January 20, 2013 5:00 pm

Buyout groups eye China and Brazil

Slowing economic growth in China and Brazil is fuelling hope among cash-flush private equity groups that there will be more dealmaking opportunities this year.

Investor interest in the two emerging-market economies has long outpaced the number of available investment opportunities for private equity, resulting in funds sitting on large amounts of undeployed capital. More than $100bn of funds in Asia, for example, are waiting to be put to work. This is the largest amount of dry powder in years, according to Mitul Patel, head of Asia Research at Preqin, the data provider.

When the Chinese and Brazilian economies were booming, and when companies and markets were still relatively underdeveloped, entrepreneurs and businesses found they had little need for the capital or advice offered by private equity.

That balance is now changing.

“We are at the stage now where entrepreneurs are finding things to be harder than expected,” Roy Kuan, head of Asia for CVC, told the Financial Times. “They are recognising the need for more operational help or advice.”

In Brazil, this shift is already happening as Latin America’s biggest economy has fallen out of favour with other investors, causing financial and commercial capital flows into Brazil to fall by more than 70 per cent to $16.8bn last year.

Private equity companies completed a record 25 transactions, worth a total of $1.1bn, there during the year, mainly in the more resilient retail, services and technology sectors, according to Dealogic.

That was in contrast to 2011, when private equity and venture capital firms raised a record $8.1bn for Brazil investments, according to the industry’s regional association LAVCA, but had difficulty closing acquisitions because of disagreements over price.

“Several [target] companies wanted to hold out for more money…so for this reason many deals were put off,” said Álvaro Gonçalves, chief executive of Brazil’s Stratus Group.

Fund managers in Asia hope a similar story will play out in China, as trading conditions become more difficult for companies.

“If you look at China in recent years, the decline in profitability has been much faster than the decline in GDP growth,” Denis Tse, a veteran private equity manager who now heads Asian investments for the pension fund of Lockheed Martin, told an industry conference last week. “Companies have not proved resilient.”

But while more investment opportunities may be emerging, one issue that remains in China is that getting out of companies, particularly through stock market listings, is still difficult.

This is a double-edged sword in that it makes entrepreneurs more willing to talk to private equity, but also holds dangers for investment firms. “Now, the growth doesn’t make up for proper due diligence as it used to – as a private equity firm you have to work much harder,” said Bruno Roy, McKinsey’s private equity leader in Asia.

“Entrepreneurs are more open to private equity, but private equity has to be much more careful about what it is buying into.”

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