its investors had to sell the company because it could not attract more follow-on investment. Now, he says, that won’t be so much of a problem. Thanks to the flood of new capital, “now is the time to invest in Brazil.”

DFJ director Elizabeth Clarkson, who was also on the panel, predicted that the new vintage of Brazil funds will produce extraordinary returns. “DFJ was early in China,” she said. “We are looking for Brazil to be a similar experience.”

- Spencer Ante also publishes the Creative Capital blog. Click here to see more.

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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