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Posted on October 2, 2012
There are plenty of opportunities, says Samantha Pearson
When Régis Dubrule arrived in Brazil with his wife and small son in 1975 in the midst of the country’s military dictatorship, the Frenchman was particularly concerned about one thing: how difficult it was to find well-designed furniture for his new home.
After working for the Brazilian office of Louis Dreyfus, the French commodities group, for about two years, Mr Dubrule and his wife Ghislaine decided to make the most of the gap in the market and set up their own furniture shop in São Paulo – Tok&Stok.
Over the next 30 years, the couple opened more branches across the country, forming a slightly more upmarket version of Ikea.
By the time Daniel Sterenberg, a director of Carlyle in Brazil, met the Dubrules in 2008 Tok&Stok had nearly 30 shops and was an attractive target for the US private equity group.
Firms have increasingly looked to put their money to work in Brazil after a record year of fundraising in 2011, hunting down opportunities in sectors ranging from retail to energy and logistics.
“When we looked at the furniture sector we realised that it was extremely fragmented; it was mostly made up of small individual shops with very few larger retailers,” says Mr Sterenberg.
In 2008 Carlyle itself had only just arrived in Brazil. Over the next four years, the fund continued to evaluate the sector, while making a series of other acquisitions in the country from a lingerie company to the largest chain of toy stores, Ri Happy.
However, in the middle of September this year, Carlyle announced it was finally adding Tok&Stok to its portfolio. According to people close to the deal, the firm paid about R$700m ($346.5m) for 60 per cent of the company.
“When the owners asked BTG Pactual [a Brazilian investment bank] to find a partner for them, we knew we wanted to participate,” says Mr Sterenberg, adding that Carlyle had first put in a bid in January.
While Carlyle has been one of the most active private equity funds in Brazil, making six acquisitions since 2008, its focus on consumer companies is shared by many of its competitors.
Government welfare programmes and the country’s recent economic boom have helped lift about 40m people out of poverty during the past decade, creating an army of consumers desperate to buy everything from televisions to the latest trainers.
In the furniture sector, the potential for growth is clear, says Mr Sterenberg. “When you look at consumption per capita on furniture, it’s only about $56 a year in Brazil, while, in mature markets it’s about $200 or $300,” he says.
Greater access to consumer credit has also allowed more lower-income Brazilians to keep shopping, while further government programmes to reduce poverty are expected to help maintain the momentum in Brazil’s consumer industries over the coming years.
So far this year, retail is the top sector in Brazil for so-called ‘Financial Sponsor’ deals, accounting for $642m of transactions, according to Dealogic.
However, consumption is not the only investment theme that has caught the attention of private equity funds in Brazil.
Luca Molinari, managing director in São Paulo for Warburg Pincus, a global private equity firm, says that infrastructure is also attractive, especially as Brazil prepares to host the World Cup in 2014 and the Olympics two years later.
“Hundreds of billions of dollars are going to be spent on either upgrading or building infrastructure in Brazil,” he says.
“Returns are probably too low in direct infrastructure investments, but we believe that at the periphery there will be companies that are not very well-known but providing important services,” adds Mr Molinari.
But while investment opportunities for private equity firms in Brazil are still plentiful, particularly given the country’s vast number of family-run companies set up in the same way as Tok&Stok, competition in the industry is becoming more intense.
Last year marked a record for fundraising in Brazil’s private equity industry, according to the Latin American Private Equity & Venture Capital Association (Lavca).
The whole region attracted a total of $10.3bn in investment, 80 per cent of which was destined for Brazil.
Now firms are starting to put that money to work. Funds have invested about $888m in Brazil so far this year, more than double the amount deployed over the whole of last year, according to Dealogic.
“Private equity activity in the country has a tremendous reason to grow,” says Daniel Wainstein, head of investment banking in Brazil for Goldman Sachs.
“We are seeing an array of firms starting to invest in the country and it is a very important part of our investment banking business and will just get larger,” he says.
Recent efforts by the government and Brazil’s central bank to bring down the country’s traditionally high interest rates are also likely to boost the industry.
Since August last year, the central bank has slashed 5 percentage points off the country’s benchmark Selic rate, bringing it down to an all-time low of 7.5 per cent.
“When leverage becomes cheaper in Brazil . . . it can play an important role in increasing the rate of returns,” explains Mr Wain-stein.
“There is a huge potential for a further increase in activity.” Household name: Carlyle added Tok&Stok to its portfolio