Super Returns Latin America 2011

1

Presented by Claudio Vilar Furtado Execu7ve Director, GVcepe [email protected], February 2011.

Copyright @2011. Fundação Getúlio Vargas -‐ GVcepe

Value crea?on and the challenge of building a PE

returns database

2

Thanks to our Sponsors and Partners

2nd Census Project Sponsor

Copyright @2011. Fundação Getúlio Vargas -‐ GVcepe

Strategic Partners Founding Members & Sponsor

3 Copyright @2011. Fundação Getúlio Vargas -‐ GVcepe

Agenda

1.   The Second Census Project

2.   PE Returns in Key Regions

3.   Nature of PE Returns

4.   PE Returns in Brazil

5.   Closing Remarks

4

The Second Census Project

180 PE&VC

Managing Organiza?ons

144 Surveyed

80% of industry

par7cipants surveyed

Gather and interpret data to reflect the reality of the Brazilian PE&VC industry and its impact on the economy.

Copyright @2011. Fundação Getúlio Vargas -‐ GVcepe Source:2nd Census of the Brazilian PE&VC Industry – ABDI/FGV

•  502 porVolio cos., Dec 09 •  2005-‐2009 Period:

•  414 new investments •  103 total exits •  39 IPOs

•  US$ 36.1 bn Commi`ed Capital •  Main LPs: Pensions 22%, Parent Orgs.

18%, Endowments 10%, GP Orgs 9%, Family Offices 9%

•  144 PE&VC Firms •  258 Investment Vehicles •  Est. 1,593 Professionals & Staff

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Industry Overview as of December 2009


PorVolio Companies

Investors

General Partners

6

Expansion of the Asset Class

2.3%

36

6

27 1.2%

13

0

5

10

15

20

25

30 35

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0%

0.5%

Committed Capital as % of GDP 40

1%

Committed Capital allocated to Brazil (US$ Bn).

1.5%

2%

2.5%

The evolu2on of commi8ed capital is impressive, increasing more than 6 2mes since 2004

and 2 fold as percentage of GDP.

2 x

2%

2 x

15% p.a

1%


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Commiêd Capital December 2009 (US$ MM)

Types Private Govt. Total %

Tradi?onal * 27.168 935 28.103 78%

Corporate Venture ** 350 -‐ 350 1%

Infrastructure *** 3.955 -‐ 3.955 11%

Real Estate 2.734 -‐ 2.734 8%

Timber 970 -‐ 970 3%

Total 35.177 935 36.112 100%

* Investment vehicles with focus on manufacturing, trade, services, agriculture and tradi7onal businesses. ** Subsidiaries of industrial corpora7ons. *** Investment vehicles dedicated exclusively to oil & gas, energy and self defined infrastructure funds. NOTE: Reduc7ons refer to discon7nued opera7ons, termina7on of funds, alloca7on to Brazil changes and reduc7ons of commiGed capital by investors.

Commièd Capital Dec. 2008 28,984

Fundraising (Vehicles in US$) 3.093

Fundraising (Vehicles in R$) 2.979

Reduc?ons (Vehicles in US$) -‐1.531

Reduc?ons (Vehicles in R$) -‐732

Exchange Rate Effect 3.318

Commièd Capital Dec. 09 36.112

Source:2nd Census of the Brazilian PE&VC Industry Copyright @2011. Fundação Getúlio Vargas -‐ GVcepe

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Diversified Fund Investor Base

Commi`ed Capital by Investment Vehicle’s Legal Structure

* All vehicle structures according to Brazilian PE&VC regula7on CVM 391, 209, 402. NOTE: Parent Organiza7on includes Corporate Ventures and Banks’ cap7ve PE&VC subsidiaries.

Main Types of Investors


9

Notes: Fundraising based on sample of 258 investment vehicles by 144 PE&VC Managing Organisa7ons. Investment based on Sample of 394 and 95 Investments made by 144 and 45 PE&VC Managing Organisa7ons in 2005-‐2008 and 2009 respec7vely.

Investment and Fundraising (US$ bn.)

Es2mate of US$ 17.8 bn. of ”Dry Powder” ready to be invested as of December 2009


1% 2% 2% 3% 3% 3% 4% 4% 4%

11% 12% 13% 14%

24%

Infrastructure -‐ other Extrac?ve Industries

Entertainment/Tourism Pharmaceu?cal/Medical/Aesthe?cs

IT and Electronics Agribusiness

Communica?on Educa?on

Energy and Oil Financial Services

Retail Civil Construc?on/Real Estate

Various Industries* Food and Beverages

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Investments by Sectors of Economic Ac?vity (US$ MM)

* Various Industries: E.g.: Chemicals, Mechanic, Electric, Metallurgic, Packaging, Tex7les. ** Various Services: E.g.: Call Center, Consul7ng.

Sample 2005-2008: 394 investments by 144 PE&VC Orgs. Sample 2009: 95 investments by 45 PE&VC Orgs.

2005-‐2008 (Includes New and Follow-‐on Investments)


1%

1%

2%

2%

4%

6%

7%

8%

11%

14%

39%

1%

1%

1%

1%

3%

5%

5%

6%

9%

10%

54%

Civil Construc?on/Real Estate

IT and Electronics

Various Industries*

Retail

Food and Beverages

Pharmaceu?cal/Medical/Aesthe?cs

Various Services**

Infrastructure -‐ other

Agribusiness

Educa?on

Transporta?on and Logis?cs Services

Extrac?ve Industries

Entertainment/Tourism

Financial Services

Energy and Oil

Including all investments

Excluding one US$ 0.765bn investment in energy transmission

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Investments by Sectors of Economic Ac?vity in US$ MM

* Various Industries: E.g.: Chemicals, Mechanic, Electric, Metallurgic, Packaging, Tex7les. ** Various Services: E.g.: Call Center, Consul7ng.

2009 (Includes New and Follow-‐on Investments)

Sample 2005-2008: 394 investments by 144 PE/VC Orgs. Sample 2009: 95 investments by 45 PE&VC Orgs.


7

1

7

3

7 9

11 10 8 7

13

31

37

47

19

0

5

10

15

20

25

30

35

40

45

50

95 and before

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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New Investment Vehicles Raised

30 to 50 new investment vehicles raised p.a. since 2008, vigorous entry and expansion in the industry. Note: 215 Investment Vehicles reported by 120 PE/VC Managing Orgs.


13

Exits & Dives?tures

NOTE: the sample contains 151 dives7tures (107 total & 44 par7al) from 2005 to 2008 & 37 dives7tures (30 total & 7 par7al) in 2009 with informa7on about the exit mechanism.

8

17 19

1 4

6

12 10

16 10

4

6 12

27

11 5

4

3

15

8 1

3

4

2

4

0

10

20

30

40

50

60

70

2005 2006 2007 2008 2009

Write-‐off

Buyback

Trade Sale

Secondary Sale IPO

24

42

48

61

37

Dives7tures 2005 -‐ 2009 (Including Total & Par7al)

Source:2nd Census of the Brazilian PE&VC Industry – ABDI/FGV Copyright @2011. Fundação Getúlio Vargas -‐ GVcepe


Agenda






15 Source: Sand Hill Econometrics available at: h^p://www.sandhillecon.com/index-‐download.php

VC Gross Returns: Sand Hill Econometrics

The Sand Hill Index had an annualized return of 16.9% from end 1988 to the end of 2004. More recently it performed at an annualized return of 8% from 2005 to the end of 2009.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Dec

/91

Jun/

92

Dec

/92

Jun/

93

Dec

/93

Jun/

94

Dec

/94

Jun/

95

Dec

/95

Jun/

96

Dec

/96

Jun/

97

Dec

/97

Jun/

98

Dec

/98

Jun/

99

Dec

/99

Jun/

00

Dec

/00

Jun/

01

Dec

/01

Jun/

02

Dec

/02

Jun/

03

Dec

/03

Jun/

04

Dec

/04

Jun/

05

Dec

/05

Jun/

06

Dec

/06

Jun/

07

Dec

/07

Jun/

08

Dec

/08

Jun/

09

Dec

/09

Jun/

10

VC Index: January 1992 - June 2010 (December 31, 1991 = 100)

2010-Q2

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Region 5 year 10 year Absolute Change % Change

La?n America & Caribbean PE 19.06% 1.71% 17.35 1015%

Emerging Market VC & PE 12.83% 6.63% 6.2 94%

US Buyout 10.44% 7.68% 2.76 36%

Western Europe VC euro -‐2.01% -‐4.13% 2.12 51%

Compara?ve End-‐to-‐End Returns by Region as of 09/30/2009.

Source: Cambridge Associates September 2009 Quarterly report.

PE Net IRRs to LPs in Key Regions by C.A.

17 Source: New Markets, New Rules, BCG & IESE Report, November 2010.

IFC experience in emerging markets, period 2000-‐2006.

It has improved greatly since 2000.

Notes: IFC’s fund-‐level data, BCG analysis. Data reflect 176 PE funds in EM. The return is net-‐of-‐fees & carried interest, the cutoff for fund data was 2006 vintage year.

Before 1990 1990 -‐1999 2000 -‐ 2006

12 points

4.4% 5.3%

17.3%

PE Returns in Emerging Markets by IESE & BCG

18 Source: Caselli, S., 2009, Explaining Returns in Private Equity Investments, Carefin Bocconi.

Caselli´s Prime Work: PE Returns in Italy Carefin-‐Bocconi (Gross-‐of-‐fees)

Conclusions: 1.   IRR is mainly driven by growth in sales, ROA and

ROE. 2.   IRR affected by put op2ons and tag along rights.

PE Growth 52%

Buyouts 26%

Early Stage 16%

Turnarounds 6%

Sample by Stage

SAMPLE Investment period* 1999 -‐ 2005 Investments 804 PE Funds 87 Man. Cos. 58 *exited no later than '07

NATURE OF DEALS

Unleveraged Deals 70%

Leveraged Deals 30% Median Sales EUR 126 M.

Median EBITDA EUR 16 M.

FINDINGS Average IRR 33.17% Largest IRRs Buyouts Stock Market Index 17.95% 2 yr Government Bonds 8%

3. Contractual agreements (exit ratchets, lockups) have a posi2ve effect on growth. 4. Longer holding period investments awarded with higher IRRs.


Agenda






20 Source: How profitable has Private Equity been and where have those profits come from? UK study, Julian Francs, based on a paper and presenta?on by Viral V. Acharya, and Conor Kehoe.

Nature of PE Returns in Mature Markets

22% 22%

44%

100%

22%

56%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

PE management Underlying stock market sector

Impact of leverage Gross IRR

Half of returns come from impact of leverage.

Evidence of UK PE disaggregate returns

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Nature of PE Returns in Brazil

Drivers of returns

Mature Markets Brazil Comments on the Brazilian model

Leverage

Growth

Mul7ple expansion

Efficiency gains

Much less reliant on debt.

Key component for crea7ng IRR.

Greater need of the type of skills and business knowledge provided by PE firms.

Many more opportuni7es with macro condi7ons improving and opportuni7es for proprietary deals.

Source: Is Brazil a good opportunity for PE investments?, Casabona 2010. Note: 9 PE&VC firms based in London and Sao Paulo were surveyed .

It is not driven by leverage and aggressive cost cu`ng; rather IRR is driven mostly by growth and efficiency (focus on opera2onal improvement).

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ü  Stable cash flow ü  Low fixed costs ü  Low Capex ü  High profit margins ü  Scaling business model

Investment Thesis

Industry

Brazilian Economy

Company Majority stake

Company Minority stake

ü  High growth rates ü  Fragmented (Roll up strategy)

ü  Non-‐cyclical sectors

ü  Health compe77veness (no price war)

ü  Low governmental regula7on

ü  Aligned with GPs exper7se

ü  Lack of financial sophis7ca7on from management

ü  Succession problems

ü  Good management team

ü  Domain knowledge of the sector from management ü  High entry barriers

ü  High market share & strong brand

ü  Low customer concentra7on

ü  A`rac7ve entry valua7on

ü  Clear exit strategy

Company’s common features

Key Company-‐Industry Features for PE Investments in Brazil

Source: Is Brazil a good opportunity for PE investments?, Casabona 2010. Note: 9 PE&VC firms based in London and Sao Paulo were surveyed


Agenda






The challenge

• Less than 50 PE/VC Managing Organiza?ons have more than 10 years inves?ng in

the country, of which 60% have completed the en?re investment-‐to-‐exit cycle.

• Fund-‐level returns are not yet available.

• The performance repor?ng requirement has been newly introduced by self-‐

regula?on in December 2010.

A changing scenario • Significant and stable growth in the industry. • GVcepe has created a comprehensive database and data collec?on system at the poruolio company and fund levels to supply the industry with the properly constructed performance data.


Challenge of Crea?ng a PE Returns Database

Individual Investments Gross-‐of-‐Fee Returns in each Investment Vehicle


Sample Ques?onnaire


NAV for each Investment Vehicle

27

Individual Investments MOI* Exited 2004/05 -‐ 2010

Sample: 25 Deals, 15 IPOs & 10 Trade Sales. 7 cases in R$ and 18 cases in US$.

Quar7les Range Median

Top 10 > 13.42

3rd 5 -‐ 9.9 6.6

2nd 3 -‐ 4.9 3.45

Lower 1 -‐ 2.9 2

Median mul7ples of investment

Note: Median holding period (4.2 years) and median exit value (US$ 86.8).

Source:2nd Census of the Brazilian PE&VC Industry

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

5%

10%

15%

20%

25%

30%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Above

MOI / COC

Rela?ve Frequency

Cumula?ve Frequency

Mul7ple of investment


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Individual Investments IRR Exited 2004/05 -‐ 2010


Top 100 > 162%

3rd 50 -‐ 99 66%

2nd 25 -‐ 49.9 37%

Lower 0 -‐ 24.9 18%

Median IRRs

Sample: 25 Deals, 15 IPOs & 10 Trade Sales. 7 cases in R$ and 18 cases in US$. Source:2nd Census of the Brazilian PE&VC Industry

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0% 45% 90% 135% 180% 225% 270% 315% 360%

IRR

Rela?ve Frequency

Cumula?ve Frequency

IRR Returns

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Excess returns over CDI* Exited 2004/05 -‐ 2010


Top 170 > 271%

3rd 130 -‐ 169.9 141%

2nd 105 -‐ 129.9 110%

Lower 80 -‐ 104.9 100%

Median excess returns over CDI

Sample: 25 Deals, 15 IPOs & 10 Trade Sales. 7 cases in R$ and 18 cases in US$.

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%

0%

5%

10%

15%

20%

25%

30%

80% 100% 120% 140% 160% 180% 200% 220% 240% 260% 280% 300% 320%

Annual returns in excess of CDI*

Rela?ve Frequency Cumula?ve Frequency

*CDI, Interbank Loan-‐Rate




Required Returns by GPs for Single Investments

This sample consists of 77 answers by 71 PE&VC managing organiza?ons.

42.5

35

30 26.25 25

22.5 22.5 19.75 19.5

Expected median nominal return (R$ % p.a.)

Macroeconomic data (%) CDI 11.14 Gov Bonds (LTN)* 12.5 Infla7on (IPCA)** 5.9 Expected Infla7on 4.5 *LTN 01/01/12 **Last 12 months


Sources: h^p://www.portalbrasil.net/ipca.htm h^p://www.ce?p.com.br/ h^p://www.tesouro.fazenda.gov.br Focus Forecast 2011


Agenda







Closing remarks

Ø The official results of the Second Census will be released on March 1st.

Ø GVcepe is concluding a comprehensive industry research with ABDI’s

government support and ABVCAP’s ins?tu?onal backing.

What is next? Ø  To provide a complete performance database, GVcepe is working on

performance data with a pre-‐selected “Best Prac?ces Group”.

Ø  Get commitment from PE&VC firms to fill out the performance data

ques?onnaires.


Best Prac?ces Reference Group

12%

4%

63%

21%

Best Prac7ces Group

Angels

Infrastructure

Private Equity

Seed / Venture

PE/VC Managing Organizations 1 Advent International 2 AG Angra Investimentos 3 Angra Partners Gestão de Recursos e Assessoria Financeira 4 Antera Gestão de Recursos S/A 5 Axxon Group 6 BNDESPAR 7 Brookfield 8 BTG Gestora de Recursos Ltda 9 CRP Companhia de Participações 10 Darby Overseas Investments, Ltd. 11 Darby-Stratus 12 DGF Investimentos 13 FIR Capital Partners Gestão de Investimentos S.A. 14 Floripa Angels 15 Gávea Angels 16 Gávea Investimentos 17 General Atlantic 18 GP Investments 19 InfraBrasil 20 Modal Administradora de Recursos S.A. 21 NSG Capital Administração de Recursos S.A. 22 Pátria Investimentos 23 Prosperitas Investimentos S.A. 24 Rio Bravo Investimentos S.A. 25 São Paulo Anjos 26 Tarpon Investments 27 TMG Capital

Together they represent 50% of the Industry’s Commi8ed Capital.



Thank you for your a^en?on

Prof. Cláudio V. Furtado Phone: +55 (11) 3285-‐4222 [email protected]

Victor C. Casabona Filho Sloan Fellowship 2010 London Business School

Phone: +44 (0) 7872 490666 [email protected]

Alexander Appel Researcher GVcepe

Phone: +55 (21) 8369-‐69669 [email protected]

Presenta7on co-‐authors

Super Returns Latin America 2011

Economy & Finance

Transcript of Super Returns Latin America 2011