Presentation
Since 2018 Pebay gladly publishes its Price & Performance report, revealing exclusive data that uncovers the true performance, in local currency, of private equity funds as well as the price these funds are paying to acquire companies in Brazil. This year we look at funds and club deals with vintages from 2002 to 2020 revealing vintages that have outperformed (2003, 2005, 2009 and 2015 onwards) and the importance of fund selection to be able to obtain gross returns above 20% p.y. in local currency.
Our report concludes with a case study of a successful deal done in Brazil in the fresh food retail sector. By using exclusive data from our market intelligence platform (Pebay.info) we show how a growth-oriented fund and a leveraged-buyout fund have obtained similar returns with quite different approaches, taking a company from the outskirts of Espírito Santo all the way to become a target company for an strategic buyer looking to profit from the post-pandemic trends of healthy fresh food consumption.
We hope the case will inspire business owners willing to grow their businesses as well as investors looking to venture into private markets in search of superior returns. While investing in private markets carries greater risk, especially in developing countries, the well informed investor will always be better positioned to find the hidden gems, avoid mistakes made by others and the pitfalls along the road.
Leonardo Ribeiro, CEO & Founder of Pebay
Prince & Performance of Private Equity in Brazil
Information on private equity entry price and fund performance is tremendously important for those navigating through private capital markets.
Market level performance metrics such as Internal Rate of Return (IRR) and Total Value to Paid-In Capital (TVPI) are key for Limited Partners (LPs) to decide their allocation plans, select the best funds and managers and monitor their portfolio properly. It also helps understand the impact of different economic cycles on funds, as well as decide to sell or buy in the secondary market of funds. GPs use the same data to benchmark against their peers and, by doing so, facilitate fundraising or implement better practices to enhance performance in the future.
Price metrics such as Enterprise Value (EV) to Earnings Before Interests, Taxes, Depreciation and Amortization (EBITDA) and Equity Value to EBITDA are also key for General Partners (GPs) to evaluate new opportunities and existing portfolio companies and know how close or far-off their multiples are comparatively to the illiquid and the liquid market. With that in mind, LPs can also assess the discount of private versus public equity alternatives to make sure future fund returns maintain a premium over funds that invest in listed opportunities.
With access to price and performance data, buyers, sellers, advisors and investors face less uncertainty and can better understand the source of performance, being able to act in order to improve it. As a result, more capital can flow into the market, with more liquidity and better returns.
However, price and performance information is extremely hard to come by. Let alone find unbiased information about it. This is due to many factors:
- Opaque market: Private fund and deal information are usually kept private;
- Inaccurate news and gossip: Press releases and news articles tend to be biased towards bigger transactions that make it to the headlines, not always reflecting the true transaction values and participation acquired. Usually news do not bring complete and accurate financial information at company level, such as EBITDA or net debt (which are used to calculate EV);
- Biased fund performance: Fund performance information are usually made available by GPs in fundraising mode, creating a natural bias towards disclosing information about the most profitable funds and deals;
- Currency effect: The information usually available regards funds that catered to public pensions funds abroad, and is dependent on disclosure by foreign LPs that only provide the information in their own currency (generally US Dollars or Euros). Given the large fluctuations of emerging markets currencies, this can severely distort true results.
Pebay compiles data on funds, investment vehicles and companies from several regulatory sources in Brazil. This data then undergoes handcraft analysis from a group of specialized analysts. The result is a complete performance set of more than 1,300 funds and club deals in Brazil launched from 1995 onwards. In-depth analysis was performed based on the financial reports of over 1,838 out of 3,702 companies that received investment from these funds.
The cash flow information needed was based on audited financial reports and regulatory filings. Omissions, missing information or uncertainties were identified and treated directly with fund managers, administrators and LPs.
Note on IFRS 16
The International Accounting Standards Board (IASB) issued IFRS 16 which is in effect for financial periods beginning in 2019. IFRS 16 forces companies to recognize the net present value of leases as an asset – “rights of use”; and as a liability – “lease liability” which generates “interest” expenses (the lease installments) and amortization. This change is causing an increase in the following metrics without impacting cash flows: (i) Net debt, as the lessee will recognize the “interest-paying” liability for the lease; and (ii) EBITDA, as the lessee will recognize the interest cost and the depreciation of the leased asset instead of the operating lease expenses. Companies with high lease expenses are especially affected, such as retailers. As a consequence EV/EBITDA and Net Debt/EBITDA for 2019 and beyond tend to be higher than they would be under the former methodology.
Performance
The results below show the true performance of private equity funds and club deals by vintage, in local currency (BRL).
It is important to highlight that some regulated funds charge management fee and performance fee locally while others charge it abroad. So to compare apples to apples, the performance was analyzed on grossed-up terms. It means that fees charged in Brazil were added back to cash flows to allow full comparability. Also, for pan-regional funds, or global funds, only the portion invested in Brazil was included in the analysis.
Gross IRRs in Brazil exhibit diverse trends across specific timeframes: from 2002 to 2009 its median was around 10% annually, with 2008 being an exception, probably due to the American housing crisis; from 2010 to 2014 it ranged between 0% and 6%. So up to 2014, in median terms, the market did not seem attractive. Especially considering that Brazil consistently presented high-interest rates. Its sovereign interest rate (Selic) fell below 10% only on three occasions in the last 21 years: 2009 (8.7%), 2012 (7.1%), and from 2018 to 2021 (9.25% in December 2021).
Brazil’s best performing vintages were 2003, 2005, 2009 and from 2015 on. In particular, 2003 and 2009 benefited from a crisis in the previous year, resulting in median IRR around 15% p.y. In 2005, the market was starting to witness a continuous expansion in liquidity and Initial Public Offerings (IPO) that lasted for five years. That brought the median IRR up to nearly 14%.
From 2015 onwards median returns improved significantly to approximately 20%. While some of this performance is based on valuations that are still to be realized, this has renovated the appeal of private equity and venture capital investments in the country. Some facts that helped performance in that period were:
- in 2015-2016 Brazil suffered a serious economic and political crisis with a sluggish recovery in the 2017-2019 period (around 1% GDP growth p.y.) making it an attractive moment to invest;
- interest rates came down from 13.75% in 2017 to 2% in 2020 creating a positive momentum for the stock market which opened a window for IPOs that allowed 28 companies to go public in 2020 and 45 in 2021. That year alone accounted for a record R$55 billion in distribution to investors of private equity and venture capital funds; and
- the interest in technology-based companies has increased dramatically up to 2021 creating a unique opportunity for funds to sell their fastest growing companies for generous prices.
Looking at the average of the top half performers and its difference to the median, another relevant conclusion emerges. Top performers always hover above 15% (also above the prevailing interest rates), reaching heights of 64% in 2005, 44% in 2007, 49% in 2009, and 62% in 2017.
In a market that looks like that, it is the manager/fund selection skills of an LP that determine how successful or unsuccessful its private equity program will be. With the exceptions of 2005, 2006 and 2017 (2019 is still too early to tell), if one was unlucky enough to invest with the bottom performers (and only them), money would have been lost on every vintage (see Low mean TVPI in Graph 2).
The performance was also analyzed with multiples of capital invested (see Graph 2). In line with IRR analysis, it shows median running around 1.5x up to 2009, dropping to 1.00 ~ 1.30 afterwards, then increasing to 2x in 2015 and 2017. It reached above 2x in three moments: at the beginning of the liquidity/IPO boom in 2005/2006, in 2015 and 2017. For these vintages top funds had on average 3.5 to 4.6x multiple on invested capital.
This analysis of multiples is especially useful to measure downside as it shows for instance that low performers can, on average, lose 50% of capital. Or, lose virtually all capital as it was the case in 2002 and 2003, vintages severely hit by the Internet bubble burst; and 2010, a point of inflexion in the economy that ended up affecting many portfolio companies and projects.
Price
Private Equity transaction entry price is another key piece of information to understand the attractiveness of a private market. It is usually known to the acquiring fund, the seller and its advisors, but rarely publicized.
However, in Brazil corporations (Sociedades Anônimas – S.A.) are generally obliged to publish financial information on an annual basis. So by identifying the corporations in the portfolio of each fund (either directly or indirectly under holding entities), Pebay was then able to handpick financial reports of the portfolio companies to calculate accounting EBITDA (without adjustments) and Net Debt of the same year the initial investment took place. Whenever possible, consolidated information was obtained on the higher available holding entity.
Results show that EV/EBITDA in Brazil range around 8x to 10x, with net debt representing 1.7% to 23.7% of EV, except for the years 2020 and 2021 affected by the pandemic when leverage increased (2020) and multiples increased (2021).
Despite the peak in 2020, a foreign investor looking at Graph 3 would be intrigued to see how little debt is used by private equity invested companies in Brazil when compared to US and European companies. Until recently Brazil has had relatively high interest rates and a concentrated banking industry. So medium and small size companies in Brazil used to face interest rates of 25% to 30% p.y. Gladly the financing gap has been fulfilled by the private equity industry.
| Box 1: Hortifruti – From Colatina, Espírito Santo, to leading the fresh food retail sector in Brazil As the global pandemic reshaped the way we live and consume, the food retail sector has witnessed notable adjustments. The trend towards healthier eating habits has driven a significant increase in the sales of organic and gluten-free products, with the sector reaching R$ 100 billion in Brazil in 2020, according to Euromonitor International. Hortifruti, which operates in the specialized fresh food retail segment in Brazil was able to seize the opportunity by growing 24% in 2020 alone, to R$1.7 billion in revenues, achieving a record EBITDA of R$171 million and attracting the attention of Grupo Americanas (AMER3), one of the largest e-commerce players in Brazil, which ended-up acquiring the company in 2021. Now the brand boasts a 80-strong chain of stores in the States of Rio de Janeiro, São Paulo, Minas Gerais and Espírito Santo, an employee base of 6,600 and a fleet of over 240 vehicles that helps it serve 1.8 million customers with fresh goods monthly. While São Paulo State is Brazil’s economic powerhouse, sometimes a company appears out of less obvious regions to lead a new sector. Hortifruti is a good example of that. It was founded in the late 1980s in the city of Colatina, State of Espírito Santo. In the 1990s it had expanded to the State of Rio de Janeiro. In the 2000s it entered the State of São Paulo. By 2010 it needed additional capital to accelerate its growth plan, opening-up the opportunity for private equity funds, especially those that were keen to look at less obvious opportunities and regions. This episode started in September 2010 when FIP Brasil de Governança Corporativa, a fund that was initially launched by Banif bank and handed over to Crescera by its LPs in 2009, acquired a 33% stake in Hortifruti for R$ 85 million. The check was increased by R$ 21.7 million in 2013 when Crescera bought-out minority shareholders. The investment marked the beginning of a strategic partnership aimed at boosting the company’s presence throughout the Southeast. The company then had 17 stores. Following the plan, the chain increased its footprint to 42 stores in 3 different States and upped its logistics system to four distribution centers and 220 vehicles. Part of the growth was inorganic, with the acquisition of Natural da Terra in 2015, a chain of 8 stores in São Paulo. Crescera’s investment cycle ended in April 2016, when it sold its stake for R$ 255 million, resulting in a 2.6x Multiple on Invested Capital (MOIC) and an internal rate of return of 22%. Interestingly, the 2.5x growth in stores explains almost all the financial return obtained by Crescera. The positive experience in the fresh food sector also left Crescera hungry for more. Then led by Paulo Guedes, who would later become Brazil’s Finance Minister, the firm looked for another bet in the sector. In November 2017 it found Oba Hortifruti, a younger player, founded in 2022, which would surpass Hortifruti in size just three years later. While PE funds usually sell their companies to strategic players or to market investors through an Initial Public Offering (IPO), the Hortifruti case marked a newer trend in Brazil. Buyout funds acquiring stakes from other PE funds in the so-called sponsor-to-sponsor transactions. Swiss firm Partners Group structured a leveraged-buyout and, together with Jean Duboc (formerly with Carrefour and Grupo Casino), snapped a 39.4% stake in Hortifruti for R$ 309.5 million, financed by a R$ 155 million loan in USD from JP Morgan. The deal included all of Crescera’s stake. In November 2017 additional stake from founders were acquired leaving Partners Group with 93.03% (furtherly increased to 97.76%). In 2015, the company had delivered an EBITDA of R$ 78 million and closed the year with a net debt of R$ 124 million, resulting in an entry multiple of 11.7x EV/EBITDA and 0.83x EV/Sales for Partners Group. Over the years Partners Group invested over R$ 830 million. On November, 2021, after a double track exit process whereby the company filed for an IPO but ended up selling to a strategic buyer, the fund successfully sold its stake in Hortifruti to Americanas for R$1.94 billion, achieving a MOIC of 2.3x and an internal rate of return (IRR) of 23.8%. As one can see, the financial return from this period goes beyond what could be achieved only with the opening of 29 new stores (70% increase since its acquisition). It also has to do with what happened before, during and after the pandemic. Firstly, by 2019 the company was already investing in omnichannel. To cope with the restrictions imposed by COVID-19 it has also developed Whatsapp sales, same-day delivery as well as buy online and pick up in-store for 100% of its locations. As a result, its online sales reached 20% during the pandemic and remained above 15% afterwards. Meanwhile the company maintained its core business model that revolves around a focus on fresh products, ensuring higher sales per square meter and a proprietary logistics service that claims “24 hours from the field to the market”. Beyond its size, Hortifruti seemed attractive for a potential incumbent buyer because it was capturing the trend of healthier food demand with a relevant online footprint. This helped the closing of a deal in november 2021 with Americanas. Hortifruti was bought for R$2 billion in the same year it reached over R$1.8 billion in revenues. The EV/Sales multiple was approximately 1.5x, or 80% above entry multiple, making the strategic component of the deal actually more important than its growth in square meters. Indeed between 2015 and 2021, Hortifruti’s net revenue grew exactly 70% (in line with the number of stores). Americanas’ acquisition of Hortifruti was aligned with Americanas’ ambition to diversify its retail portfolio, tapping into the growing trend of health-conscious consumers. It also reflected Americanas’ strategic pivot towards offering a broader range of healthy and organic food options. Americanas aimed to leverage its expansive retail infrastructure to enhance Hortifruti’s market presence. The integration with AME, Americanas’ digital wallet, further demonstrated the company’s commitment to providing an omnichannel experience for customers. However, the landscape has evolved since the acquisition. The recent announcement of Americanas seeking bankruptcy protection, with a staggering debt of R$43 billion, introduced uncertainties. In May 2023, Americanas attempted to sell Hortifruti, initiating the process of market sounding. However, the company encountered significant hurdles in the divestment process, primarily due to the absence of separate financial statements for Hortifruti. The lack of distinct financial records complicated negotiations and emphasized the intricacies faced by Americanas in its efforts to divest the acquired business. In November 2023, Americanas decided to suspend the process of selling Hortifruti. The company cited the necessity to maintain focus on finalizing and publishing its financial results, along with obtaining approval for the bankruptcy recovery plan. This decision underscored the challenges Americanas continues to grapple with in the midst of its financial restructuring, further adding complexity to the evolving narrative of this strategic acquisition. In conclusion, the case of Hortifruti stands as a double success story in the private equity sector by multiplying investors’ capital by a combined 6x over a decade, showcasing resilience and strategic prowess despite the uncertainties introduced by Americanas’ evolving situation. The company’s journey from a strategic partnership with Crescera to its acquisition by Partners Group and the exit to Americanas exemplifies a well-executed investment cycle and the ability of different segments of the PE market to interact successfully, yielding good returns and highlighting the potential within the fragmented and growing fresh food sector. |
About Private Equity Bay (Pebay)
Private Equity Bay (Pebay) maintains an online private equity intelligence service (Pebay.info) specialized in PE, VC, Real Estate, Infrastructure and similar investments in Brazil. Pebay tracks and analyzes performance of more than 1,300 funds, of approximately 500 managers, as well as more than 3,600 invested companies and projects, with data on investments, financials and valuations. All based on the highest standards of quality and reliability. With Pebay investors can better monitor their investments, compare performance, originate opportunities, access the secondary market and reduce time spent with search and treatment of key information.
