Private equity and venture capital in an emerging economy: evidence from Brazil

Abstract

The Private Equity and Venture Capital (PE/VC) financial model was initially developed in the US and, therefore, designed for the US institutional environment. The degree to which the US PE/VC model can perform in other institutional environments is an interesting question. This article is based on data supplied by all of the 65 PE/VC organizations with offices in Brazil in 2004. Comparing Brazil and the US, we found that the main similarities are: an industry composed mostly of independent organizations, managing capital coming mostly from institutional investors; capital is heavily concentrated regionally and in few organizations; investments are made within a close geographical distance; and software and IT are preferred sectors. The main differences are that for Brazil: investments are concentrated in more advanced stages of corporate development; since credit is scarce, few LBOs take place; low levels of sector specialization (PE/VC investing in a broad variety of industrial sectors); firm concentration in Sao Paulo's financial district suggests a quest for commercial partners and strategic buyers for portfolio companies; and Brazilian PE/VC regulation recognizes the inefficiency of the legal system and forces the use of arbitration. We also discuss possible reasons for these adaptations.

Keywords:

• private equity
• venture capital
• emerging market
• institutions

Acknowledgements

This project was made possible with the full support of FGV Center for PE/VC Research and its sponsors. The authors acknowledge the important contribution given by Professor Cláudio Vilar Furtado and the institutional support for data collection provided by the Brazilian Private Equity and Venture Capital Association (ABVCAP), Sao Paulo Stock Exchanges (BOVESPA), the Emerging Markets Private Equity Association (EMPEA), Brazilian Ministry of Science and Technology's Financing Arm (Finep), Endeavor, and the International Finance Corporation (IFC). Ribeiro received grants from the National Council for Scientific and Technological Development (CNPq) and the National Association of Investment Banks (ANBID). Carvalho received grants from the State of São Paulo Research Foundation (FAPESP) (Project 03/08825-7), CNPq (Process 477572/2003-0), GVpesquisa and GVcepe. Comments from André Aquino, Rodrigo Bueno, Tiago de Melo Cruz, Joubert Castro Filho, Janine Gonçalves, Elizabeth Johnson, Isak Kruglianskas, Roger Leeds, Keith Nelson, Fernando Ruiz, David Stolin, Isaias Sznifer and Vitaly Vorobeychik are gratefully acknowledged. Gisele Gaia and Fábio Barreto provided invaluable assistance. An earlier version of this paper has been presented at the 2006 Babson College Entrepreneurship Research Conference (BCERC). It derives from Ribeiro's MSc. thesis: O Modelo Brasileiro de Private Equity e Venture Capital.

Notes

1. In fact we also collected data for six PIPE organizations (organizations that make private investment in public equity), but for the sake of international comparison, they had to be excluded from the sample, leaving us with 65 organizations.

2. To identify the population of managing organizations in Brazil, we relied on the following sources: (1) Endeavor's guide; (2) Brazilian Venture Capital Association (ABVCAP) members' list; (3) list of funds regulated by Comissão de Valores Imobiliários (CVM), the local securities and exchanges commission; (4) IFC's annual report; (5) Ministry of Science and Technology's (FINEP) internal address book; (6) list of firms in Johnson and Pease (2001); and (7) analysis of news in the media.

3. In Brazil, PE/VC funds can take different legal forms such as holding companies, limited partnerships, investment funds regulated by the local security and exchanges commission, etc. Also, a PE/VC organization can manage one or more PE/VC funds.

4. Managers are those with decision power over at least one phase of the PE/VC cycle.

5. FINEP, BNDES, SEBRAE, Banco do Nordeste, etc.

6. Inter-American Development Bank, International Finance Corporation, Overseas Private Investment Corporation, the Netherlands Development Finance Company, etc.

7. Namely: Natura (cosmetics), Gol (low cost/low fare airliner), ALL (railways and logistics), DASA (laboratorial services), CPFL (power generation and distribution), TAM (airliner), Submarino.com (internet retailer), Localiza (car rental) and UOL (Internet service provider).