A

GLOBAL STUDY REPORT

ON

‗Opportunities for Indian Private Equity Players in Brazil‘

Submitted to:

Sal Institute of Management

IN PARTIAL FULFILLMENT OF THE

REQUIREMENT OF THE AWARD FOR THE DEGREE OF

MASTER OF BUSINESS ASMINISTRATION

In

Gujarat Technological University

Project Guide:

Asst.Proff. Nilesh Patel

SAL Institute of Management, Ahmedabad.

Submitted By:

Students of Finance,

SEM: IV,

MBA: 2010-12,

SAL Institute of Management.

SAL INSTITUTE OF MANAGEMENT

MBA PROGRAMME

Affiliated to Gujarat Technological University, Ahmadabad.

March, 2012.

Certificate

This is to certify that this Comprehensive Project Report title,

‗Opportunities for Indian Private Equity Players in

Brazil‘

is the bonafide work of Students of Finance, SEM: IV, MBA: 2010-12, Sal

Institute of Management who carried out the research under my

supervision. I also certify further, that to the best of my knowledge the

work reported herein does not form part of any other project report or

dissertation on the basis of which a degree or award was conferred on an

earlier occasion on this or any other candidate.

Project Guide:

Asst.Proff. Nilesh Patel Dr. Viral Bhatt

SAL Institute of Management, A‘bad. Prinicipal,

Sign: _________ Sign: __________

SAL INSTITUTE OF MANAGEMENT

Affiliated to Gujarat Technological University, Ahmedabad.

We, Students of Finance, SEM: IV, MBA: 2010-12, SAL Institute of

Management, hereby declare that the Global Study Project entitled

‗Opportunities for Indian Private Equity Players in Brazil‘ is a result of

our own work and our indebtedness to other work publications, references,

if any, have been duly acknowledged.

Sign,

Date: 24/04/2012

Place: Ahmedabad

Students of Finance,

SEM: IV,

MBA: 2010-12,

SAL Institute of Management.

―Experience is the best teacher‘‘ This saying has played a guiding role in

including GSR as a part of the curriculum of the M.B.A. programme of the

Gujarat Technological University. This study Report allows students to do

practical work and to study real global business environment which

develops a feeling about the difficulties and challenges in the business

world.

In this direction, we have tried our best to present a project

report. This project report will help the readers to know in-depth about the

Opportunities lying in Various Sectors of Brazil for Private Equity Players.

The preparation of this project is based on facts and findings

noted and information collected from various secondary sources such as

internet, Books, News Papers, Magazines and written and published

documents.

In spite of our best efforts, there may be omission and

commissions which may please be excused..!

Acknowledgements

We are extremely thankful to Mr. Nilesh Patel, Asst. Professor of Sal

Institute of Management for their valuable guidance and the help they have

provided to us throughout the completion of our project, undertaken as a

part of our M.B.A curriculum. He was always there to lend a helping hand

& directed us towards preparing the project. He has always welcomed our

queries and doubts regarding the project work and also in the subjects,

they have taken great interest to teach us. Without their help and right

guidance the completion of the project would have been very difficult.

The level of knowledge he possess has covered entire aspects of the

management expertise in different fields particularly in our project related

to Finance. We are also thankful to our college SAL Institute of

Management for offering us such a great subject that binds all the

knowledge we have gained through this subject as a report. And last but

not the least we would like to thank all our students for their valuable

contribution in successful completion of project.

With Thanks…

Students of Finance,

SEM: IV,

MBA: 2010-12,

SAL Institute of Management.

TABLE OF CONTENTS

S.NO. PARTICULARS PAGE NO.

1

Introduction and Research Methodology

Chapter I The Journey of BRICS

1

1.1 Origin and History

1.1.1 Importance of BRICS

1.1.2 Economic Overview of BRICS

1.1.3 Further Development

1.2 Why Brazil

1.2.1 Comparative Study Amongst BRICS country

1.2.2 SWOT analysis of Brazil

1.3 Why Private Equity

1.4 Why Private Equity in Brazil

1.4.1 Reasons for investment in private equity in brazil

1

1

2

2

3

3

4

10

11

11

1.4.2 Attractiveness of Private Equity investments amongst the BRICS

countries

15

2. Chapter II Country at a glance 19

2.1 History of Brazil 19

2.2 Geography 24

2.3 People 25

3.

2.4 PESTEL analysis of Brazil

Chapter III Conceptual Framework of Private Equity

3.1. Meaning of Private Equity

3.2. Process of Private Equity

3.3. Evolution and Growth of Private Equity

3.4. Development of Private Equity in Brazil

3.5. Current Scenario of Private Equity in Brazil

3.6. Private Equity Scenario In India

28

43

43

44

45

51

54

55

4. Chapter IV Comparison of Private Equity investment in India and Brazil 61

4.1 Private Equity investment in india 61

4.2 Private Equity deals in brazil

4.3 Comparison of Private Equity investment in India and Brazil

4.4 Forecasting of Private equity investment in India using regression

4.5 Forecasting of Private equity investment in Brazil using regression

4.6 Comparison between India and Brazil

4.6 Hypothesis testing ( T test)

4.7 Major Private Equity players in brazil

62

63

64

66

67

68

69

5. Chapter-V Sector Analysis 73

5.1 Healthcare Sector

5.1.1 Current Situation in Brazilian Healthcare Sector

5.1.2 Areas of Investment opportunities for Private Equity

5.1.3 Participating Companies

5.1.4 Restructuring of Healthcare sector

5.1.5 Healthcare sector in India

5.1.6 Potentiality of Healthcare for P.E investor

5.1.7 Role of Private Equity in accelerating growth in healthcare sector

5.1.8 Opportunities for Indian Private equity players in healthcare

5.2. Infrastructure Sector

5.2.1. Overview of Infrastructure Sector of Brazil

5.2.2. Current Scenario in Infrastructure

5.2.3. Infrastructure Investment requirements in Brazil

5.2.4. Investment Opportunity in Infrastructure

5.2.5. Indian Infrastructure

73

73

76

79

80

82

85

88

89

93

93

93

94

95

99

5.3 IT Sector

5.3.1. Overview of Brazilian Information Technology

5.3.2 Current Scenario Of IT in India

102

102

104

5.4 Agriculture Sector

5.4.1. The Brazilian Agribusiness Background

5.4.2. Current Status Of Brazil‘s Global Market Share Projections

107

107

109

5.4.3. Challenges in Agribusiness in Brazil

5.4.4. Opportunity for Private Equity firms in Agribusiness

5.5 Education Sector

5.6 Oil and Gas Sector

110

113

116

124

6. Chapter-VI Findings & Suggestions 130

7. Chapter-VII Conclusion& Future Scope 133

8. Chapter-VIII Bibliography 138

LIST OF TABLES & GRAPHS

SR.

NO. PARTICULARS

TABLE/GRAPH

NO.

PAGE

NO.

1. Ranking of BRIC countries according to various parameter (T-1) 2

2. Future Estimates regarding GDP of BRIC countries (T-2) 2

3. Private Equity Penetration (G-1) 12

4. Public Offerings (G-2) 13

5. Attractiveness of PE Investment among BRICS (T&G-3) 15

6. Population Growth (T&G-4) 25

7. Birth Rate (T-5) 26

8. Death Rate (T-6) 26

9. Real GDP Growth Rate (T-7, G-5) 31

10. Per Capita GDP (T-8, G-6) 32

11. Inflation Rate (T-9, G-7) 32

12. PE Investment by Stages in India (T-10) 58

13. Private Equity Investment in India (T-11, G-8) 61

14. Private Equity Investment in Brazil (T-12, G-9) 62

15. Comparison of PE Investment in India And Brazil (T-13, G-10) 63

16. Prediction about Future P.E investment in India (T-14, G-11) 65

17. Prediction about Future P.E investment in Brazil (T-15, G-12) 66

18. Comparison between India and Brazil (T-16, G-13) 67

19. Infrastructure Investment requirements in Brazil (T-17, G-14) 94

20. Estimated Investment in Infrastructure (T-18, G-15) 96

21. Private Equity Deal flow in IT (G-16) 102

22. PE Transaction by Sector in IT (G-17) 104

23. Brazil‘s Global Market share Projections in Agriculture

Sector

(T-19) 109

EXECUTIVE SUMMARY

The Global Study Report is conducted to find out the opportunity for the Indian Private

Equity players in Brazil. We study the country importance of BRICS in current time and the

reason for choosing brazil as well as private equity than we studies brazil at a glance which

includes profile of Brazil and the history of the same. We analyzed economic overview of the

country which includes demographic profile of the country, political factors, economic

factors, socio-cultural factors, educational background, science and technological factors,

environmental and legal factors.

It is followed by the conceptual framework of Private Equity evolution in growth of the

Industry in Brazil, historical development of Private Equity in Brazil and other parameters for

such Investment opportunities. We analyzed strategic opportunities in the Brazil that gives

clear idea about the investment.

This report also includes various sectors of Brazil where Indian Private Equity players have

opportunities. The major sectors which are mainly covered under this Report is

1) Healthcare

2) Infrastructure

3) Information Technology

4) Agriculture

5) Education

6) Oil and Gas

Out of these 6 sectors, in 3 sectors private Equity players have opportunities. As we are

studying the opportunity for Indian private equity players, we have to compare these sectors

with Indian sectors.

The sectors where Indian Private Equity players have opportunities are

1) Healthcare 2) Infrastructure 3) Information Technology

Opportunities in Different Sectors

1) Healthcare

Health care sector in Brazil is having huge potential for Indian Private Equity players

but the problem with this sector is government restrictions on FDI. As FDI is ban in

this sector, it restricts the Indian Private Equity players from investing; The

Opportunity can be taped by Indian players only if there is any change in the

regulations or in the FDI policy by the Brazilian government.

2) Infrastructure

The Infrastructure sector is on the high front and is expected to boom mainly because of two

reasons

a) FIFA World Cup 2014

This event will receive almost R$ 105 billion in investment projects. The investment

will be required mainly in the area of Development of Airports and constructions and

modernization of Stadiums.

b) Olympic Games 2016

The Rio Olympic Games of 2016 are expected to see an investment of R$ 30 billion.

Rio de Janeiro plans to develop a better metro system for easy and safe access to the

game site. In order to house the millions of new tourists the city projects it will need

about 300 hotels, or 86 thousand new rooms.

3) Information Technology

The Brazilian IT market represents an attractive opportunity for private equity

investments. Brazilian IT industry in 2011 should grow 13.1% - almost double the

global rate of growth of 7% - to reach total revenues of US$39 billion. Brazil has

extensive experience in technology outsourcing, with a well developed local market in

information technology outsourcing (ITO) and business process outsourcing (BPO).

The offshore ITO and BPO markets potentially represent a significant growth

opportunity for developing countries as major global players continue to increase their

presence in a few well-positioned in Brazil.

Research Methodology:

Marketing Research is the systematic design, collection, analysis and reporting

of the data and findings relevant to a specific marketing situation face by

marketers.

What to study?

Project Title: ‘OppOrtunities fOr indian private equity

players In Brazil ’

Why to study?

Exploratory studies provide information to use in analyzing a situation, but uncovering

conclusive evidence to determine a particular course of action is not the purpose of

exploratory research. Usually, exploratory research is conducted with the expectation that

subsequent research will be required to provide conclusive evidence, It is a serious mistake to

rush into detailed surveys before less expensive and more readily available sources of

information have been exhausted.

Primary Objectives:

The primary objective of this study is to find out opportunities for Indian private

equity players in the Brazilian market so that Indian private equity players can

tap this opportunities in order to get returns.

Secondary objectives:

1) To understand the growing importance of BRICS in current times and

position of Brazil amongst the BRICS countries.

2) To analyze Brazil at a glance in accordance with different parameters.

3) To understand Evaluation and growth of Private Equity with Indian as

well as Brazilian Scenario and identify the major private equity players

currently working in Brazil.

4) To carry out Strategic Analysis of Brazil with respect to Private Equity

5) To analyze major sectors of Brazil to identify opportunities for Private

equity players

Data Collection:

Data are collected from secondary data sources.

Data are collected through internet websites, Books, News Papers,

indexes other publications etc.

Tools of Data Analysis and Interpretation:

Regression analysis

Time series analysis

Column Chart

Scatter chart

Data Analysis Software:

spss

excel

Place: Ahmadabad

Limitations:

The study related with finding the opportunities for Indian private equity

players in Brazil is done on the basis of secondary data, therefore minor

deviations, misprint and misinterpretations may generate the error in further

calculations, analysis and related implications.

The various frame works, data collections, suggestions and

recommendations are strictly restricted and applicable to brazil only

Various policies, annual reports of various boards and other vital information

and some of the data collection part is the biggest challenge, constraint of

this project.

In this exploratory study time duration and cost were also one of the major

limitations.

Chapter 1

Journey of BRICS

1

1.1 Origin and History

Various sources refer to a supposed "original" BRIC agreement that predates the Goldman

Sachs thesis. Some of these sources claim that President Vladimir Putin of Russia was the

driving force behind this original cooperative coalition of developing BRIC countries

The BRIC [Brazil, Russia, India and China] idea was first conceived in 2001 by Goldman

Sachs as part of an economic modeling exercise to forecast global economic trends over the

next half century. These countries are all deemed to be at a similar stage of newly advanced

economic development

BRIC Foreign Ministers at their meeting in New York on 21st September 2010 agreed that

South Africa may be invited to join BRIC. Accordingly, South Africa was invited to attend

the 3rd BRICS Summit in Sanya on 14 April 2011.

1.1.1 Importance of BRICS

The economic potential of Brazil, Russia, India and China is such that they could become

among the four most dominant economies by the year 2050. These countries encompass over

25% of the world's land coverage and 40% of the world's population and hold a combined

GDP of 18.486 trillion dollars. On almost every scale, they would be the largest entity on the

global stage. These four countries are among the biggest and fastest growing emerging

markets.

This Group has come into widespread use as a symbol of the shift in global economic power

away from the developed G7 economies towards the developing world. It is estimated that

BRIC economies will overtake G7 economies by 2027

It has been argued that geographic diversification would eventually generate superior risk-

adjusted returns for long-term global investors by reducing overall portfolio risk while

capturing some of the higher rates of return offered by the emerging markets of Asia, Eastern

Europe and Latin America. By doing so, these institutional investors have contributed to the

financial and economic development of key emerging nations such as Brazil, India, China,

and Russia. For global investors, India and China constitute both large-scale production

platforms and reservoirs of new consumers, whereas Russia is viewed essentially as an

exporter of oil and commodities- Brazil and Latin America being somehow "in the middle

It is estimated that China and India will become the dominant global suppliers of

manufactured goods and services, while Brazil and Russia will become similarly dominant as

suppliers of raw materials. It should be noted that of the four countries, Brazil remains the

only nation that has the capacity to continue all elements, meaning manufacturing, services,

and resource supplying simultaneously. Cooperation is thus hypothesized to be a logical next

step among the BRICs because Brazil and Russia together form the logical commodity

suppliers to India and China. Brazil is dominant in soy and iron ore while Russia has

enormous supplies of oil and natural gas..

2

1.1.2 Economic Overview of BRICS

Ranking of BRIC countries according to various parameter (Table-1)

Statistics

Categories Brazil Russia India China

Area 5th 1st 7th 3rd

Population 5th 9th 2nd 1st

Population growth rate 107th 221st 90th 156th

Labor force 5th 7th 2nd 1st

GDP (nominal) 8th 11th 9th 2nd

GDP (PPP) 7th 6th 4th 2nd

GDP (nominal) per capita 55th 54th 137th 95th

GDP (PPP) per capita 71st 51st 127th 93rd

GDP (real) growth rate 15th 88th 5th 6th

Human Development Index 73rd 65th 119th 89th

Exports 18th 11th 16th 1st

Imports 20th 17th 11th 2nd

Current account balance 47th 5th 169th 1st

Received FDI 11th 12th 29th 5th

Foreign exchange reserves 7th 3rd 6th 1st

External debt 28th 24th 26th 23rd

Public debt 47th 122nd 29th 98th

Future Estimates regarding GDP of BRIC countries (Table-2)

Rank

2050 Country 2050 2045 2040 2035 2030 2025 2020 2015 2010 2006

1 China 70,710 57,310 45,022 34,348 25,610 18,437 12,630 8,133 4,667 2,682

3 India 37,668 25,278 16,510 10,514 6,683 4,316 2,848 1,900 1,256 909

4 Brazil 11,366 8,740 6,631 4,963 3,720 2,831 2,194 1,720 1,346 1,064

6 Russia 8,580 7,420 6,320 5,265 4,265 3,341 2,554 1,900 1,371 982

1.1.3 Further Development (Planning to Expand to BRIMCK)

Mexico and South Korea are currently the world's 13th and 15th largest by nominal GDP,

just behind the BRIC and G7 economies, while both are experiencing rapid GDP growth of

5% every year, a figure comparable to Brazil from the original BRICs. it did not consider

Mexico, but today it has been included because the country is experiencing the same factors

that the other countries first included present. While South Korea was not originally included

in the BRICs, recent solid economic growth led to Goldman Sachs proposing to add Mexico

and South Korea to the BRICs, changing the acronym to BRIMCK.

3

1.2 Why Brazil

Brazil moved past India as the centre of investor‘s interest. According to a team of private equity firm from the US, Brazil was considered the ―best of the BRICS‖ with a huge growth potential.

1.2.1 Comparative study amongst the brics country

The competition is now no longer between India versus China, it‘s India versus Brazil. For

global investors, China is now no longer alternative. The Asian giant is powering ahead with

a 9%-plus growth rate and emerging as the only credible state to challenge the battered but

still supreme economic might of the US.

Within the BRICS pack, Russia is considered risky and South Africa is developing, so that

leaves investors with India and Brazil. MNCs allocating capital with an eye on the changing

global economic order will place their bets on both countries.

Experts feel that it is government policies that have made the difference. According to the

World Bank report ―The Ease of Doing Business‖, Brazil has improved five steps to 120

from the previous year, while India‘s position has remained static at 166.

Despite growth concerns in Brazil, it seems to be overtaking India in terms of perception and

therefore the key issue for India is to start working on its economic issues and win back the

confidence of investors.

In India, corruption, political deadlocks, opaque and cumbersome regulations and tight

monetary policy that are stagnating growth, seem to have dented investor confidence and

investment. Brazil, on the other, carries on the progressive policies of former Presidents

Fernando Henrique Cardoso and Luiz Inacio Lula da Silva that have developed the South

American state into a sound economy with a political and fiscal environment conducive to

growth. Last month, Brazil emerged as the sixth largest economy in the world, right after

India.

4

1.2.2 SWOT Analysis of Brazil

5

STRENGTH

1) SOUND FINANCIAL POLICIES-:

Latin America has been able to resist many of the economic woes of the 2007-2010

recessions with a little luck and some sounds financial policies. After the debt crisis,

Latin America has thrown away the policies of protectionism and fiscal profligacy and

has embraced some capitalistic qualities such as, flexible exchange rate, independent

central banks, more responsible fiscal policies and tighter regulation of banks. Latin

American citizens were the biggest benefactors of these changes in fiscal policy.

Between 2002-2010 approximately 40 million of the 480 million citizens rose from the

ranks of poverty and the income distribution became a bit less unequal.

2) BRAZILIAN AGRICULTURE MIRACLE-:

Brazil is the only tropical weather food exporting giant. They achieve this great feat

through deregulation and science."The increase in Brazil's farm production has been

stunning. Between 2000 and 2010, the total value of the country's crops rose from 23

billion reais ($23 billion) to 108 billion reais, or 365%. Brazil increased its beef exports

tenfold in a decade, overtaking Australia as the world's largest exporter. It has the world's

largest cattle herd after India's. It is also the world's largest exporter of poultry, sugar

cane and ethanol."

3) BANK OF AMERICA INVESTING IN BRAZIL-:

Foreign investments in a country bring in more capital and talent to improve the

productivity and abilities of the country. Bank of America's investments will create jobs

and increase competition that benefit Brazil

4) NATURAL SUGARCANE HEDGE-:

Brazil's sugar companies are lucky to have a natural hedge, in that when the sugar price

is low many can produce ethanol instead. This can be consumed by motorists in the

domestic market or exported for use in alcoholic drinks or other industries." This natural

hedge allows sugar producers to guarantee a reasonable price for their crops, which

allows them to make long term investment plans more accurately.

6

WEAKNESSES

1) INCOME INEQUALITY-:

Income inequality has a negative effect on the economy in many countries. It makes it

difficult to move from one social economic status to the next. It also creates disincentives

to work hard, because social economic mobility is impossible.

Official data for the last three decades show that Brazil has one of the world's most

unequal distributions of income. This article examines the relevant data and then

explains the causes of this persistent inequality, considering them also in cultural and

historical context. It discusses the politics of continuing inequality and possible strategies

for reducing it. Many economic hardships occur when dealing with income inequality.

Income inequality is a reflection of how economic systems distribute wealth unevenly to

the citizens.

The middle class usually has a large influence on economic development and

government policies. If income is unevenly distributed, the wealth exert dominant

control over poorer citizens, which may create political and economic tension between

the classes. The tension can result in strikes or other forms of demonstrations that acutely

hurt production and growth. More general tensions may result in a submissive underclass

that has no ability (skills) or incentive to work hard.

2) EDUCATION-:

Education plays a significant and positive roll in the performance of countries; however,

education achievement is declining in Brazil. "Even in the richer areas, however, the

standards have been falling over the past decades. A cycle was observed in Brazil: the

State invested little in education; the standards of public education dropped; the middle

class moved their children to private schools; the middle class stopped to care about

public education; the State invested even less in education; the standards fell even more;

Education is open to free enterprising, under official supervision. Nowadays, practically

all the middle class sends their children to private schools. Costs may vary from as little

as R$ 50 (US$ 20) in smaller cities to R$ 500 in São Paulo or Rio de Janeiro (cities

where services are most expensive in Brazil).

Declining educational systems will have an effect on future economy growth, because

high paying jobs will need highly skilled workers. Without a good education system,

those skilled jobs will have to move to other countries."

7

3) INEFFICIENT TAX SYSTEM-:

According to the World Bank's most recent business survey, Brazil ranks 150th out of

183 countries on how easy it is to pay taxes. Not only is the tax system extremely

difficult to navigate, it amounts to a huge percentage of profits, upwards of 69%

according to World Bank's study.

4) INFRASTRUCTURE INVESTMENT IN BRAZIL-:

Brazil has a history of underinvestment in their infrastructure. According to the

Economist, "in 2007, Brazil invested just 0.1% of GDP to improve their transportation."

The World Bank Growth Commission stated that 7% of GDP should go into

infrastructure in order to maintain developing world GDP growth rates. Brazil needs to

increase their rate of development in order to fulfill their potential economic growth.

Improving infrastructure has many benefits, such as getting products to export and

import more quickly. It also brings together a sprawling nation.

5) CRIME-:

High levels of crime deter foreign investments in a country and increase the cost of

business due to bribery and safe concerns of employees. High crime can also affect

tourism and create a general image of volatility / risk. If crime is epidemic, it could also

affect laws and judicial procedures that ensure fair treatment for local businesses and

foreigners looking to investing with the country.

OPPORTUNITIES

1) POSITIVE DISCRIMINATION FOR BLACKS-:

Although Brazil regards itself as a true melting pot, the majority of its "black" population

earns half of their "white" counterparts. The disparity in income is causing the

government to question how to bridge the gap. Some ideas call for University quotas to

increase the numbers of minorities. This policy has already had positive effects on black

enrollment. Equality between different ethnic groups and races helps reduce poverty and

welfare, while giving an entire generate of poor students an opportunity to contribute

unique business ideas.

8

2) PEAK OIL SUPPLY-:

The peak of increasing oil supply, according to the International Energy Agency (IEA),

will happen sometime around the 2020 to 2030. This could increase the demand for oil

extracting companies and peripheral technology that can find oil in more difficult

locations. The manufacturing of oil from coal and natural gas is a potential benefit of a

peak in oil supply. This peak in demand will benefit countries with lots of untapped oil,

such as Brazil and Saudi Arabia. The importance of oil will only grow over time.

Sources of unconventional oil will also benefit as the demand for these more expensive

sources increases.

3) OIL DISCOVERY-:

Countries tend to profit when they contain natural resources such as oil. Brazil recently

discovered a vast amount of deep water oil reserves off it‘s' coast.

Excitement about the potential of Brazil as a massive new source of oil and gas

intensified yesterday after a senior energy ministry official declared that the newly found

Carioca field could have 33bn barrels in place.

The comments by Haroldo Lima, head of Brazil's National Petroleum Agency, that the

country was harbouring an oil find that vied with the largest in Saudi Arabia and Kuwait,

sent the price of shares in BG, the UK exploration company, up 5% and helped lift the

wider London market. The news of the discovery also contradicts pronouncements that

growth in world oil production may have peaked.

Oil experts said it was the biggest find anywhere in the world for at least seven years and

would push Brazil's reserves into the global top 10 but comparisons to Saudi Arabia may

be over-optimistic. Brazil's total reserves will rise to about 20bn barrels as a result of the

discovery, compared with Saudi Arabia's 260bn, whose daily production is four times

that of the Brazil.

Countries tend to gain profit from exporting oil and cut any cost from the importation of

oil. The economy can use the additional revenues to increase funding in areas that lead to

long term positive growth, such as in the education and health sectors.

9

To get to the oil, the Brazilian government is spending $174 billion over the next few

years. These expenditures will benefit firms such as GE, Petrobras, Schlumberger, and

Halliburton, as well as many foreign firms.

4) HYDROELECTRICITY-:

Total installed capacity increased from 4.8 million kW in 1980to 8.5 million kW in 1990

and to 73.4 million kW in 2000. Production for 2010 was 339.5 billion kWh, of which

hydropower contributed 89%. Consumption of electricity was 360.6 billion kWh in the

same year. Brazil's hydroelectric potential is estimated at 16.5 billion kW, three times its

current capacity. Construction of the Itaipu Dam on the Paraná Rive has joint Brazilian-

Paraguayan project, the world's largest hydroelectric plant, attained its full capacity of

12.6 million kW, at a cost of $15 billion. About 70% of Brazil's population is served by

Itaipu, which generates about 75 billion kWh per year. Each of Brazil's nine turbines

(Paraguay controls the other nine) at Itaipu has a capacity of 700,000 kW, which can be

transmitted up to 1,000 km (620 mi) away. Brazil regularly purchases a large portion of

Paraguay's half of its Itaipu electricity production."

5) AGRICULTURE-:

With soil so rich that almost any crop will grow, Brazil is potentially one of the world's

greatest agricultural nations. It exports cognac, champagne and wine to Argentina, the

U.S. and Europe—including 30 million liters last year to France. It is the world's No. 1

producer and exporter of coffee, ranks seventh in soybeans and rice; sixth in tomatoes,

sweet potatoes and peanuts; fifth in jute; fourth in tobacco and cotton; second in sisal,

cane sugar, cacao, corn, oranges. Yet its agricultural technology is primitive and its

export potentiality (it grows more bananas and pineapple than any other country, but

exports little) is barely tapped.

THREATS

1) EXPORT DRIVEN ECONOMY-:

Exports helped to expand Brazil's economy, but they can rapidly change direction and

slow Brazil's economy.

10

2) VERY HIGH INTEREST RATES-:

High interest rates can debilitate an economies ability to invest. High rates draw money

into savings accounts, because savings accounts offer better returns and less risk than

investing in riskier assets. Interest rates are meant to drive down inflation, but high

government spending would have to drop in order for inflation to slow down to a

reasonable level. High interest rates also increase the value of currencies. For emerging

countries that focus on exports, a high rate slows down export demand.

1.3 Why Private Equity

Reason #1 - Substantial Liquidity

Private equity transactions are an excellent way for owners wanting to remain private to

obtain significant liquidity at an attractive valuation without having to transact an outright

sale. Most private equity firms prefer to purchase over 50% of the equity in a typical

transaction. This can generate substantial liquidity for the owners to "take some chips off

the table" and diversify their net worth, while maintaining significant ongoing ownership,

providing for new ownership opportunities for the next generation and retaining day-to-

day operational control.

Reason #2 - Growth Capital

In addition to providing liquidity for the selling shareholders, private equity firms will

provide additional debt and equity capital for internal and external growth opportunities.

In many businesses, the management team has excellent growth plans but does not have

the capital or is not willing to "bet the farm" to execute a given strategy. This could

include opening branch offices, entering a new product or service line or making select

acquisitions of marketplace competitors. Private equity investors are more than willing to

provide the capital necessary to execute growth plans that make strategic sense.

Reason #3 - Eliminate Personal Guarantees and Retain Operational Control

Many owners have created substantial personal wealth and are looking to eliminate

personal guarantees to the bonding companies and banks. In the past, this was difficult to

do without selling the business to a competitor and giving up control to a larger company.

In a typical private equity transaction, all shareholder guarantees are eliminated and day-

to-day control remains with the management team. While most investors prefer to

purchase over 50% of the equity, they have no interest in running the business on a daily

basis. Private equity firms will have approval rights on major issues such as new

acquisitions, capital raises, strategic plans, and future liquidity events but investors will

11

leave the daily operation of the business in the hands of the management team.

Reason #4 - Obtain a Strong Partner with Aligned Goals

Private equity professionals not only bring financial strength to help finance the business,

they traditionally possess relationships and contacts that can help generate new customers

and new supplier relationships. The investors will participate in the business at the Board

of Directors level and many possess significant operational expertise and have extensive

merger and acquisition experience. The investors also have many other portfolio

companies that could be facing similar growth issues or could provide a complementary

service or customer or supplier relationship. Further-more, the goal of a private equity

investor is to maximize the value of their investment in the company which in-turn

maximizes the management's ownership interest in the company.

Reason #5 - "Second Bite at the Apple"

In a typical private equity transaction, the management team will still own a large

percentage of the business (10% to 50%) through a combination of retained ownership

and new stock options granted by the investor. Therefore, in three to seven years when

the outside investor is ready to exit their investment, the management team will receive

substantial additional value for the business. Hopefully, since the initial investment, the

business will have grown and retired debt and will be worth much more than the original

valuation. In many instances, owners can receive more money from the "second bite at

the apple" than from the first.

1.4 Why Private Equity in Brazil

1.4.1 Reasons for investment in private equity in brazil

Beyond the general economic drivers there are some specific characteristics that explain PE

investor confidence, among them: (i) limited private equity penetration, (ii) the size of the

Brazilian economy, (iii) a growing middle class, (iv) increasing exit opportunities and

maturation of Brazilian capital markets, and (v) multiple industries with a high degree of

fragmentation

12

Limited Private Equity Penetration (Graph-1)

According to EMPEA, the country‘s PE investment as a percentage of GDP was only 0.16%

at December 31, 2009.24 China is ahead and India had almost three times as much as Brazil.

The only country behind Brazil among the BRICs was Russia, but since Russia is seen as the

least attractive destination for private equity investments among the BRICs according to the

2011 data. The relatively small percentage in Brazil suggests that there is still a lot of room

for private equity investments to grow before the market becomes crowded and returns start

to diminish.

Size of the Economy

Brazil is the largest and most populous country in Latin America, with almost 200 million

people. It covers an area greater than the continental United States. São Paulo, the biggest

city in Brazil, is one of the world‘s five largest cities. The Brazilian economy is the largest in

Latin America and the fifth largest in the world, with an estimated GDP of approximately $2

trillion in 2010. In the past few years, the country has experienced continued GDP growth,

with real GDP increasing by 7.6% in 2010, according to IBGE. Economic projections for the

next few years predict strong growth and a continued improvement in the country‘s key

macroeconomic metrics.

13

Growing Middle Class

The improved economic environment in Brazil has led to continuous improvements in real

wages. A large portion of the population has seen a significant increase in purchasing power

and is now consuming more sophisticated products, boosting the growth of consumer-driven

businesses. Previous governments launched several income distribution programmes to

improve living standards for the lower and middle classes. Among such programmes, the

Bolsa Família Programme (BFP) deserves special mention. This is a comprehensive measure

to stimulate growth and social progress at the family level by offering cash incentives

conditional on behavior such as school attendance, use of health cards, and other social

services. Since its launch, the BFP has grown exponentially to include approximately 50

million people, of which two thirds are classified as low-income families. In terms of the

numbers of beneficiaries, the BFP is by far the largest cash incentive programme in the

developing world. Brazil‘s strong macroeconomic performance, together with the success of

the BFP, has helped to reduce poverty and income inequality significantly in recent years. By

2014, projections estimate that 50 million new members will be added to the already large

Brazil.

Increasing Exit Opportunities and Maturation of Brazilian Capital Markets (Graph-2)

The São Paulo Stock Exchange (BM&FBovespa) is Brazil‘s largest. As of December 31,

2010 its 471 companies had a market capitalization of US$1.54 trillion, making it the tenth

largest in the world 30. Yet at the beginning of the 90s, the Brazilian equity markets suffered

from economic instability and political uncertainty. After the stabilization of the currency in

1994, some analysts predicted that Brazil‘s capital markets would experience a period of

strong growth, with a significant increase in the number and size of listed companies.

However, the final push to the development of the Brazilian capital markets only came in

2000 with the creation of a new corporate governance segment known as the Novo Mercado.

14

Novo Mercado required stricter corporate governance, thereby reducing risk for investors and

helping to boost demand for Brazilian publicly traded companies. This in turn generated

greater interest from local companies in accessing the capital markets to finance growth and

provide liquidity for existing shareholders. Consequently, from 2005 to 2010 there were 182

equity offerings on the Bovespa, with more than R$320 billion raised.31 In 2010, the world‘s

largest public share offering occurred on the BM&FBovespa, with the Brazilian oil company

Petrobras raising US$70 billion to finance its future growth.

Multiple Industries with a High Degree of Fragmentation

Brazil‘s growth prospects should provide expansion opportunities within various industries

while increasing the need for capital to finance such growth. Furthermore, a large number of

industries in Brazil are still highly fragmented, presenting interesting consolidation dynamics.

15

1.4.2 FACTORS BY WHICH IS PLAYING A ROLE IN DETERMINING

THE ATTRACTIVENESS OF PE INVESTMENT IN BRIC

COUNTRIES(Table-3)

Entry valuations

are too High

weak exit

Environment

challenging tax/regultory

Envornment

political

risk

India 58% 14% 8% 11%

china 45% 14% 31% 24%

Russia 2% 17% 30% 63%

Brazil 31% 11% 11% 3%

Graph-3

0%

10%

20%

30%

40%

50%

60%

70%

Entry valuations are too High

weak exit Environment

challenging tax/regultory Envornment

political risk

India

china

Russia

Brazil

16

Analysis of the Factors

In BRIC countries, Brazil is generating average 30% return on private Equity. While

considering risk between BRIC countries Brazil is comparative less risky than other countries

With respect to Entry valuation

Entry valuation is very low as compare to other countries. There by with less amount of

capital private equity players can enter into the market which makes the market attractive for

small P.E players as well.

With respect to Political risk

If we compare political risk Russia has highest political risk and Brazil has lowest political

risk. which states that Brazilian economy is politically stable and that leads to stable

government policies.

With respect to weak exit environment

In brazil, Weak Exit environment is lowest amongst the BRIC countries which states that P.E

players can exit the market with easy through IPO or other means.

With respect to weak exit environment

While considering challenging tax & regulatory environment, India and brazil both have less

challenging environment comparing other countries and both are investor friendly country.

Comparing that four risk factor for BRIC countries, India and Brazil Have the low risk than

Russia and China, but Brazil seems to be a more attractive country than India because of

lower entry valuations. Brazil is the country which can provide high return with lower risk.

17

Chapter 2

The Country at a Glance

18

Official Name: Federative Republic of Brazil (República Fede-rativa do Brasil).

Short Name: Brazil (Brasil).

Term for Citizen(s): Brazilian(s).

Capital: Brasília.

Independence: September 7, 1822 (from Portugal).

19

2.1 History of Brazil

The Empire Flag (October 12, 1822 — November 15, 1889)

Brazil was one of only three modern states in the Americas to have its own home-based

kingdom (the other two were Mexico and Haiti) - for a period of almost 90 years. In an

unusual reversal, Brazil, rather than Portugal itself, was the capital of the Portuguese Empire

from 1808 to 1821.

In 1808, the Portuguese court, fleeing from Napoleon's attack of Portugal during the

Peninsular War in a large fleet accompanied by British men-of-war, moved the government

tools to Brazil, establishing them in the city of Rio de Janeiro. From there the Portuguese

king ruled his huge empire for 13 years, and there he would have remained for the rest of his

life if it were not for the chaos aroused in Portugal due, among other reasons, to his long stay

in Brazil after the end of Napoleon's control.

In 1815 the king vested Brazil with the dignity of a united kingdom with Portugal and

Algarve‘s. When King Joao VI of Portugal left Brazil to return to Portugal in 1821, his elder

son, Pedro, stayed in his stead as regent of Brazil. One year later, Pedro stated the reasons for

the secession of Brazil from Portugal and led the Independence War, instituted a

constitutional kingdom in Brazil assuming its head as Emperor Pedro I of Brazil.

Also known as "Dom Pedro I", after his resignation in 1831 for political incompatibilities

(displeased, both by the landed elites, who thought him too liberal and by the intellectuals,

who felt he was not liberal enough), he left for Portugal leaving behind his five-year-old son

as Emperor Pedro II, which led the country ruled by regents between 1831 and 1840. This

period was beset by rebellions of various motivations, such as the Sabinada, the War of the

Farrapos, the Male Revolt, Cabanagem and Balaiada, among others. After this period, Pedro

II was declared of age and assumed his full privileges. Pedro II started a more-or-less

parliamentary control which lasted until 1889, when he was drive out by a coup d'état which

instituted the republic in Brazil.

20

Externally, apart from the Independence war, stood out decades of pressure from the United

Kingdom for the country to end its participation in the Atlantic slave trade, and the wars

fought in the region of La Plata river: the Cisplatine War (in 2nd half of 1820s), the War

against Oribe & Rosas (in 1850s), the War against Aguirre and the Great War of La Plata (in

the 1860s). This last war against Paraguay also was the bloodiest and most expensive in

South American history, after which the country entered a period that continues to the present

day, averse to external political and military involvements

The Old Republic (1889–1930)

Temporary Republican Brazilian Flag (November 15–19th 1889)

Pedro II was removed on November 15, 1889, by a Republican military coup led by General

Deodoro da Fonseca, who became the country's first de facto president through military

ascension. The country's name became the Republic of the United States of Brazil (which in

1967 was changed to Federative Republic of Brazil.).

From 1889 to 1930, although the country was formally a constitutional democracy, in

practice women and the illiterate (the majority of the population) were prevented from voting.

Also, to ensure that the outcome of the polls reflected the will of the landlords, the vote also

was not secret, with the presidency alternating between the dominant states of Sao Paulo and

Minas Gerais. Thus, the first Republican period was widespread with economic chaos,

followed by political and social revolutions hold backed by the government. Between 1893

and 1926 several movements, civilians and military shook the country. The military

movements had their origins both in the lower officers' corps of the Army and Navy (which,

dissatisfied with the regime, called for democratic changes) while the civilian ones, such

Canudos and Contestado War, were usually led by messianic leaders, without conventional

political goals.

Internationally, the country would stick to a course of conduct that extended throughout the

twentieth century: an almost isolationist policy, interspersed with sporadic automatic

alignments with major western powers, its main economic partners, in moments of high

21

turbulence. Standing out from this period: the resolution of the Acreanian's Question and the

tiny role in the World War I (basically limited to the anti-submarine warfare).

This period, known as the "Old Republic", ended in 1930 with a military coup that placed

Getulio Vargas in the presidency.

Populism and development (1930–1964)

After 1930, the successive governments continued industrial and agriculture growth and

development of the vast interior of Brazil. Getúlio Vargas led a military rule that had took

control in 1930 and would remain ruling from 1930 to 1945 with the backing of Brazilian

military, especially the Army. In this period, he faced internally the Constitutionalist Revolt

in 1932 and two separate coup d‘état attempts: by Communists in 1935 and by local Fascists

in 1938.

A democratic government prevailed from 1945–64. In the 1950s after Vargas' second period

(this time, democratically elected), the country experienced an economic boom during

Juscelino Kubitschek's years, during which the capital was moved from Rio de Janeiro to

Brasília.

Externally, after a relative separation during the first half of the 1930s due to the effects of

the 1929 Crisis. In the second half of the 1930s, there was a rapprochement with the fascist

governments of Italy and Germany. However, after the fascist coup attempt in 1938 and the

naval blockade imposed on these two countries by the British navy from the beginning of

World War II, in the decade of 1940 there was a return to the old foreign policy of the

previous period. During the 1940s, Brazil joined the allied forces at Battle of Atlantic and in

the Italian Campaign during WWII; in the 1950s the country began its participation in the

United Nations' peace keeping missions with Suez Canal in 1956 and in the beginning of the

1960s, during the presidency of Janio Quadros, the first attempts to break the automatic

alignment (that had started in the 1940s) with the U.S.A.

The institutional crisis of succession for the presidency, triggered with the Quadros'

resignation, coupled with other factors, would lead to the military coup of 1964 and to the

end of this period.

22

Military Dictatorship (1964–85)

New Professionalism and the Escola Superior de Guerra

By the late 1950s and early 1960s, the success of revolutionary warfare techniques against

conventional armies in China Algeria and Cba led the conventional armies in the developed

and underdeveloped worlds to concentrate on finding military and political strategies to fight

domestic revolutionary warfare. This led to an adoption of what Stepan called, in 1973, ―New

Professionalism.‖ The New Professionalism was formulated and spread in Brazil through the

Escola Superior de Guerra, which had been established in 1949. By 1963 New

Professionalism had come to dominate the school, when it declared its primary mission to be

preparing ―civilians and the military to perform executive and advisory functions (Decreto

Lei No. 53,080 December 4, 1963).‖ This new attitude towards professionalism did not arise

out of nowhere. Though its domination of the ESG was completed by 1963, it had begun to

penetrate the college much earlier than that — assisted by the United States and its policy of

encouraging Latin American militaries to assume as their primary role in counter-guerrilla

and counter-insurgency warfare programs, civic action and nation-building tasks.[10]

By 1964, at the same time that the military elite were unsatisfied with the natural delay,

transfers and accommodation, characteristics of the negotiation processes in democratic

governments and was also eager to impose their development project, saw a leftist revolution

as a real possibility (through the paradigm of internal warfare doctrines of the new

professionalism). Events like the rising strike levels, the inflation rate, embraced demands by

the Left for broaden political process; land reform and the growing claims of the enlisted men

were seen as "evidence" that Brazil was facing the serious possibility of a leftist internal

insurgency.

Knocking on the barracks door

From 1961 to 1964, Brazilian President Joao Goulart had been initiating economic and social

reforms that were clearly failing to address the economic problems of the country; policies

which satisfied neither Brazil's elites nor its increasingly mobilized working classes. The cost

of living index, rather low in late 1950s began to rise sharply, and per capita GDP growth fell

sharply, from 4.5% in 1957 to negative growth by 1963. Goulart also began to take steps that

alienated the Brazilian military and stoked their worst fears of revolutionary leftism. Goulart

was a member of the wealthy agrarian elite of the country, was a Catholic, possessed huge

amounts of land and supported the United States during the Cuban missiles crisis. But he also

tolerated communists within his government, pursued a neutralist foreign policy, passed a law

23

limiting the amount of profits multinationals could transmit out of the country, a subsidiary of

ITT was nationalized and showed favoritism towards military officers labelled "ultra-

nationalist" (he claimed they were loyal to him), which worried the pro-American national

military and the United States government, concerned that Goulart could be too leftist for

their tastes.[12]

Military response

By early 1964 important sections of the military had developed a consensus that intervention

in the political process was necessary. The development of this consensus was likely helped

by important civilian politicians, such as governor of Minas Gerais, and the United States

government. Though many in the trumclaim the coup was "revolutionary," most historians

agree that that is not so, since there was no real transition of power; military dictatorship was

the fastest way to implement neoliberal economic policies in the country while suppressing

growing popular discontent, and the coup was thus a way for Brazil's already-ruling elite to

secure its power. At first, there was intense economic growth, due to neoliberal economic

reforms, but in the later years of the dictatorship, the reforms had left the economy in

shambles, with soaring inequality and national debt, and thousands of Brazilians were

deported imprisoned, tortured, or murdered. Politically motivated deaths numbered in the

hundreds, mostly related to the guerrilla-antiguerrilla warfare in the 1968–73 period; official

censorship also led many artists into exile.

Redemocratization to present (1985–Present)

Tancredo Neves was elected president in an indirect election in 1985 as the nation returned to

civilian rule. He died before taking oath in, and the elected vice president, José Sarney took

the oath as president in his place.

Fernando Collor de Mello was the first elected president by popular vote after the military

regime in December 1989 defeating Luiz Inácio Lula da Silva in a two round presidential

race and 35 million votes. Collor won in the state of São Paulo against many prominent

political figures.

24

2.2 Geography:

Location: Eastern South America, bordering the Atlantic Ocean

Geographic

coordinates:

10 00 S, 55 00 W

Map references: South America

Area: total: 8,511,965 sq km

land: 8,456,510 sq km

water: 55,455 sq km

note: includes Arquipelago de Fernando de Noronha, Atol das Rocas, Ilha

da Trindade, Ilhas Martin Vaz, and Penedos de Sao Pedro e Sao Paulo

Area -

comparative:

slightly smaller than the US

Land

boundaries:

total: 16,885 km

border countries: Argentina 1,261 km, Bolivia 3,423 km, Colombia 1,644

km, French Guiana 730.4 km, Guyana 1,606 km, Paraguay 1,365 km,

Peru 2,995 km, Suriname 593 km, Uruguay 1,068 km, Venezuela 2,200

km

Coastline: 7,491 km

Maritime

claims:

territorial sea: 12 nm

contiguous zone: 24 nm

exclusive economic zone: 200 nm

continental shelf: 200 nm or to edge of the continental margin

Climate: mostly tropical, but temperate in south

Terrain: mostly flat to rolling lowlands in north; some plains, hills, mountains, and

narrow coastal belt

Elevation

extremes:

lowest point: Atlantic Ocean 0 m

highest point: Pico da Neblina 3,014 m

Natural

resources:

bauxite, gold, iron ore, manganese, nickel, phosphates, platinum, tin,

uranium, petroleum, hydropower, timber

Natural recurring droughts in northeast; floods and occasional frost in south

25

hazards:

Environment -

current issues:

deforestation in Amazon Basin destroys the habitat and endangers a

multitude of plant and animal species indigenous to the area; there is a

lucrative illegal wildlife trade; air and water pollution in Rio de Janeiro,

Sao Paulo, and several other large cities; land degradation and water

pollution caused by improper mining activities; wetland degradation;

severe oil spills

Environment -

international

agreements:

party to: Antarctic-Environmental Protocol, Antarctic-Marine Living

Resources, Antarctic Seals, Antarctic Treaty, Biodiversity, Climate

Change, Climate Change-Kyoto Protocol, Desertification, Endangered

Species, Environmental Modification, Hazardous Wastes, Law of the Sea,

Marine Dumping, Ozone Layer Protection, Ship Pollution, Tropical

Timber 83, Tropical Timber 94, Wetlands, Whaling signed, but not

ratified: none of the selected agreements

Geography -

note:

largest country in South America; shares common boundaries with every

South American country except Chile and Ecuador

2.3 People

a) Population growth

Population Growth Rate (%) (1) (Table-4)

SOURCE: International Monetary Fund- 2011 World Economic Outlook

Graph-4

Country 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Population

Age growth 0.94 0.91 0.87 1.15 1.11 1.06 1.04 1.01 1.23 1.2 1.17 1.13

26

b) Life Expectancy at Birth

Life expectancy at birth: Total population: 72.53 years

Male: 68.97 years

Female: 76.27 years (2011)

c) Age Structure and Aging

Age structure:

0-14 years: 26.2% (male 27,219,651/female 26,180,040)

15-64 years: 67% (male 67,524,642/female 68,809,357)

65 years and over: 6.7% (male 5,796,433/female 7,899,650) (2011)

d) Birth Rate

Birth rate: 17.79 births/1,000 population (2011 est.)

BIRTH RATE (2) (Table-5)

Country 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Brazil Birth

Rate 18.84 18.45 18.08 17.67 17.25 16.83 16.56 16.3 18.72 18.43 18.11 17.79

SOURCE: International Monetary Fund- 2011 World Economic Outlook

e) Death Rate

Death rate: 6.36 deaths/1,000 population (July 2011 est.)

DEATH RATE (3) (Table-6)

Country 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Brazil

Death

Rate

9.37 9.34 9.32 6.13 6.14 6.15 6.17 6.19 6.35 6.35 6.35 6.36

SOURCE: International Monetary Fund- 2011 World Economic Outlook

Languages: Portuguese (official), Spanish, English, French

27

2.4 PESTEL Analysis of Brazil

28

PESTEL ANALYSIS

Of

BRAZIL

Official Name: Federative Republic of Brazil (República Fede-rativa do

Brasil).

Short Name: Brazil (Brasil).

Term for Citizen(s): Brazilian(s).

Capital: Brasília.

Independence: September 7, 1822 (from Portugal).

Political Factor

The Brazilian Federation is based on the binding association of three autonomous political

entities: the States, the Municipalities and the Federal District. A fourth entity originated in

the aforementioned association: the Union. There is no hierarchy among the political entities.

The Federation is set on six fundamental principles: sovereignty, citizenship, dignity of the

people, social value of labor, freedom of enterprise, and political pluralism.

On 1 January 2011, Dilma Rousseff of the Workers‘ Party (PT) was sworn in as Brazil‘s first

female president. Brazil will host the football World Cup in 2014 and Rousseff is responsible

for preparing the country for the Olympics in 2016.

Traditionally, Brazilian foreign policy was mainly concerned with protecting its autonomy

and promoting national development.Brazil‘s ambitions have been complemented by a

growing international appreciation for the potential benefits that democratic and peaceful

midsized powers can bring to the emerging multipolar global order.

29

Political Parties

Several political parties are represented in Congress. Since representatives to the lower house

might switch parties, the proportion of congressional seats held by particular parties can

change. Brazil's major political parties include

Workers' Party (PT-center-left)

Democrats (DEM-center-right)

With respect to Private Equity

Political condition have a direct influence on the Policies and structure within the courtry. If

the political condition is stable within the country. There will be lower fluctuations in the

country and less variability in the returns .so Stable policy will lead to higher return for

private equity players and vice versa.

Economical Factor

Characterized by large and well-developed agricultural, mining, manufacturing, and service

sectors, Brazil's economy outweighs that of all other South American countries, and Brazil is

expanding its presence in world markets. In 2008, Brazil became a net external creditor and

two ratings agencies awarded investment grade status to its debt. After record growth in 2007

and 2008, the onset of the global financial crisis hit Brazil in September 2008. Brazil

experienced two quarters of recession, as global demand for Brazil's commodity-based

exports dwindled and external credit dried up. However, Brazil was one of the first emerging

markets to begin a recovery. Consumer and investor confidence revived and GDP growth

returned to positive in 2010, boosted by an export recovery. Brazil's strong growth and high

interest rates make it an attractive destination for foreign investors.

To see how and why Brazil is becoming one of the greatest opportunities for property

investors, there are some key reasons which are briefly explained below. We have to

highlight the capital growth, the low cost of living in the country, the booming property

market, the favourable currency exchange, the low inflation and the economic expansion

among others.

30

Economic facts & figures: Brazil World

GDP (ppp) $2.282 trillion (2011 est.) N/A

GDP per capita $11,600 (2011 est.) US$10,764

Real GDP growth 2.7% (2011 est.) 3.3%

Unemployment rate 6% (2011 est.) 8.7%

Population 201 million 6.8 billion

Inflation rate 6.5% (2011 est.) 82%

Exchange rate 1.602 (2011 est.) reals per USD N/A

Population

Population: 203,429,773 (July 2011 est.)

Population growth rate: 1.134% (2011 est.)

The average annual percent change in the population, resulting from a surplus (or

deficit) of births over deaths and the balance of migrants entering and leaving a

country. The rate may be positive or negative. The growth rate is a factor in

determining how great a burden would be imposed on a country by the changing needs

of its people for infrastructure.

The age structure of a population affects a nation's key socioeconomic issues. Countries

with young populations (high percentage under age 15) need to invest more in schools,

while countries with older populations (high percentage ages 65 and over) need to

invest more in the health sector. The age structure can also be used to help predict

potential political issues.

Impact of private equity due to increase in population

The population of Brazil in 2011 was around 201 million and would increase in the coming

years. So more & more people will engage with the different sectors of Brazil indirectly it

will lead to development of that particular industry. With growth of various industry more

capital will be required and so the industry will prefer for the Private Equity option and there

by the private Equity investment in Brazil would increase

31

Gross Domestic Product (GDP):

The Brazilian economy‘s solid performance during the 2008 financial crisis and its strong

and early recovery, including 2010 growth of 7.5%, have contributed to the country‘s

transition from a regional to a global power. Expected to grow 3.5% in 2011 and 4.0% in

2012, the economy is the world‘s seventh-largest and is expected to rise to fifth within the

next several years.

GDP - real growth rate (%) (Graph-5)

Table-7

Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Real GDP 0.8 4.2 1.9 1 -0.2 5.1 2.3 3.7 5.4 5.1 -0.2 7.5 2.7

Per Capita GDP: (Graph-6)

-5

0

5

10

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Pe

rce

nta

ge

Years

Real GDP

0

5,000

10,000

15,000

1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

US

$

Years

Per Capita GDP

32

Table-8

Year 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Per capital

GDP 6,150 7,400 7,600 7,600 8,100 8,300 8,800 9,500 10,200 10,100 10,800 11,600

With respect to Private Equity

GDP has direct relationship with the investment of a country. High GDP indicate that a

country is in growing position. In 2011 GDP of Brazil was 2.7%. So it indicates that Brazil‘s

economic condition has gone down, hence it would not attract international private equity

investors

Inflation rate:

Low unemployment and strong domestic demand pushed 12-month inflation to 7.3% through

the first three quarters of 2011, above the upper limit of the government‘s target of 2.5%-

6.5%. The central bank believes, however, that the global economic downturn will dampen

inflationary pressure and projects inflation to fall within the target band by the end of 2011

and throughout 2012

Inflation rate (consumer prices) (%) (Graph-7)

Table-9

Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Inflation Rate 5 6 7.7 8.3 14.7 7.6 6.9 3 3.6 5.7 4.9 4.9 6.5

With respect to Private equity

The inflation rate of Brazil in 2011 is 6.5%, if the inflation rate increases consumer

spending will decrease. Thus it would affect their investment decision. This would

affect the private equity investment of the country and would hamper its growth.

0

5

10

15

20

1 2 3 4 5 6 7 8 9 10 11 12 13

Per

cen

tage

Years

Inflation Rate

33

SOCIO CULTURAL FACTOR

Mainly there are two major parts of socio cultural factors in Brazil,

The social characteristics and

The knowledge/education.

Social characteristics give an outline over society classes, ethnicity, inequality, crime and

health in Brazil. These factors will certainly influence Brazilian society.

SOCIAL CHARACTERISTICS

Society Classes

The modern Brazilian society cannot be reduced to a typecast Latin American society;

a wealthy landed elite masses versus masses of poor peasant and workers.

The high class people have more property and prestige.

The middle class is divided into formally employed people, a technical work force

based on knowledge and skills, and the informally employed people, self-employed

businessmen who accounted nearly half of the economically active population.

Ethnicity

In the sixteenth century, at the time of the first European contact, the original

Amerindian population of Brazil range from 2 to 5 million.

Portuguese were the first European immigrants who entered in Brazil.

Many racial and cultural groups arrived in Brazil intermingled and intermarried.

Inequality

Brazilian society had initially the double moral standard for men and women.

Men were expected to exhibit their masculinity, while a sophisticated woman was

supposed to remain virgins till marriage and to be truthful to their husbands.

Men were routinely main heads of households and married women were legally

subordinate to support their husbands.

Crime

Brazil stands 1st in terms of high rates of violent crimes, such as murders and

robberies.

Other crimes like carjacking, express kidnapping, trafficking, domestic abuse, slavery

and internet hacking are also prevalent in Brazil.

A major problem is that the human rights are violated during capture and custody of

crime suspects.

34

Health

Based on the Human Development Report Brazil is a high developed country.

For Brazil the HDI is 0,800, which makes Brazil just a high developed country.

The infant mortality rate (IMR) is a major indicator for the health situation of a

country, because births are not affected by the population‘s age structure.

Sports:

The Brazilian people can be introduced as sports loving people. Most of the people

regularly follow and participate in veracious kinds of sports.

The most admired sport of Brazil is football. It can be said that football is in the blood

of Brazilian people and can be considered a cultural event.

Brazil is the only country which have participated in all the Football World Cups and

even won the tournament five times (1958, 1962, 1970, 1994 and 2002).

Brazil had around 5 million visitors in 2008, of which 82,000 from the Netherlands.

Therefore Brazil is 49th on the world ranking, direct revenues reached USF 5.78

billon.

Apart from football, Volleyball is also now becoming popular among the Brazilian

people.

Human

developme

nt index

(HDI)

value

Life

expectancy

at birth

(years)

Physicians

(per

100,000

people)

Population

using

improved

sanitation

(%)

Population

using an

improved

water

source (%)

Infant

mortality

rate (per

1,000 live

births)

Brazil

0,800 71,7 115 75 90 31

71,7 115 75 90 31

115

75

90

31

35

EDUCATION / KNOWLEDGE

Education

Education expenditures:

The principles or main beliefs for education in Brazil were established in the 1988 Brazilian

foundation, and it was decided that education is a right for all.

The education system is divided into 3 different categories; fundamental, intermediate

and higher education. Playgroup or preschooler education is added to this hierarchical

structure aiming to provide assistance to children below 7 years of age.

With the growth of the economy of the last years it is surprising, that the quality of

education is getting worse.

Following are some well-known universities of brazil and are ranked as follows:

Institution (Brazil) World Rank

University of Sao Paulo 196

University of Campinas 248

Federal University of Rio de Janeiro 334

Knowledge

Brazil is a leader in the export of oranges, sugarcane and coffee. It also exports other

important products like soy beans, rice, tobacco, bananas and cotton.

It can be said that Brazil has a fertile land where any crop can grow easily. Therefore

Brazil is well known for the agriculture.

Brazil‘s electricity consists for over 80% of hydro power and in the future there are

plans for constructing over 30 dams in the Amazon.

Language:

Portuguese is the official language, spoken by all but few lonely Amerindians, who

preserve their languages, and immigrants who have not yet gained expertise in

Portuguese.

There are no official regional dialects. Brazil is the only Portuguese-speaking country

in South America.

36

With respect to Private Equity

Brazil stands high in crime rate. There are many cases of Robbery and kidnapping .This

states that the laws are not implemented properly which leads to insecurity amongst the

investors regarding security of their investment.

SCIENCE AND TECHNOLOGICAL FACTOR

Large investments were made in the country's infrastructure for the production of

steel, machine tools, energy, communications, and transportation.

Some high-technology projects with expected voter spinoffs were started in atomic

energy, aeronautics, and space research.

Brazil's attempt to strengthen its scientific base involved international attention and

was considered an example of how a country might move from underdevelopment,

poverty, and international dependency to economic growth, better living standards,

and self-sufficiency.

The investments in science and technology of the previous years were not sufficient to

fight off the coming debt crisis and uncontrolled inflation.

The crisis resulted from a combination of factors, including the outdated pattern of

domestic economic growth through import-substitution industrialization, the increase

in international interest rates and oil prices, and the unexpected increase in public

expenditures resulting from transfer of government and extensive investment.

Modern science and technology are products of Western culture and tradition and are

not transposed easily to other societies and cultures.

A relationship between Brazil and the Asian countries indicate important differences

in the two experiences and possible explanations for the different outcomes of their

science and technology policies.

With respect to private Equity

As the investment in technology is not sufficient, there is a large scope for private equity

players to provide the funding require for developing the technological environment within

the country. Such environment will help to generate innovations within the country.

37

ENVIRONMENTAL AND LEGAL FACORS OF BRAZIL

Deforestation

Deforestation has been a major source of pollution, biodiversity loss, and greenhouse

emissions worldwide, but deforestation has been Brazil‘s prime cause of

environmental and ecological ruin.

Recent policy

Brazil's National Institute for Space Research (INPE) has helped reduce deforestation

over the course of 2011 through its Real Time Deforestation Detection System.

The Government is taking strict measures to efficiently enforce its deforestation

reduction policy through closing down illegal sawmills and stopping illegal timber

and vehicles.

Brazilian governmental tax policies, tax incentive systems, rules of land allocation,

and the agricultural credit system, not only harm the environment, but also ―reduce

the chances of the poor to become farmers".

This structure harms the small, poor farmer, since the low tax rate level becomes

capitalized into the price of land, reflected in high land prices, making it loss-making

for the poor farmers of Brazil. This forces them to move into the Amazon in search of

cheap, unclaimed land, following to the rules of land allocation that indirectly

encourage deforestation.

Interest rates on loans for agriculture purpose are lower than those for non-agricultural

sectors. The system of credit goes beyond harming the environment, as it encourages

mechanization and technological updating which reduces employment. The extent of

break down to the environment, and more particularly the Amazon, is hard to

measure, but it is true that it does increase deforestation rates.

Desertification

Desertification means that the soils and vegetation of dry lands are badly degraded,

not essentially that land turns into desert.

Expert environmental agencies were formed at the federal level and in some states,

and many national parks and reserves were set up.

38

National environmental policy

The primary aim of this policy is to form standards that make sustainable

development possible, using mechanisms and instruments that are capable of ensuring

more protection for the environment.

The NEP involves many environmental issues, including the specification of standards,

licensing, environmental impact assessments, special areas for preservation, incentives for

cleaner production, etc.

Pollution

Air pollution

Brazil the only area of the world which broadly utilizes ethanol, air quality issues in

Brazil relate more to ethanol emissions.

About 40% of fuel consumed in Brazilian vehicles sourced from ethanol, air pollution

in Brazil differs from that of other nations where predominately petroleum or natural

gas-based fuels are used.

Atmospheric concentrations of acetaldehyde, ethanol and possibly nitrogen oxides are

higher in Brazil than most other parts of the world due to their emissions being high in

vehicles using ethanol fuels

Water pollution

Water pollution is also resulting from ethanol production.

The major problem related with land taxes is how land use is defined. Basically, the

more the land is used, the less it is burdened by tax.

Imprecise forest land is considered unused, resulting in higher taxes. If that land were

cleared for no reason, taxes would reduce.

Land and income taxes effect deforestation highly, but other parts of the tax system

such as capital gains and commodity taxes, seems to have had no effect on

deforestation. Some particular tax breaks exist at the local level that encourages

unsustainable forest use, but overall these taxes were relatively benign.

39

Legal factors of Brazil

Fiscal crisis

Brazil felt the financial crisis at its most at the end of 2008 and industry was affected

highly. Yet the situation began to recover in the second quarter of 2009.

It‘s GDP reduced by 2.9% in 2008 and by 0.9% in the first quarter of 2009. After that

period, the economy returned to growth. This is much more better than in the

developed countries and far better than in countries such as Russia and Mexico .

The minimum leverage requirement of the banks is 11%, higher than the 8% ratio

usually suggested by the Basel agreements.

Graph1. Capital/asset ratio of the 50 largest Brazil banks (%)

The country recently received an investment grade, which consolidated the capital

inflow and foreign exchange reserves, reaching US$197 billion in October 2008.

Foreign debt continued to reduce, standing at US$214 billion by the end of 2008.

Public debt also reduced to just US$67 billion and the National Treasury, after a long

period of time, and hence was no longer a foreign debtor but become a creditor

40

Graph : Evolution of foreign debt (US$ billion)

Therefore, the depreciation of the Brazilian real would not lead, to any type of fiscal

pressure on the government. On the contrary, the resulting foreign exchange gains led

to a reduction of the debt primarily.

Brazil experienced the financial crisis most strongly at the end of 2008 and industry

was particularly affected as it was distinguished in three ways.

First was, exports of manufactured goods reduced significantly during the last quarter

of that year, by approximately 37%.

The problem that the Brazilian exporter faced was a major drop in sales to emerging

countries, i.e., the main customers of its industrial sector that mainly specialized in

medium-technology products. .

Secondly, in addition to the shrinkage, as in the rest of the world, US$ funding for

exports was severely punched. As the Brazilian real was devalued by more than 30%

over the last months of 2008, companies were badly affected and some went into

bankruptcy.

Even though the crisis, the real personal income overall grew by 2.2% between

October 2008 and January 2009. Retail trade continued its positive trend and ended

the year with an estimated growth of 5.6%.

41

With respect private equity

Brazil‘s complicated tax system and its restrictive labour laws make it vital for the

parties to involve experienced financial and legal advisors who can help them work

through these issues.In general terms, Brazil‘s legal and regulatory environment is

well suited to supporting private equity deal structures.

In particular, that financial and securities laws and regulations are generally modern,

clear and stable. generally accepted that the referred regulatory arrangements have

prevented major impacts to the national economy during the 2008 financial crisis.

Accordingly, the Brazilian judiciary system is slow and, in several instances, has

generated unpredictable decisions. To a certain extent, related to the immaturity of the

Brazilian private equity industry. Specifically, since there are no consolidated

precedents referring most of issues involved in such sector, market participants are

not able to anticipate how certain rules are to be interpreted and applied in concrete

circumstances. foreign exchange regulation can be considered another pitfall, since it

is unstable and often obscure. Finally, intellectual property rights protection is

negatively affected due to inefficiencies in bureaucratic processes.

42

Chapter 3

Conceptual Framework of Private

Equity

43

3.1 MEANING OF PRIVATE EQUITY

Private equity organizations are partnership specializing in venture capital, leverage buyouts,

mezzanine investments (which combine debt and equity contract characteristics), build-ups,

distressed debt, and other related investments. Typically private equity and venture capital

firms are frequently labeled as ‗financial sponsors‘. Private equity includes both organized

as well as unorganized market, the previous being referred to as the professional

management of investments in unregistered securities of private firms and to a certain extent

the public firms also while the later refers to as unregistered securities being sold to

institutional investors and qualified individuals.

The European Private Equity and Venture Capital Association defines private equity as ―any

equity investment in a company which is not quoted on a stock exchange‖. Private equity

can be used to develop new products and technologies, to expand working capital, to make

acquisition, or to strengthen a company‘s balance sheet. It can also resolve ownership issues

and management issues.

Private equity had started in order for financing young industrial firms, as a result of which

significant capital was required in improve growth and provide sufficient funds. These

companies have important intangible and limited tangible assets, they expect a period of

negative earnings and their prospects are uncertain. Private equity organizations finance the

high risk situations of companies and they expect high returns at the later stage. They conduct

due diligence before making any investment regarding business, financial, legal and

regulatory framework, and environmental issues applicable for the company, in order to

protect the value of their equity investments.

Usually private equity investors do not mainly invest their own capital, but rather raise the

majority of their funds from institutions and high net worth individuals.

44

3.2. PROCESS OF PRIVATE EQUITY

Stages Company

Company And

Private Equity

Firm

Private Equity

Firm

Approach the

Private Equity

Firm/ Evaluate

the Business

Plan

1. Appoint

Advisers

2. Prepare

Business Plan

3. Contact Private

Equity firms

Review Business

Plan

Initial Enquiries

and Negotiations

Provide

additional

information

1. Meet to discuss

Business Plan

2. Build relationship

3. Negotiate outline

Terms

1. Conduct initial

enquiries

2. Value the

business

3. Consider

financing

Structure

Due Diligence Disclose all the

relevant

information/

Documents

1. Liaise with

accountants

2. Liaise with other

external consultants

Initiate external

Due Diligence

Final

Negotiation/

Completion

1. Liaise with

Legal Advisers

2. Liaise with

Consultants

1. Negotiate final

terms

2. Document

constitution and

voting rights

Draw up

completion

Documentation

Monitoring and

Exit

1. Provide Periodic

Management

Accounts

2. Communicate

regularly with

Investors

1. Monitor

investment

2. Constructive

Input

3. Involvement in

major decisions

45

3.3 Start and Development of the Private Equity Industry

Private equity industry has developed since World War II at the same time in the United

States and in Europe, though the level and speed of its development since then different

significantly on the two continents. The origins of the modern private equity industry outline

back to 1946 with the formation of the first venture capital firms. It was not until after World

War II that what is measured today to be true private equity investments began to emerge

marked by the founding of the first two venture capital firms in 1946: American Research

and Development Corporation (ARDC) and J.H. Whitney & company.

The thirty-five year period from 1946 through the end of the 1970s was characterized by

comparatively small volumes of private equity investment, undeveloped firm organizations

and limited knowledge of and familiarity with the private equity industry.

The second half of the 1970s and the first years of the 1980s saw the appearance of several

private equity firms that would be survive through the various cycles both in leveraged

buyouts and venture capital. Among the firms founded during these years were:

• The Cinvan a European buyout firm, founded in 1977.

• Forstmann Little & Company one of the largest private equity firms through the end

of the 1990s, founded in 1978 by Ted Forstmann , Nick Forstmann and Brian Little.

• The company Clayton, Dubilier & Rice found originally as Clayton & Dubliner, in

1978.

• The company Welsh, Carson, Anderson & Stowe was founded by Pat Welsh, Russ

Carson, Bruce Anderson and Richard Stowe in 1979.

• Candover , one of the earliest European buyout firms, founded in 1980.

• The company like GTCR and Thoma Cressey (originally Golder Thoma & Cressey,

later Golder Thoma Cressey & Rauner) founded in 1980 by Golder , who built the

private equity program at Fist Chicago Corporation that backed by the Fedral Express.

46

The 1982 to 1993 first private equity phase

During 1980-90 is perhaps more closely associated with the leveraged buyout than any other

time in past. For the first time, the public became aware of the ability of private equity to

affect majority companies and "corporate raiders" and "hostile takeovers" entered the public

alertness. The decade would see one of the largest booms in private equity culminating in the

1989 leveraged buyout of RJR Nabisco, which would supremacy as the largest leveraged

buyout transaction for nearly 17 years. In 1980, the private equity industry would raise

approximately $2.4 billion of annual investor commitments and by the end of the decade in

1989 that figure stood at $21.9 billion marking the fabulous growth experienced.

The beginning of the first boom period in private equity would be marked by the well-

publicized success of the Gibson Greetings acquisition in 1982

In January 1982, Mr. William Simon who was former US Secretary of the Treasury, and a

group of investors, which would later famous as Wesray Capital co., acquired Gilbson

greetings, Who produce greeting cards. The purchase price for Gibson was $80 million, of

which only $1 million was rumored to have been contributed by the investors. By mid-1983,

just sixteen months after the original deal, Gibson completed a $290 million IPO and Simon

made around $66 million. Simon and Wesray would later complete the $71.6 million

acquisition of Atlas Van Lines. The success of the Gibson Greetings investment attracted the

attention of the media to the emerging boom in leveraged buyouts.

As there was high leverage in the transactions in 1980s, the deals failed regularly, but as there

was attractiveness of returns, successful investments attracted more capital. As there was

increased leveraged buyout activity and investor interest, private equity firms increased

Among the major firms founded in this period were:

Bain Capital

Chemical Venture Partners,

Hellman & Friedman

Hicks & Hass (later it was known as Hick Muse Tate & Furst)

The Blackstone Group

Doughty Hanson

BC partners

The Carlyle Group

47

Additionally, as the market developed, new niches within the private equity industry began to

emerge. In 1982,Venture Capital Fund of America the first private equity firm focused on

acquiring secondary market interests in existing private equity funds was founded and the

first private equity firm named First Reserve Corporation focused on the energy sector, was

founded in 1984.

The Corporate raiders, hostile takeovers and greenmail

A corporate raid typically featured a leveraged buyout that involved a hostile takeover of the

company, which had perceived asset stripping, major layoffs or other significant corporate

restructuring activities. Management of many large publicly traded corporations reacted

negatively to the threat of potential hostile takeover or corporate raid and undertook

defensive measures including poison pills, golden parachutes and increasing debt levels on

the company‘s balance-sheet. The threat of the corporate raid lead to the practice of

"greenmail", where a corporate raider or other party acquired a significant stake in the stock

of a company and received an incentive payment from the company in order to avoid a

hostile takeover of the company. Greenmail represented a transfer payment from a company's

existing shareholders to a third party investor and provided no value to existing shareholders

but did benefit existing managers.

The second private equity phase and the beginning of a modern private

equity 1993-2002

Beginning approximately in 1992, three years after the RJR Nabisco buyout, and ongoing

through the end of the decade the private equity industry once again experienced a

tremendous boom, both in venture capital (as will be discussed below) and leveraged buyouts

with the appearance of brand name firms managing multi-billion dollar sized funds. After

declining from 1990 through 1992, the private equity industry began to increase in size

raising approximately $20.8 billion of investor commitments in 1992 and reaching a high

water mark in 2000 of $305.7 billion, outpacing the growth of almost every other asset class.

New start of leveraged buyouts

In 1980s there were corporate raids, hostile takeovers, asset stripping, layoffs, plant closings

and outsized profits to investors. Private equity began to earn a new degree of legality and

respectability. Many of the acquisitions were made in 1980 which were unsolicited and

unwelcome, so private equity firms in the 1990s focused on making buyouts attractive

propositions for the management as well as the shareholders. Big companies that were once

not ready at an approach from a private-equity firm are now pleased to do business with

48

them. Additionally, private equity investors increased their focus on the long term

development of companies they acquired, using less leverage in the acquisition. In the 1980s

leverage would routinely represent 85% to 95% of the purchase price of a company as

compared to average debt levels between 20% and 40% in leveraged buyouts in the 1990s

and the first decade of the 21st century. In addition, private equity firms increased

investments in capital expenditures and provided incentives for management in order to

build long-term value.

The bursting of the Internet Bubble and the private equity crash (2000 to 2003)

The NASDAQ crashed and there was a technology slump in March 2000. This shook the

entire venture capital industry as the valuations for startup technology companies collapsed.

As a result, many venture firms wrote-off their large proportions of their investments and

many funds had their the values below the amount of capital invested. Venture capital

investors reduced size of commitments they had made to venture capital funds and in

numerous instances, investors sought to unload existing commitments for cents on the dollar

in the secondary market. Total venture capital investments were during 2003 through the

second quarter of 2005.

The third private equity phase and the Golden Age of Private Equity

during 2003-2007

As 2003-2007 time is known as golden age for private equity. Almost two and half years

before 2003 private equity sector reel huge losses in telecommunications and technology

companies. After 2003, in next five years private equity recovered and resulted in

completion of 13 of the 15 largest leveraged buyout transactions which is unique or highest

level of investment activity and investor commitments and a huge expansion and maturation

of leading private equity firms or institutions.

Due to important factors like combination of decreasing interest rates, loosening lending

standards and regulatory changes for publicly traded companies lead the private equity for the

largest boom in history had ever seen. For the first time, many large corporations saw private

equity ownership more potentially more attractive than remaining public. The increased

fulfillment costs would make it nearly impossible for venture capitalists to bring young

companies to the public markets and dramatically reduced the opportunities for exits via IPO.

Instead, venture capitalists have been forced increasingly to rely on sales to strategic buyers

for an exit of their investment.

49

In 2002, decrease in interest rates reduces the cost of borrowing and due to that capacity of

private equity firms increase to finance large acquisitions. Lower interest rates encourage

investors to go back to comparatively dormant high yield debt secured loan markets, making

debt easily available to finance buyouts. Besides that substitute investment also increase

significantly due to investors had focus on yield instead of risk, so this higher yielding

investments search of investor‘s lead larger funds and it converted in larger deals, and that

looking like impossible turn in to reality.

In 2002-2003, Europe where finance were easily available for certain buyouts. Like in year

2001 Apex partners and Hicks company purchased international yellow pages directories

business from BT Group for £2.14 billion which made it largest non-corporate LBO in

Europe. Later Yell bought US directories publisher McLeod USA for about $600 million, and

floated on London's FTSE in 2003.

The Credit Crunch and post-modern private equity (2007 – 2008)

In July 2007, the credit markets had been affected by turmoil spilled over into the leveraged

finance high-yield debt markets. The markets were seemed to highly healthy during the first

six months of 2007, because of extremely issuer friendly developments (like payable in Kind)

and huge availability of finance for large leveraged buyouts. Month of July and August saw

a notable slowdown in issuance levels in the high yield and leveraged loan markets with only

few issuers accessing the market. Such uncertain market situation lead to slowdown which

leads companies to led plans to issue debt on hold until the autumn. By the end of September,

the full quantity of the credit situation became obvious as major lenders (including Citygroup

and UBS AG) announced major write-down due to credit losses. That made leveraged

finance markets almost idle. The sudden change in the market resulted that buyer‘s starts

withdraw from or renegotiate the deals completed at the top of the market, most remarkable

transactions involved:

Harman International (announced and withdrawn 2007)

Sallie Mae (announced 2007 and withdrawn 2008)

Clear Channel communications (2007)

BCE (2007)

Additionally, the credit crunch also encouraged buyout firms to follow a new group of

transactions in order to organize their massive investment funds. These transactions have

included PIPE transactions as well as purchases of debt in existing leveraged buyout

transactions. Some of the most notable of these transactions completed in the depths of the

50

credit crunch include Apollo Management‘s acquisition of the City group Loan Portfolio

(2008) and TPG Capital‘s PIPE investment in Washington Mutual (2008).

The 2008-20011 Latest Private Equity phase

Let‘s start with evaluation of 2010, a mixed year in many respects. From 2009, deal making

start to recover, with plenty of dry powder, good-quality assets and available credit laying a

foundation for higher levels of investment. During that time, inflated asset prices driven by

high public-market comparables, intense competition and sellers‘ sticky price expectations

prevented many transactions from reaching end. In fund-raising, the news almost across the

globe was poor, as new capital raised hit, and repeated low. While this was expected certain

the lag effect of limited partners‘ (LPs) funding commitments. The weak exit root for private

equity market was seemed to very defficult throughout the first three quarters of 2010 and it

remains continued for fund-raising in 2011. Here we can hope for a fundraising recovery

arrived in the 2012 as exit markets opened up with better conditions ahead. Returns also

rebounded, but the lack of liquidity overall for 2010 left many LPs scratch their heads about

the true value of their PE holdings.

As looking at 2011 international PE markets must take into account not only the incompatible

forces at work in 2010, it also the continued weakness of the global economic recovery and

credit markets. Market indicators undoubtedly point that PE activity would be stronger across

the board in 2011: More deals will be consummated, more deals exited, with high returns.

Researchers also firmly believe that the credit crunch of 2008 and the Great Recession have

unleashed forces that will basically change the PE industry over the next decade. Private

equity has long been a cyclical business—whether driven by conglomerate breakup values

and junk bonds in the 1980s, growing multiples on the back of strong equity markets in the

1990s or credit market-enabled multiple expansion in the early 2000s. Whatever the cause,

there has always been a healthy market beta driving returns along. Researchers believe that

future PE returns would be shaped more by alpha. Most of what can be called alpha will be

created by four interconnected factors:

Having a well clear PE strategy

Professionalizing organizations and positioning them to win

creating truly proprietary investment theses supported by accurate due diligence; and,

very critically

Building real, repeatable value-creation processes that run through the life cycle of an

investment partnership.

51

3.4 DEVELOPMENT OF PRIVATE EQUITY IN BRAZIL

Brazil has developed into the major market for private equity in Latin America, accounting

for more than Mexico and Argentina combined. In 2010, total PE investments in the country

were US$4.6 billion,3 representing 69% of the Latin American PE industry. Brazil is today

the most attractive emerging market for private equity investments.

The PE industry has benefitted from positive macroeconomic developments in the country.

Over past 15 years, Brazil had political stability, and a strict monetary policy and finally

controlled inflation, creating a kind investment climate. Also during that time, capital markets

have expanded, there were improvements in corporate governance and minority shareholder

protection, which provided a viable exit route for PE investors.

Today economic conditions are favourable for the growth of the Brazilian PE industry. The

emerging middle class, eager to benefit from ever-increasing disposable income and credit

availability, is boosting internal consumption of a broad range of products, from food to

government-subsidized housing, making Brazil one of the leading consumer markets

worldwide. The Brazilian government is stimulating this growth, mainly by means of large

investments in infrastructure, including the World Cup in 2014 and the Olympic Games in

2016. Other sectors such as commodities and energy will continue to play an important role

in the continued growth of GDP, backed by solid internal and external consumer markets.

First Steps (1994-2000)

The initial conditions for the growth of the private equity market in Brazil emerged in the

wake of the Plano Real. Launched in 1994, this economic plan focused on shoring up the

Real as a stable currency, controlling inflation through interest rates, and initially fixing

the exchange rate. Previous periods of hyperinflation and political instability had

prevented most investors from acquiring privately held assets. Capital liberalization in

the 1990s was another important milestone that resulted in increasing competition from

foreign companies, underlining the need for local companies to improve productivity.

The government also contributed to the emergence of the PE industry in Brazil by

privatizing inefficient state owned companies in several sectors during the early 1990s.

This attracted private equity investments into the country, such as the acquisition of ALL

(the largest private railway in Brazil) and Telemar (one of the largest telecommunication

companies) by PE funds in the 90s. The early years of the private equity industry saw

increasing activity among major Brazilian banks, the emergence of local independent

firms, and a number of uncertain forays by international funds. These players invested in

52

many different sectors and in companies at different stages, ranging from large scale

privatizations to internet start-ups.

During the mid- 90s, low valuations and emerging markets attracted investors promising

outstanding returns. At the end of 1998, the PE industry in Brazil were able to raise US$

3.7 billion as investment into the country.

But due to the Asian and the Russian crisis, investors were reminded abouth the political

and economic risks , due to which they were pulling back their capital from emerging to

developed economies. In 1999, there were major currency deflations in Brazil and there

was also sharp increase in the interest rates, in order to control the inflation, these all had

a bad effect on the real economy. As a result of this fund managers could not meet the

expectations of investors as they poorly performed, and thus they left the markets as they

could no longer raise capital.

Brazilian Private Equity Shake-Out (2001-2004)

In the early 2000s, Brazil went through a period of macroeconomic uncertainty when it

could no longer attract capital, with the Asian crisis still lingering most of the emerging

economies. The terrorist attacks of September 11 2001 had a strong impact on financial

markets and investments globally. The election of leftwing candidate Luis Inácio Lula da

Silva as president encouraged investor concerns that the previous monetary policies,

including inflation targets and primary surplus control, would be discontinued. During

2002, the exchange rate to the dollar reached more than 3.5 and interest rates soared to

24.9%.

Private equity fund raising went as a result of the macroeconomic environment and

disappointing returns from previous vintages. Funds struggled to raise capital.

International players pulled back investments and several left the country, while

independent local players started to fill the gap. As competition dwindled, most of the

deals were done at low multiples. Exits from PE investments were only possible via sales

to strategic players, as the capital markets in Brazil were still in their early years.

Despite this adversity, the period was marked by several important regulatory measures

that established the basis for the future development of the PE industry. In 2002, there

were new norms that allowed local pension funds to allocate part of their funds to

alternative investments, such as private equity. This created an important source of

domestic funding as Brazilian pension funds would grow to about US$342 billion in

assets under management by 2010. In 2003, the Fundo de Investimentos em

53

Participações, allowed PE firms to increase fund raising and investors to arrange capital

through a less risky, more transparent and tax-efficient instrument. Corporate governance

and the protection of minority shareholders in Brazil were also improved during this

period.

Private Equity Matures (2005- 2010)

From 2005, there was favorable macro-economic environment, due to falling interest

rates, inflation under control, and no sign of political instability. Market concerns about

President Lula‘s policies proved to be overly pessimistic as he maintained the previous

government‘s economic power, while boosting income distribution policies. Political

stability was enhanced after his re-election in 2006. The positive momentum for Brazil

culminated with its upgrade by S&P to investment grade (in 2008/ 09), which prompted

a massive capital inflow to the country.

The middle class increased spending, which boosted the growth in the sectors from real

estate to consumer goods. Credit availability increased which led to consumption boom,

as credit penetration increased from 25% in 2005 to 44% of GDP in 2009.

There was positive economic climate which benefited the entire PE cycle: attracting

investment, deploying capital, exiting investments and generating returns. Starting in

2005, fund raising resumed on a large scale, the pace of investment accelerated and funds

started exiting their investments, some through the capital markets.

The global financial crisis of 2008/09 did affect the PE industry in Brazil negatively, but

to a much lesser extent than in the developed and most other emerging countries. Thanks

to Brazil‘s flexible and favorable macroeconomic fundamentals, PE development was

halted for only a short period of time. Despite a slight decrease in fund raising in 2009,

billion-dollar funds were still being raised, for example GP Investments‘ US$1.4 billion

fund in 2008 and Advent International‘s US$1.65 billion fund in 2010. Yet while

investors continued to deploy capital in the country, they did so at a reduced pace,

instead focusing their attention on managing portfolio companies.

However, by 2010 PE investments in Brazil had improved even beyond pre-crisis levels,

the PE firms‘ regained confidence in the country‘s fundamentals and favorable outlook.

As a result, the PE industry resumed its activity, reaching a record level of US$10.5

billion invested in the Country.

54

3.5 Current Status of Private Equity in Brazil

Currently there are around 150 private equity institutions operating in Brazil. This number

has increased rapidly during the past few years due to the growth of the local economy and

the arrival of large international funds.

The private equity funds active in Brazil can be divided into two large groups according to

their origins:

(i) local funds, (ii) international funds.

The first group is comparatively limited in number, but large in terms of assets under

management (AUM). According to a PwC Survey, 58% of total assets under management

for private equity in Brazil were raised by local funds. These funds were mainly

established during the 90s and the beginning of the 2000s, and survived the economic crises

and changes that Brazil went through during this period. When Lula da Silva took office in

2003, most of the international funds that had once dominated the PE industry had already

left Brazil, as a result of which local funds prospered both in terms of fund raising and new

investments.

A relevant subgroup of the local funds, which was established relatively recently (around

2008), are institutional-backed funds, consisting of PE firms associated with large financial

institutions such as investment and commercial banks. The main players in this segment

are Bradesco-Espirito Santo, Kinea-Itau and BTG Pactual. These firms were established

to take advantage of the strong growth of the private equity industry in Brazil over the last

few years and to leverage the multiple business relationships that their parent banks

maintained with Brazilian companies. But, this subgroup generally deployed capital at a

slower speed than the other players, because their private equity business divisions are still

growing.

The international funds include well-known institutions such as Actis, Advent International,

Apax Partners, Carlyle and General Atlantic. With the exception of Advent International,

these funds entered Brazil very recently, establishing local offices during the third phase of

development of the industry, mainly after 2008. These have support from parent companies

in terms of fund raisind as well as operating expertise. But as they are relative newcomers,

they lack the breadth and depth of the connections of local players.

55

3.6 Private Equity Scenario in India

Risk Capital Foundation id the first VC-PE firm to start operations in India in 1975. During

1976-1995, domestic financial institutions like Industrial Finance Corporation of India

(IFCI), Industrial Development Bank of India (IDBI), and Industrial Credit and Investment

Corporation of India (ICICI Bank) were some of the few private organizations that provided

any Venture Capital or Private Equity capital, and the actual investment made by them was

also insignificant. During the period 1996-2000, several international and domestic VC and

PE firms raised capital internationally and started investing tiny amounts in India.

The total investment in India made by these firms was only US $20 million in 1996 and US

$80 million in 1997. Even though PE-VC investment was only $20 million in 1996 and $80

million in 1997, the pace of growth was very healthy largely due to the worldwide dot-com

boom. Unfortunately, because this growth was driven by of the dot-com bubble, it came

crashing down soon after NASDAQ lost 60% of its value in 2000 – for example, the total

number of deals went down from 280 in 2000 to 110 in 2001 – and this investment reached

its low point both in the number of deals and total value in 2003. From 2003 onwards, India‘s

economy started growing at 8% to 9% annually in real terms and at 13% to 15% in nominal

terms (including inflation), and since some sectors (the services sector and the high-end

manufacturing sector) started growing at 10% to 14% a year in real terms and 15% to 20% in

nominal terms, VC-PE firms started investing again in 2004. They invested US $1.65 billion

in 2004, surpassing the investment of $1.16 billion in 2000 by 42%. The table below shows

the number and value of deals in India during the period from 1996 to 2006.

Number and Value of Deals (in million US $)

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Number

of Deals

280 110 78 56 71 146 299 470 450 270 300 454

Value

of Deals

($)

1160 937 591 470 1650 2183 7460 13000 11000 4000 8150 9400

Sources: Evalueserve, IVCA and Venture Intelligence India

56

In the last two decades, there were many economic reforms and general ways of doing

business improved, which has helped to increase the growth in India. There has been

globalization as a result of which the economy has improved and there will be many global

transactions in future.

India has never welcomed foreign companies. As a result of restrictions on ownership, red

tape and many other barriers, it was difficult for retail giants and banks to have a grip in one

of the fastest growing economies. But the story is not so with foreign private equity.

Foreign private-equity investments in Indian companies doubled to $2.2 billion in 2005 from

the previous year, then increased in the first nine months of 2006 to $5.4 billion. And unlike

South Korea and Japan, where foreign private-equity groups have been called as "vultures,"

they have been welcomed in India--even after scoring big profits.

At first, foreign private equity chased India's IT and outsourcing boom. But now there are

also opportunities in everything from finance to pharmaceuticals. Rising corporate

profitability--the profits of listed companies have been growing 20% to 30% annually. And

although the average deal size in 2005 was only $21 million, compared with $163 million in

South Korea, the investments are getting larger. Last April, TPG New Bridge put $100

million into Shriram, making it one of the largest and best-capitalized truck-finance

57

companies in India. In October, Providence Equity Partners, another U.S. private-equity firm,

bought 16% of Idea Cellular, an Indian wireless company, for $400 million. Singapore's

government-owned Temasek Holdings has also invested heavily, buying a 9.9% stake in Tata

Teleservices for about $300 million, the first time the $21.9 billion Tata Group has brought in

a private-equity investor.

At the BSE foreign funds have also made money, where SENSEX went from 3000 to 13000

in four years. It is assumed that it was easy to make money earlier, but now it is tougher

through the private equity route. There are many potential firms for private equity

investments, but they are turning towards the public markets, because the offer higher

valuations. The new funds which are coming in India, may not be having a long term and

growth building horizons. The period of investments will become shorter as funds are aiming

at flipping their investments, instead of aiming at building up companies, and this could spoil

the attractiveness of the private equity concept.

But now, as the economy of India is improving and there are steady growth projections, there

seems to be more attractiveness for the private equity concept.

Stages of Private Equity

The stages of Private Equity Market are as follows.

CATEGORY DEFINITION

Seed

Financing

Providing small sums of capital necessary to develop a business idea.

Start-up

financing

Providing capital required for product development and initial marketing

activities.

First-stage Financing the commercialization and production of products.

Second-stage Providing working capital funding and required financing for young firms

during a first growth period.

Third-stage Financing the expansion of growth companies.

Bridge

financing

Last financing round prior to an initial public offering of a company.

Source: RATT(1981)

58

PE Investments by stage: 2010 (Table-10)

STAGE OF COMPANY NO. OF DEALS AMOUNT (US$M)

Early stage 59 236

Growth Stage 42 393

Late Stage 104 3663

PIPE 61 1314

Buyout 11 1125

Others 22 769

Late stage and PIPE deals accounted for around 70% of overall value of PE

transactions (PIPE: Banking, pharma and auto componenets)

No. of PE Deals according to Stage of Company

Value of Deals according to Stage of Company

0

20

40

60

80

100

120

Early stage

Growth Stage

Late Stage PIPE Buyout Others

NO

. OF

DEA

LS

STAGE OF COMPANY

NO. OF DEALS

NO. OF DEALS

59

As it is evident from the table and graph that Private equity is majorly used for late stage

financing almost 50%, such financing suggest that most of the firms use Private equity to

bridge the gap that is require for going for IPO.

The graph shows that private equity is the least used during the early stage and the growth

stage. Though the number of deals in the early and the growth stage are more than incurred

for the buyout and other purposes, yet in value this shows a reverse picture.

We can also see that Private equity for the purpose of buyout is not used because Private

equity in buyout terms to be very costly as well as risky.

3%

5%

49%18%

15%

10%

AMOUNT (US$M)

Early stage

Growth Stage

Late Stage

PIPE

Buyout

Others

60

Chapter 4

Comparison of PE Investment In

India and Brazil

61

Comparative analysis between private equity investments in India and

brazil

4.1 Private equity investment in India (Table-11)

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Number

of Deals

280 110 78 56 71 146 299 470 450 270 300 454

Value of

Deals ($)

1160 937 591 470 1650 2183 7460 13000 11000 4000 8150 9400

(Graph-8)

P.E funding across the world is largely driven by U.S Economy there by any changed in U.S

economy has direct influence in the Private equity investment in India.

We can see during 2000 the private equity investment in India was 1160 million but it went

down in 2001 due to 9/11 attacks and further recession in the us economy kept it down till

2003, but us economy revived in 2004 so as private equity investment in India. It reached its

pick during 2007 but once again the us economy was suffered from recession which kept the

Private equity investment down during 2009.

1160 937 591 470

16502183

7460

13000

11000

4000

8150

9400

0

2000

4000

6000

8000

10000

12000

14000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

MIL

LIO

N

$

VALUE OF DEALS (MILLION $)

VALUE OF DEALS (MILLION $)

62

4.2 Private equity investment In Brazil (Table-12)

Year 2005 2006 2007 2008 2009 2010 2011

PE

investment

(million $) 474 1342 5285 1983 2332 10544 10330

Graph-9

as we have seen earlier also, private equity investment is largely driven by changes in the

fazes of U.S economy. Private equity investment in brazil is showing an increasing trend

from 2005 till 2007. But recession during 2008 and 2009 in u.s kept the investment low. But

it once again revived in 2010 and 2011.

.

4741342

5285

1983 2332

10544 10330

0

2000

4000

6000

8000

10000

12000

2005 2006 2007 2008 2009 2010 2011

MIL

LIO

N

$

YEARS

PE investment (million $)

PE investment (million $)

63

4.3 COMPARISION OF PE INVESTMENT IN INDIA AND BRAZIL

(Table-13)

Year 2005 2006 2007 2008 2009 2010 2011

PE investment

in Brazil

(million $)

474 1342 5285 1983 2332 10544 10330

PE investment

in India

(million $)

2183 7460 13000 11000 4000 8150 9400

Graph-10

This chart shows very interesting scenario between two countries. From the year 2005-2009

private equity investment in India is very high as compare to brazil but from 2009 onwards

private equity investment in brazil has overtaken India. And in coming year it is also

expected to be higher than india.

0

2000

4000

6000

8000

10000

12000

14000

2005 2006 2007 2008 2009 2010 2011

4741342

5285

1983 2332

10544 10330

2183

7460

13000

11000

4000

8150

9400

MIL

LIO

N

$

YEARS

Comparitive analysis

PE investment in Brazil (million $)

PE investment in India (million $)

64

4.4 Forecasting of opportunities for private Equity investment in

India using Regression Analysis

Regression Analysis

Regression analysis is a statistical technique with the help of which the functional

relationship between two variables can be established and which helps us in estimating the

unknown value of one variable for a known value of other variable

Usage

Regression analysis is here used for predicting the future value of the Private equity deals on

the basis of past data. We can predict the future value using the following formula

Y=a+B(x)

Where

Y= Dependant variable(Investment in P.E)

a =intercept (which remains constant)

B(x)= Independent variable

Prospect of Private Equity Investment in India

Year PE investment in

India (million $)

2000 1160

2001 937

2002 591

2003 470

2004 1650

2005 2183

2006 7460

2007 13000

2008 11000

2009 4000

2010 8150

2011 9400

Here we have derived regression line using MS excel,

A=-1898100

B=948.9406

Y=-1898100+948.9406(x)

65

Prediction about Future P.E investment in India (Table-14)

Year a b X PE investment in India (million

$)

2012 -1898100.209 948.941 2012 11169

2013 -1898100.209 948.941 2013 12118

2014 -1898100.209 948.941 2014 13067

2015 -1898100.209 948.941 2015 14016

2016 -1898100.209 948.941 2016 14965

Graph-11

From the above chart that, we can expect an increasing trend of private equity investment in

India . It is expected to increase to 14964.847(million) in the year 2016 from 9400(million) in

2011. So we can expect a growth of 60 % in the private equity investment during next 5

years.

0

2000

4000

6000

8000

10000

12000

14000

16000

2011 2012 2013 2014 2015 2016 2017

PE investment in India (million $)

PE investment in India (million $)

66

4.5 Forecasting of opportunities for private Equity investment in

Brazil using Regression Analysis

Year PE investment in

Brazil (million $)

2005 474

2006 1342

2007 5285

2008 1983

2009 2332

2010 10544

2011 10330

Above table has been derived using MS excel, from the above table we can get

A=- -3223893

b= 1607.821

Y=-3223893+1607(x)

Prediction about Future P.E investment in Brazil (Table-15)

Year A b X PE investment in Brazil

(million $)

2012 -3223893 1607.821 2012 11043

2013 -3223893 1607.821 2013 12651

2014 -3223893 1607.821 2014 14258

2015 -3223893 1607.821 2015 15866

2016 -3223893 1607.821 2016 17474

Graph-12

02000400060008000

100001200014000160001800020000

2011 2012 2013 2014 2015 2016 2017

PE investment in Brazil (million $)

PE investment in Brazil (million $)

67

We can also expect an increasing trend in the private equity investment in Brazil. Private

equity in brazil in 2011 is 10330(million) and is expected to increase to 17474.136 in the year

2016. There by we can expect an immense growth of 70 % in the private equity investment

during next 5 years.

4.6 Comparison between India and Brazil (Table-16)

Year India Brazil

2012 11169 11043

2013 12118 12651

2014 13067 14258

2015 14016 15866

2016 14965 17474

Graph-13

From the above chart, we can see that during 2012 and 2013 in P.E investment in India and

Brazil is expected to remain at a same level but during next three years Private equity

investment in brazil is expected to grow faster than India due to fund requirement for FIFA

world cup 2014 and Olympic Games 2016.

1116912118

1306714016

14965

11043

12651

14258

15866

17474

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

2012 2013 2014 2015 2016

India

Brazil

Expon. (Brazil)

68

4.6 Hypothesis Testing (T-test)

Ho: There is no significance difference in terms of private equity investment in brazil and

India.

H1: The opportunities for Private equity investment in Brazil are more than India.

Year India Brazil

2005 2183 474

2006 7460 1342

2007 13000 5285

2008 11000 1983

2009 4000 2332

2010 8150 10544

2011 9400 10330

Variable

1 Variable

2

Mean 7884.714 4612.857

Variance 14336426 18043843

Observations 7 7

Hypothesized Mean Difference 0

df 12

t Stat 1.521259

P(T<=t) one-tail 0.07705

t Critical one-tail 1.782288

P(T<=t) two-tail 0.1541

t Critical two-tail 2.178813

Tcal=1.521258

Ttab=1.782288

Because T cal =1.521258 is less than T tab=1.782288 so here we reject the null hypothesis

so we can say that the scope for private equity investment in brazil is more than india.

69

4.7 Major International Private Equity Organizations

The private equity industry in Brazil consists of the not only the local private equity firms but

it also consists of some international private equity firms operating in Brazil. The number of

funds has increased dramatically, with many international funds that had no previous

Brazilian ‗footprint‘ setting up local offices and bringing new investments strategies (such as

leveraged buyouts) to the country in the last two years. The international funds comprise

well-known institutions such as Actis, Advent International, Apax Partners, Carlyle and

General Atlantic. With the exception of Advent International, these funds entered Brazil very

recently, establishing local offices during the third phase of development of the industry,

mainly after 2008. They have broad support from their parent companies both in terms of

fund raising and operating expertise. Yet while they have strong brands, and highly capable

professionals recruited from leading investment banks and local fund managers, as relative

newcomers they still lack the breadth and depth of the connections of local players. At

present the international private equity firms contribution of 5% of the total

investments made by Private equity firms in Brazil.

There lies an opportunities for Indian private equity players to tap this undiscovered

market with huge potential.

1)Denham Capital

Denham Capital is a worldwide energy - and commodities focused private investment firm

with over $4.3 billion invested and committed capital. Denham Capital counts with an

integrated team of experienced investment professionals based in Boston MA, Houston TX,

Short Hills NJ, London UK and São Paulo, Brazil. Denham Capital invests across the capital

structure and across all stages of the corporate and asset lifecycle, from development projects

to mature, operating business. Denham Capital typically targets equity investments between

US$50 million to US$200 million.

Denham capital invested in following companies in Brazil:

Vulcan Power Company –Geothermal power

Mining Ventures Brazil –mining and metals

1) Darby overseas investments

Darby — the private equity arm of Franklin Templeton Investments — is a pioneer in

emerging markets private equity investing with experience and on the ground presence in

Asia, Central and Eastern Europe and Latin America. Darby focuses on well managed mid-

sized companies in need of expansion capital, having built a proven, successful track record

of investments for more than 16 years. Darby‘s parent company, Franklin Templeton

Investments, is one of the largest global investment management organizations, with total

AUM of over US$600 billion. Since 1997, Darby has invested over US$250 million in 16

companies either based or with relevant presence in Brazil.

Darby‘s investment portfolio in Brazil comprises a variety of sectors, including consumer

goods, retail and distribution, leisure and hospitality, manufacturing, technology, financial

services, and infrastructure.

70

2) Advent internationals

Founded in 1984, Advent International is one of the world‘s leading global buyout firms,

with offices in 16 countries on four continents. Since inception, the firm has raised US$26

billion in private equity capital and completed over 250 transactions valued at approximately

US$50 billion in 35 countries. Advent is the leading private equity investor in Latin America,

having raised more than US$5 billion for the region since 1996. The firm‘s most recent fund,

LAPEF V, closed on US$1.65 billion in April 2010, making it the largest private equity fund

ever raised for Latin America.

Over the past 14 years, Advent has invested in 40 Latin American companies, and today

these businesses are valued at more than US$10 billion and employ over 60,000 people.

3) Apax Partners:

Apax Partners is an independent global partnership focused solely on long-term investment in

growth companies. Funds advised by Apax Partners typically invest in large companies with

a value between €1bn and €5bn. The Funds invest in five sectors: Financial & Business

Services, Healthcare, Media, Retail & Consumer, Tech & Telecom.

Releasing potential is at the heart of everything we do. Whether it's identifying potential

investments, growing our portfolio companies or realising their value at the right time, our

strategy is geared to releasing potential.

Throughout its 30 year history, the company has successfully invested across all investment

stages, and through several complete economic cycles.

The firm's current success is rooted in a culture that has always been outward looking,

pioneering and committed to growing businesses. The deep understanding of the five sectors

in which it invests has been at the core of Apax Partners' strategy, giving it early access to

investment opportunities and an ability to quickly add value to portfolio companies.

4) 3i group

3i is an international investor focused on private equity, infrastructure and Debt Management,

with investments in Europe, Asia and the Americas. Today the 3i Group has £ 12.7 billion in

total assets managed over 160 investment professionals and 116 affiliated companies.

5) DLJ South American Partners

DLJ South American Partners is an independent private equity fund manager focused in

South America, primarily in Argentina, Brazil and Chile. DLJSAP is a strategic alliance

between Credit Suisse Alternative Investments - which has more than US$131 billion of

assets under management (including nearly US$52 billion of private equity assets) - and a

team of professionals with over 50 years of experience in private equity investments in the

region. The DLJSAP team has been successfully investing in private equity in Brazil since

1996.

71

Chapter 5

Sector Analysis

72

Here, we will be basically studying 6 sectors where there are highest opportunities for Private

Equity Investments: 1. Healthcare

2. Infrastructure

3. Information Technology

4. Agriculture

5. Education

6. Oil and Gas

73

5.1 Healthcare

5.1.1 Current Situation in Brazilian Health care sector

Most Brazilians are served by the public health system – Sistema Unico de Saude, SUS. In theory,

the SUS hospital infrastructure and its physical and economic resources are sufficient to meet the

needs of the population, but patients often have to wait in long lines for surgery, laboratory tests

and treatment. The government is making efforts to improve health services and conducts

numerous periodic campaigns, but quality of health care still varies enormously.

The best academic hospitals (which typically serve the very poor) and top line private hospitals are

well equipped, usually with state of the art equipment. The vast majority of health services fall

somewhere in between, but in major urban areas of Brazil the population has access to modern

diagnostic and treatment equipment and tools.

Healthcare market in Brazil has been growing at a fast pace for the past few years, thus

making it one of the attractive industries in Latin America. The total expenditure on

healthcare was valued at around US$ 168 Billion in 2010 that showcased the country‘s

ability and desire to provide effective medical services to the society. Factors, such as

disease prevalence, strong investments, and the government initiatives are supporting

the market dynamics. Thus, the healthcare spending is likely to grow at a CAGR of around

6% during 2010-2013 to reach US$ 201.6 Billion by 2013 end.

The Brazilian healthcare sector continues to show strong performance and perspectives,

given the strong economic fundamentals of the country, even in a challenging global

74

environment. The GDP growth for 2010 of 7.5% and unemployment rate historical low are

the main drivers of the increasing healthcare spending, since approximately 75% of private

healthcare coverage is corporate-based and is considered the most important benefit

offered to employees in Brazil.

While healthcare plan revenues have substantially increased in the last five years (CAGR

of approximately 13%), only 22% of the population in Brazil has private healthcare

coverage, compared to 85% in the U.S. and 60% in Mexico. Considering that the Brazilian

private healthcare coverage penetration is projected to double by 2020, the potential

market may reach R$170 billion (US$100 billion).

Furthermore, healthcare plans will increase dental plan coverage penetration due to: (i)

cross-selling strategy of its players, (ii) the lower average dental plan ticket, and (iii) less

stringent regulation of dental plans as compared to healthcare plans (e.g., impossibility of

cancelling plans and regulated price readjustments).

Recent Trend of vertical integrations

The bullish Brazilian healthcare market has led to a consolidation trend in the sector,

especially driven by vertical integration (e.g., acquisitions of hospital and diagnostics

laboratories), allowing greater cost controls and, consequently, higher profitability.

Approximately 20% of private healthcare operators‘ clients are responsible for 80% of

medical costs.

The cost controls, collectively with fiscal incentives and co-payment plans, will increase

affordability for the underpenetrated lower income population. Additionally, healthcare

subsectors in Brazil continue to be extremely fragmented when compared to more mature

markets like the U.S.

Major mergers and acquisition

Currently, most of the M&A activity involves healthcare facilities, especially hospitals

and clinics, as managed care operators are seeking for vertical integration. The most

acquisitive companies in the sector are Amil (largest managed care operator in Brazil

with 9 % of market share and traded on the São Paulo Stock Exchange) and Rede D‘or

(largest hospital chain in Brazil and the healthcare arm of Andre Esteves‘ financial

conglomerate, BTG Pactual), which have recently disputed most of the acquisitions of

hospitals and clinics in Brazil. Since 2007, Amil has acquired 14 hospitals totaling 1,687

beds.

75

M&A activity shall remain a strong driver for growth and profitability improvement in

2011, given the increasing cash generation and credit availability in the market. Amil

should remain the most acquisitive player in the country.

―Smiling Brazil‖- A government Initiative

Several government programs and policies are being implemented to address key health

related issues, which are critical in nature. Smiling Brazil, for example, is the national

policy for oral health created by the government to expand the access of dental care to the

population. The program has improved the condition of primary health in the country

through investment and is further likely to strengthen healthcare market potential.

76

5.1.2 Areas of Investment Opportunities in Health Care for Private Equity

The health care industry in Brazil is one of the industries that is growing at an unprecedented

rate and promises great investment opportunities for Private equity players across the globe

and especially Indian private equity players.

Interested parties

Foreign investors, private equity players, capital providers, financiers and investment bankers

Healthcare sub-sector

Pharmaceutical, Hospital, Health Insurance, Clinical Laboratory, Medical Equipment and

Drugstore Sectors.

a) Pharmaceuticals and biotechnology

Within this wide-ranging sector, we see opportunities in these key areas: Specialty

Pharma, Generics / OTC, Drug Delivery and Animal Health.

b) Healthcare Services

This is the largest and most rapidly-evolving sub-sector within the global healthcare

industry and includes activities such elderly and specialty care, including for people in

their own homes, in hospital and in community facilities, as well as operational services

such as outsourced support and clinical services and B2B contract services.

77

c) Medical devices and technology:

This sub-sector deals with a range of devices, medical equipment and consumables,

diagnostics and healthcare IT encompassing a means to identify the nature of health

conditions and to allow intervention with methods that increase life span and/or improve

the quality of care and life.

Growth Potential for healthcare in Brazil

The number of lives covered by healthcare plans in Brazil – 44.8 million – is still low when

compared to the Brazilian population, which totals 191 million people, and corresponds to a

coverage rate of approximately 23%. This enormous deficit means that there is great potential

for expansion and consolidation of the country‘s healthcare segment, especially when

compared to the market in the United States, which is already highly developed (see table

below). Brazil‘s favorable economic scenario, b the increase in average worker income and

the higher employment levels achieved in recent years all serve to reinforce this potential.

78

Currently, among health plan members in Brazil, 33% are divided among the ten largest

operators in the country, and 10% of this total are covered by Amilpar.

Brazil is the world‘s tenth largest market for drugs and second largest in Latin America after

Mexico. Privatization, deregulation, and removal of barriers to competition have led the

multinational companies to dominate the pharmaceutical industry with 70 percent of their

share, while most of the domestic companies concentrate on selling generic medicines. The

factors that hold the market from progressing are the high prices of the drugs, interest rate

fluctuations, and increased R&D costs.

Currently, there are more than 7,800 hospitals in the country to serve the needs of its entire

population. However, due to uneven distribution, some sections of the population still have

only limited access to healthcare facilities. To meet the growing demand for healthcare,

investment in both public and private sectors has been increasing.

About 30 percent of the hospital equipment and medical devices requirement are imported

from Japan, Germany, and the United States. Numerous medical devices such as plastic tubes

used for special applications, surgical gloves, and syringes have been exempted from import

duties. Telemedicine and home healthcare sectors are other emerging sectors in the healthcare

industry.

Although the government has been criticized for being unable to bring about socio-economic

development, President Lula has shown commitment to bringing about reforms. This has

helped in keeping consumer and business expectation indices on the positive side. The new

macroeconomic reforms have gone a long way in making Brazil a preferred destination for

foreign investors. Privatization, deregulation, and removal of many types of barriers to

competition have led to many multinational companies setting up a base through Greenfield

projects and acquisitions. Trade and investment policies are favorable to private investments

and certain capital goods are exempt from custom tariffs and other forms of taxes and duties.

Brazil is a member of the Southern Cone Common Market (MERCOSUR), and has greater

access to other countries in the region such as Argentina, Paraguay, and Uruguay. Since the

inception of the MERCOSUR, not only has Brazil experienced increased investment but has

also reduced tariff rates on several items.

Country Industry Forecast Service for the Brazilian Healthcare Industry uses a

macroeconomic perspective to provide a focused analysis of the industry. This service covers

an array of issues related to the healthcare services sector - ranging from political issues,

industry regulations to their overall impact on the industry. Besides enable decision makers to

assess the impact of non-market forces, The analysis also helps in identify new opportunities.

it provides a strong base for preparing emergency plans.

Brazil is the world‘s tenth largest market for drugs and second largest in Latin America after

Mexico. Privatization, deregulation, and removal of barriers to competition have led the

multinational companies to dominate the pharmaceutical industry with 70 percent of their

share, while most of the domestic companies concentrate on selling generic medicines. The

factors that hold the market from progressing are the high prices of the drugs, interest rate

fluctuations, and increased R&D costs.

Currently, there are more than 7,800 hospitals in the country to serve the needs of its entire

population. However, due to uneven distribution, some sections of the population still have

only limited access to healthcare facilities. To meet the growing demand for healthcare,

investment in both public and private sectors has been increasing.

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About 30 percent of the hospital equipment and medical devices requirement are imported

from Japan, Germany, and the United States. Numerous medical devices such as plastic tubes

used for special applications, surgical gloves, and syringes have been exempted from import

duties. Telemedicine and home healthcare sectors are other emerging sectors in the healthcare

industry.

Although the government has been criticized for being unable to bring about socio-economic

development, President Lula has shown commitment to bringing about reforms. This has

helped in keeping consumer and business expectation indices on the positive side. The new

macroeconomic reforms have gone a long way in making Brazil a preferred destination for

foreign investors. Privatization, deregulation, and removal of many types of barriers to

competition have led to many multinational companies setting up a base through Greenfield

projects and acquisitions. Trade and investment policies are favorable to private investments

and certain capital goods are exempt from custom tariffs and other forms of taxes and duties.

Brazil is a member of the Southern Cone Common Market (MERCOSUR), and has greater

access to other countries in the region such as Argentina, Paraguay, and Uruguay. Since the

inception of the MERCOSUR, not only has Brazil experienced increased investment but has

also reduced tariff rates on several items.

Country Industry Forecast Service for the Brazilian Healthcare Industry uses a

macroeconomic perspective to provide a focused analysis of the industry. This service covers

an array of issues pertinent to the healthcare services sector - ranging from political issues,

trade policies, and industry regulations to their overall impact on the industry. Besides

enabling decision makers to assess the impact of non-market forces, this analysis also helps

in identifying new opportunities. In addition, it provides a strong base for preparing

contingency plans.

5.1.3 Participating Companies (Brazil)

ABDS - BRAZILIAN ASSOCIATION FOR HEALTH LAW ABIMO - BRAZILIAN MEDICAL DEVICES MANUFACTURERS ASSOCIATION ABS - BRAZILIAN HEALTHCARE ASSOCIATION ANAHP - NATIONAL ASSOCIATION OF PRIVATE HOSPITALS BRADESCO SAÚDE CEPEDISA - CENTER FOR STUDIES AND RESEARCH OF HEALTH LAW CONEXÃO SISTEMAS DE PRÓTESE CORREIA DA SILVA ADVOGADOS ASSOCIADOS DK DIAGNOSTICS DMBRANCO HEALTHCARE INVESTMENTS & ADVISORY EDUARDO DANTAS ADVOCACIA & CONSULTORIA ELP HEALTH LAWYERS NETWORK EUGENIO DE LIMA E PITELLA ADVOGADOS EURASIA GROUP

GRUPO CAPRONI GRUPO TRIUNFO GRUPO VITA - HOSPITAIS E MATERNIDADES H. LUNDBECK A/S HOSPITAL MEMORIAL SÃO JOSÉ IN VITRO DIAGNÓSTICA LABORATÓRIO DAUDT LOGIKA CONSULTORES ASSOCIADOS MERCAPITAL MICROMAR SOLUTIONS TO NEUROSURGERY MOMSEN, LEONARDOS & CIA PINHEIRO NETO ADVOGADOS PORTO SEGURO SAÚDE PREVENT SENIOR PARTICIPAÇÕES ROCHE DIAGNOSTICA STATE BAR OF SÃO PAULO - OAB/SP - HEALTH LAW COMMISSION STATE OF RIO DE JANEIRO TAKEDA PHARMACEUTICAL COMPANY TORRONTEGUY LAW OFFICE TOZZINIFREIRE ADVOGADOS UNIMED PAULISTANA VIDALINK BENEFÍCIOS EM MEDICAMENTOS

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5.1.4 Restructuring of Health care sector

The Brazilian government today actively encourages new investors in the sector by

providing them the option of preferential purchase in public tenders. The government also

offers special financial investment conditions, which are beneficial for the investors.

Thus, with the backing of the government, the investors can gain tremendous advantage

from investing in the health industry of Brazil.

The government is also making constant efforts to restructure the health industry in Brazil

by inducing application of state-of-the-art Information Technology systems. The health

industry in Brazil is the biggest in the South American continent and holds immense

potential for further expansion.

The Brazil government‘s ambitious plans to expand the health care industry provide

ample investment opportunities for foreign investor.

Investment opportunity lies in supplying medical equipment and IT products. Foreign

investors can invest in providing patient monitoring services.

Another priority is to ensure the supply of shares and health services in hospitals and

institutes of the Ministry of Health and the Conceição Hospital Group network, entity

linked to the Ministry that has a 100% attendance by SUS. To perform specialized

consultations, hospitalizations, surgeries and transplants in that action, there is about R$

850 million planned in the budget. The second program of the Ministry of Health

covered with more money for this year is "Basic Health Care", with R$ 9.4 billion to

support activities such as family health.

To attract foreign investment in the country the Brazilian government has taken the

initiative and has taken measures to introduce reformatory plans to restructure the

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healthcare delivery system. The government of Brazil has decentralized the health care

sector in every Brazilian state and given them the autonomy.

a) Pharmaceutical Industry

The Pharmaceutical industry, which is a part of the Health Industry, holds great potential

for investment in Brazil. The country is being tipped as being one of the top seven

countries in the world that has tremendous potential for growth in the pharmaceutical

sector and is regarded as being the emerging market for investment.

In terms of the revenue generated, the Brazilian Pharmaceutical industry is the 10th

largest market in the world and is the second largest market in South America. The

pharmaceutical industry is huge, and is responsible for providing employment for about

47,000 people in Brazil.

.

Government initiatives in the Pharma industry to attract foreign investors

Changing situation from the past

In the past, the pharmaceutical manufacturing companies in Brazil lacked proper

production technique. Also, the government imposed heavy taxes on medicines. As a

result, not many local investors were keen to invest in the sector. However, the situation

today has changed drastically. The government now has reduced the prices of drugs and

this has created a dynamic investment environment in the country.

The Brazilian Pharmaceutical industry is one of the main industries that are the central

point of the Brazilian government‘s industrial policy. The government of Brazil, with a

view to give a boost to the industry, has formulated a special financing program.

The government aims to increase the local production of medicines, facilitate

development of Research and Development centers and encourage mergers and alliances

with foreign investors.

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The main motto of the Brazil government is to bring down the negative balance of

trade of pharmaceuticals, improve the standards of drug quality in the country and

enhance production of medicines. The government of Brazil has very ambitious plans

of creating an environment in the country to attract investment of about $5 billion

dollars. Thus, there is great opportunity for investors to invest in the sector and gain

valuable returns on their investments.

Practical steps that can facilitate market players in this period are the revision of some

bureaucratic courses, especially in custom processes, and improving communication

between regulatory institutions and industry. The modest tax level should guarantee the

continuity of Brazil's growth and its role in harmonizing regulatory process in Latin

America, and at the same time, as a member of G20, effective actions for the foreign

investment in the country's health sector would bring Brazil to gain a better visibility

worldwide.

5.1.5 Health care sector in India

India is perched to witness additional growth in its economy as a result of positive trends

within the healthcare sector. Reports clearly suggest that healthcare sector is going to be

one of the major sectors that would fuel the economic growth and will contribute to the

increased revenues, along with IT Services and Education sectors in the country. Over 40

million new jobs and 200 billion increased revenues are expected to be generated by the

Indian healthcare sector till 2020, as per a report titled, ―India‘s New Opportunities-

2020‖, prepared by the All India Management Association, Boston Consulting Group

and the Confederation of Indian Industries (CII).

Healthcare – Market Size

The Indian healthcare sector is poised to reach US$ 280 billion by the year 2020, thereby

contributing an expected Gross Domestic Product (GDP) spend of 8 per cent by 2012

from 5.5 per cent in 2009, according to a report by an industry body. A US$ 36 billion

industry today and growing at 15 per cent compound annual growth rate (CAGR), the

Indian healthcare industry will reach the market value of US$ 280 billion by 2022.

Increasing population, higher expenditure on lifestyles, rising market of health insurance,

government initiatives for better medical infrastructure, and focus on Public Private

Partnership (PPP) models are some of the driving factors for the growth of healthcare

sector in India.

Major players in the Indian healthcare sector include Apollo Hospitals Enterprise Ltd,

Fortis Healthcare Ltd, Max Hospitals and Aravind Eye Hospitals.

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Healthcare – Trends and Investments

US medical devices-maker Welch Allyn plans big India expansion and boosts its

presence in India. The US-based company has a range of products such as stethoscope,

ophthalmoscope, BP monitors, cardio-pulmonary and thermometry devices. ―Welch

Allyn has drawn up an aggressive five-year strategy to focus on the Indian market, as we

target revenues of US$ 5 million by 2015,‖ according to Con Hickey, Senior V-P, Japan.

Mergers and Acquisitions

Asia Pacific and Africa. Welch Allyn has selected Garuda Med Equipments as its

marketing and distribution partner in India. The plan behind the joint venture is to focus

the resources on customers in primary healthcare centres and B&amp;C class cities and

rural market in the country.

Aventis Pharma, a unit of France‘s Sanofi, a drug maker company intends to acquire

unlisted Universal Medicare‘s nutraceuticals business in order to boost its share in the

Indian healthcare segment in the country. Universal Medicare‘s turnover of the

nutraceuticals business, which comprises of over 40 over-the-counter formulations, is

estimated at over US$ 23.13 million.

Medical-equipment maker Trivitron Healthcare intends to invest US$ 21.02 million

in 2011 on capacity expansions and acquisitions. Trivitron has set up a 25-acre medical-

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technology park at Irungattukottai, near Chennai, which has started its operations in

September 2010. With 10 housing facilities, the park currently operates one factory for

manufacturing ultrasound and colour Doppler machines (under a joint venture with

Hitachi Aloka).

Medical Tourism ( A strategic Advantage for India)

As per the study conducted by the India‘s commerce chamber, medical tourism industry

in India is competitive in nature and has been able to attract a large number of foreign

visitors surpassing the figures for other South East Asian countries, thereby contributing

significantly to the country‘s economy.

In a report titled, ‗Emerging Trends in Domestic Medical Tourism Sector,‘ by a leading

industry body it was stated that an estimated 3.2 million medical tourists would arrive in

India by 2015. The report stated that the states of Andhra Pradesh, Karnataka, Tamil

Nadu, Maharashtra, West Bengal and New Delhi have been identified as the major

destinations for medical tourists in the country. These states have adequate medical

infrastructure for medical operations, cosmetic surgeries such as facelifts, Botox

treatment, tummy tucks, and eye and dental care have so far proven the most sought after

treatments by foreign patients.

Serving more than 850,000 foreign patients every year, India has been able to uphold a

strategic advantage and with the existing 40 per cent CAGR, a leading industry body

estimates that the medical tourism sector could rise to US$ 2.4 billion by 2015.

Apart from the regular medical services, India also offers a variety of holistic medicare

such as yoga, meditation and ayurveda. The western states of Goa, Kerala, and Karnataka

have emerged as the most admired destination for ayurveda and spa healing resources.

Healthcare - Government Initiatives

There have been a number of noteworthy initiatives taken up by the Indian government

to boost the healthcare sector in the country. These initiatives focus on investment that

are closely linked to providing better medical infrastructure, rural health facilities etc.

100 per cent foreign direct investment (FDI) is permitted for health and medical services

under the automatic route.

The National Rural Health Mission (NHRM) had allocated US$ 10.15 billion for the up

gradation and capacity enhancement of healthcare facilities.

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Moreover, in order to meet revised cost of construction, in March 2010 the Government

allocated an additional US$ 1.23 billion for six upcoming AIIMS-like institutes and up

gradation of 13 existing Government Medical Colleges

5.1.6 Private Equity in India

Tracing Back the Time

PE activity in the US touches its climax in the year 2000. Following the 9/11 tragedy in

2001, this declined significantly. India was hit hard, as major portion of private equity in

India comes from u.s

With the recovery of the US market in 2004 fund raising activity began to steady. At this

point in time, PE investors started focusing on emerging markets like India, China, and

Brazil. The year 2006-2007 was one of the most flourishing periods for Private equity

funding in the Indian healthcare sector. Players like Apollo, Fortis, Max Healthcare and

other private hospital groups got sizeable PE funding.

These successful deals perked up the industry and set the stage for new investments but

later after two years, global economic crisis of 2008-2009 hit back investments. fund

flows decreased in health care sector even though it is consider as a recession free sector

Once global economy showed signals of recovery, PE investments started smoothening

the year 2010 brings back the energy and trigger interesting business models. Every

industry began to revitalize. PE investors were back in the attention. This time not only

did the healthcare delivery sector blossom with PE funds, but the diagnostic sector, other

stand alone centers and medical technology companies also attracted large funds. A new

trend was set that lead to higher investments in super-specialty centres. Beams, R G

Stone, Max, Dr Lal Path labs, Metropolis, Med fort Hospitals, Fortis, Nova Medical V

Centers, pitched in for PE deals.

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Potentiality of Health Care for P.E Investors

Healthcare sector in India is primarily under served. India requires over 100,000 hospital

beds and a several-fold increase in diagnostics investigations to achieve our 'Health for

All' initiative by 2020. The Government spending on healthcare is only 1 % of GDP, as

compare to private spending of 3.5 to 4 per cent. So there will be incredible opportunities

for the growth of healthcare sector in the country. therefore, interest of the PE players

have increased.

Sectors such as pharmaceuticals, diagnostics, hospitals and medical equipment are

attracting a good amount of investment. PE firms are betting big on small- and mid-sized

Pharma companies to put their bucks on. Looking at the medical technology sector in

healthcare, where players like Philips and GE are buying local companies and investing a

handsome amount in research and development, we can say that this sector will also

attract PE investments. The hospital sector also has been very successful in drawing funds

due to its capital intensive nature.

Hospital sector especially super-specialty services will continue to be the main focal

point for PE investors. The main attraction for private equity players would be Tier II

and III cities as a result of the under- penetration of healthcare services in these areas.

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investors will turn towards innovative business models as a result of lower income levels

and limited insurance access leading to lower margins in such cities,

Regional players from the healthcare industry who are intending to expand and brand

their businesses will attract PE funding. Investors will always look for profit-making

businesses to invest their money. Moreover, specialization in a particular field is a must.

Focus on a single discipline as this business model is currently attracting the investor's

eye.

PE firms are now trying to create a niche for themselves in areas that more capital

intensive. Further on, the country will see an increase in infrastructure and economic

affluence that will set the stage for ample investment opportunities in the healthcare

sector

Relationship between Capital Market and P.E

There has been mixed opinion within the industry regarding growth of Private equity

funding. Some believes that the downfall in the capital market after the economic crisis

has lead to increased PE investment opportunity. However, others believe that Private

Equity investors have found the Indian industry very promising and growing that has

lead to increase in the private equity funding India.

The dip in the capital market has increased PE funding. As there are hardly a few

healthcare players with critical size to get listed, this segment needs to see lot more

consolidation to have large sized players capable of listing and sustaining growth like the

way Apollo and Fortis have done in the recent past. There is only one medium-sized

stock in the medical technology space, and that is Opto Circuits. Though there are

several listed players in the Pharma industry, the other two segments of healthcare

services and medical technology lag behind due to size restriction

For a company to reach the Intial Public Offering (IPO) stage, it usually has to undergo a

round of PE funding. The funding enables it to become a larger concern, with established

systems and a proven track record. Hence, when such a company goes for an IPO, the

market is aware of it. The drop in IPOs can possibly be attributed to the market response

to the past few IPOs in the healthcare sector, which saw lukewarm responses. Hence,

some PE- funded companies may be waiting for the right time to attempt an IPO. As a

proportion, therefore, it may seem that there are more PE investments in the sector as

compared to IPOs.

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5.1.7 Role of P.E in Accelerating the Growth of the Health care Sector

PE funding is termed as smart money as investors bring more than just capital to the

table. With their expertise and managerial skill sets, PE investors act as a catalyst for

creating enterprise value. In a similar context, analysts across the country state that PE

funding is expected to play a crucial role in the expansion of the healthcare industry in

2011. ―Currently PE funding is vital to the sector. Healthcare, as a sector has a long

gestation time and requires large one-time capital expenses. With the help of PE funding,

smaller companies can look at a larger market, and increased scope of operations. This

enables smaller companies to become medium-sized enterprises, and even have IPOs over

a period of time.

Healthcare funding is critical to the advancement of healthcare delivery, medical device,

pharma, life sciences, and biotechnology areas. ―It is expected that deal flows in the

healthcare sector will continue to see a rise in the near future. There have been a number

of investments in the past few months, and with an improving economy, the appetite for

risk of PEs has also risen. However, having said that, PEs are also more wary and take

risks only after intense due diligence.

P.E players in Indian Market:

Some of the major PE players being, New Enterprise Associates and GTI, GIC Special

Investments, Sequoia Capital, Kotak PE, IDFC, Warburg Pincus, Milestone Religare

Investment Advisors, India Value Fund, Asian Healthcare Fund, Matrix Partners, ICICI

Venture, Carlyle Growth Fund and Kalpathi Investments.

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5.1.8 How Indian P.E players can convert the challenges of the Brazilian

healthcare into opportunities (Challenges and Proposed Solutions)

Challenge 1: Inefficient provision of care

Brazilian constitutional guarantee of universal health care is not being fulfilled; about

20 percent of the Brazilians are not covered by Health services often as a result of

economic, institutional or even geographical barriers. This can be explained to a

significant degree by insufficient funding and inefficiency in the provision of healthcare.

In Brazil, both the public and private sectors suffer from insufficient funding. SUS has been

underfunded since its inception in 1988. A tax on financial transactions, designed

specifically to support healthcare, was later revoked after funds were mostly diverted to

other purposes. A constitutional amendment (EC-29) approved in 2000 defined minimum

contributions to healthcare for all levels of governments, but neither the federal nor state

governments have fulfilled their obligations.

The private sector has moved to fill the gap in the public healthcare system. Originally,

private plans were to provide supplemental coverage, according to the Brazilian

constitution. Today, these plans, regulated by the Agência Nacional de Saúde Suplementar

(ANS), cover 43m people, up from about 30m. They are the primary if not only coverage

used by the privately insured.

But funding is also a problem in the private sector, and many health plans and hospitals

have closed down as a result. In 2000 there were more than 2,000 registered health plan

operators; today, there are fewer than 1,200.

Proposed solution

Full implementation of EC-29

Public healthcare system can be improved by the full implementation of EC-29. This will lead

to states and municipalities having adequate resources to meet up the needs of their

population.

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Public private partnership

To improve its efficiency and stretch existing resources, Brazil‘s public healthcare system

should adopt public-private partnerships (PPPs) more widely. PPPs structured hospitals have

made more intensive use of installed capacity, hired fewer medical services, increased

patient turnover and reduced average cost per patient. At the same time, they follow more

protocols to achieve medical excellence and use better-qualified personnel, thus improving

the effectiveness of existing resources.

There by here the Indian P.E players can act as partners collaborating with the

government in order to provide funding and increase the effectiveness of the public as

well as the private health care system.

Challenge 2: Lack of innovation

Aside from a few excellent in area such as green energy, aerospace and agribusiness.

Brazil doesn‘t have highly innovative economy Although the country is eighteenth

largest economy in the world it‘s investment in research and development is less than 1%

of the global total , according to the National Association for Research and Development of

Innovative Companies (ANPEI). Brazil is ranked only 24th in patent registrations, according

to the World Intellectual Property Organization (WIPO)

Brazil‘s life sciences industry underperforms other sectors, registering few innovative drugs

and devices. In fact, only 3.2% of Brazilian companies‘ patent registrations are related to

healthcare and life sciences, according to a study by São Paulo-based Prospectiva

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Consultoria. This is despite the fact that of the patents registered by Brazilian universities,

25% are related to healthcare and life sciences, a much higher percentage than for

companies. This suggests that knowledge produced in academia is not finding its way into

the market.

Inability of Government Laws

Brazil‘s Intellectual Property Law was passed in 1996, but more progress is needed to

change the attitudes and structure of an industry that grew by copying intellectual property

developed elsewhere Other legislation has focused on innovation.

In 2004 the Innovation Law was passed to facilitate the collaboration between

universities, technology institutes and companies, and to stimulate the creation of

investment funds targeting innovation. (It is not clear who owns the patents that result

from such collaboration, which creates a high risk for companies.)

The 2005 Law of Goods (Lei do Bem) provides tax incentives to companies that invest in

technologically innovative R&D, and enables the government to invest directly in private

start-ups. (Through an ―economic subsidy‖, the government provides money for companies

to hire researchers and scientists.) These incentives are slowly being adopted

For Brazil to gain relevance in the global life sciences market and compete with other

emerging countries, it will have to invest in people, facilities and technology. Barriers to the

industry‘s emergence include lack of managerial expertise in Brazilian companies, especially

with respect to innovation, and a paucity of knowledgeable investors who understand and are

willing to take on the risks involved in developing products in the life sciences industry.

Furthermore, Brazil‘s infrastructure for developmental research (laboratories, animals for

testing and other) is inadequate, and start-ups often carry out trials abroad.

There are institutional barriers as well. These include burdensome tax and labour

regulations; a slow approval process for new drugs and devices; and complex processes for

obtaining funding, making it difficult for smaller firms to compete

Proposed Solution

Efficient Implementation of Governmental Law

The special challenges of small and medium-sized companies must be addressed. Most

local companies are family-run and struggle with issues of governance and succession.

They need access to a pool of skilled management professionals that can help them to

evolve. Furthermore, the process for accessing public funding must be simplified for

smaller companies that lack the personnel and structure to navigate compulsory

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bureaucratic requirements

Approval and registration of new drugs and devices should be expedited. It currently takes

between eight and twelve months to get a product through the registration process.

Furthermore, political and social pressures are brought to bear on the approval process,

sometimes impinging on technical recommendations as to which and when drugs and

devices are approved. This places an additional burden on budget-constrained companies

that make all R&D investments upfront.

A revision of Brazil‘s notoriously burdensome tax system could also help to fuel growth in

the industry. Today, it is more advantageous for tax-exempt hospitals and public

institutions to import equipment directly than to buy it locally; laws exempt them from

import taxes. That benefit does not extend to products bought domestically, which incur

sales taxes. Small innovative companies could also benefit from import tax exemptions

Funding for stimulation of Innovation

Indian P.E players can help in stimulating the growth or stimulating innovation in the

world‘s 18th

largest economy by providing fund to invest in research and development

which will lead to development of new drugs

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5.2. Infrastructure

5.2.1) Overview of Infrastructure sector of Brazil

Private investment in Brazil‘s infrastructure sector is poised to grow. In the past, the

government was more committed to return to a fiscal surplus than investing in public

infrastructure. The result of this was that a wide range of essential investments in

Brazilian infrastructure were not undertaken. The only solution for the government to

catch up is to foster private investment, either through public private partnerships or

through privatizations. Several opportunities are available today, ranging from electric

power, roads, airports, railways, etc.

Despite the massive underinvestment, Brazil will host the next two biggest sports events

in the world: the Football World Cup in 2014 and the Rio Olympic Games in 2016.

According to Valor Economico at a recent conference promoted by the G-20, Brazil is

estimated to require the largest volume of infrastructure investment among all emerging

and developing countries in the years to come. The government estimates that US$906.5

billion will be needed, with US$545.7 billion to be invested in the period 2011-2014, and

US$360.8 billion thereafter. Infrastructure investments related to the World Cup and the

Olympic Games alone will demand US$36.5 billion.

5.2.2) Current Scenario in infrastructure

International benchmarking indicates that Brazil‘s infrastructure stock compares well

within Latin America and the Caribbean (LAC) countries but less so with

international peers from East Asia.

Brazil‘s infrastructure is poor by international standards, but with large potential for

improvement. In a World Economic Forum survey, Brazil ranked 74th among

countries in infrastructure. In the same survey, it ranked 10th globally in market size.

Most countries with a market size comparable to or larger than Brazil‘s have better

infrastructure — the notable exception being India. We believe this disconnect

between infrastructure and market size illustrates the potential for significant

infrastructure growth in the coming years.

Brazil lacks stable and credible regulatory environment to spur private sector

investment. The main issues are: 1) regulatory bottlenecks and political uncertainties,

2) excessive renegotiations of concessions, and 3) the lack of efficiency of regulatory

agencies

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There is an Improper utilization of funds available to government for overall

development. The government intake is close to 40% of GDP, but in contrary to that

one can not see significant growth in infrastructure sector. Also this requires

companies to spend on average 2,600 hours per year to prepare, file, and pay their

taxes. Both figures are outliers by international standards.

5.2.3) Infrastructure Investment requirements in Brazil (Table-17 &

Graph-14)

0

1

2

3

4

5

6

1970s 1980s 1990s 2000s

Electricity 2 1.5 0.5 0.4

Telecommunications 1 0.4 1 1

Transport 2 1.5 0.6 0.4

Water and Sewage 0.4 0.2 0.2 0.3

Brazil : Infrastructure Investment (as % of GDP)

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Interpretation

Brazil‘s infrastructure needs are especially significant; the bar is higher because the

starting point is lower.

Infrastructure investment in Brazil has slowed to about 2.1% of GDP on average in recent

years.

That is down from 5.4% in the 1970s, 3.6% in the 1980s, and 2.3% in the 1990s. While

the investment slowdown is comparable to the one seen in the region, the resulting

infrastructure picture is worse in Brazil than elsewhere.

The World Bank study estimates that Brazil would need infrastructure investment of 6–8%

of GDP per year to catch up with South Korea in 20 years. While ambitious, such

infrastructure investment levels were achieved by Korea, China, Indonesia, and Malaysia

from the late 1970s through the late 1990s.

Surveys suggest that infrastructure investment of about 2% of GDP per year is needed to

simply maintain the current infrastructure stock (offsetting depreciation), and to keep up

with a growing population.

Building on studies by the World Bank and the World Economic Forum, we estimate that

to sustain real GDP growth of about 5% and catch up to infrastructure levels in Chile, the

Latin American infrastructure leader, Brazil would need to invest 4% of GDP per year on

infrastructure over 20 years, or about twice as much as in recent years.

5.2.4) Investment Opportunities in Infrastructure

In order to allow Brazil to fulfill its potential, ABDIB estimates that an annual amount of

160.9 billion Reais will need to be invested in infrastructure, divided as follows: power -

28.3 billion; oil & gas - 75.3 billion; transportation and logistics - 24.1 billion; sanitation -

13.5 billion; and telecommunications - 19.7 billion. Moreover, the country will need

several works to successfully host the 2014 FIFA World Cup and the 2016 Rio de Janeiro

Summer Olympic Games. Both events will require huge investments. It is estimated that

only the World Cup will require 100 billion Reais for urban transportation, hospitality,

public security, power, transport, airports, accessibility and sanitary services. A full

description of all the opportunities of investment in infrastructure in Brazil would be

tiresome, but some of them are worth mentioning.

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Table-18, Graph-15

FIFA World Cup 2014

The World cup will receive almost R$ 105 billion in investment projects. The twelve host

– cities need development of not only state of the art stadiums, but also the logistics to

house tourists and create easy access to key points of the city. Almost R$ 6 billion is

allocated for modernization and construction, generating almost 20 million new jobs. R$ 9

billion is given to airports alone, and urbanization is to reach R$ 90 billion in investments.

Olympic Games 2016

The Rio Olympic Games of 2016 are expected to see an investment of R$ 30 billion. Rio

de Janeiro plans to develop a better metro system for easy and safe access to the game site.

In order to house the millions of new tourists the city projects it will need about 300

hotels, or 86 thousand new rooms.

Transportation

Efficient transportation, for civil or commercial use, is imperative for the development of

Brazilian industry. With over 8.5 million kilometers (3.3 million square miles), the

country has to be able to connect and serve its vast areas effectively. Brazil must be able to

keep the economy growing by capitalizing on its resources and large consumer market, an

almost impossible task when transport infrastructure is underdeveloped and costly. Some

attention has been given to modernization of the sector, but efforts have been slow to

make significant changes and are often inefficient.

Power Oil & gasTransportati

on & logistics

SanitationTelecommu

nications

Series1 28.3 75.3 24.1 13.5 19.7

01020304050607080

Estimated Investment in Infrastructure (in Reais billion)

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The National Council for the Integration of Transportation Politics (CONIT) was created

in 2001 and is responsible for coordinating the sector‘s politics but had its first meeting

only in late 2009. Also, The National Plan for Transportation Logistics (PNLT) represents

an effort to organize long – term planning but it neglects to prioritize activities. The

current fragmented system continues to discourage foreign investment and heightens the

cost of the final product. Significant deficiencies exist in planning and in the politics of an

intermodal integration. Difficulty in port access and the underutilization of waterways and

railways curtail the potential of the marketplace. Waterways should be given priority in its

development, only a quarter of the usable 44 thousand kilometers are utilized. In sum, the

system as a whole must be modernized to eliminate bottlenecks and create a new network

of transportation that is synchronized to ensure faster deliveries and quick processing.

Airports

The airports are faced with yet another challenge: accommodating the peak demand

resulting from the World Cup in 2014 and the Olympics in 2016. The country is expected

to see over 600,000 visitors from all over the world in the two- year time frame. GDP

during this period is expected to have an increase of R$47.9 billion. However, the

challenge goes beyond simply adjusting to a temporary demand flux. An airport is a

country‘s first chance to make an impression. A smooth experience from the start will

attract travelers in the long run and increase tourism across the country. Brazil must focus

on airport reform as one of the main priorities in order to guarantee not only the success of

these two events but also to sustain a growing economy and fully benefit from the boost in

GDP.

Ports

As the Brazilian market expands, its ports are faced with operational challenges that must

be addressed in order to keep the country competitive in the marketplace. A consistent

growth in the global GDP is backed by the consistent growth in foreign trade. The desire

to achieve economies of scale has led to a higher demand in global naval transportation

and sequentially growth in ship size. Brazil‘s ports are not only overworked but also have

not kept up with technology, making it difficult to accommodate the new large ships and

other advanced systems.

Infrastructure investment in ports would triple in 2010–13, with an average annual growth

of 25%, from a very low starting point. The main drivers here include the implementation

of new ports administered by the private sector, on the back of an improved regulatory

environment since late 2008, BNDES notes. While the global crisis and resulting slower

trade flows temporarily cooled pressures on port utilization, port improvement and

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expansion remain a pressing medium-term challenge. For instance, Brazil‘s national

association of containers (Abratec) estimates that the sector saw a volume decline of

14.3% in 2009 after 12 years of uninterrupted growth, but now looks for a rebound of

18.3% in 2010 as global trade recovers and the Brazilian economy expands.

Foreign investment in Infrastructure

Urban development of Slums:

This project comes in urban development, and the participants are the Federal

Government/Rio de Janeiro State and municipal governments. The region where this

project will be execute is Rio de Janeiro, Niterol, Sao Goncalo and the Lowlands. The

expansion project includes deletion of shanty towns from areas of risk and river banks, and

also to expand the supply of water in Baixada Fluminense, Sao Goncalo, and Niterol and

Itaboral regions. It also includes setting up of sewage systems and clean-up of Guanabara

and Sepetiba Bays. The construction of housing in Rio de Janeiro and the Baixada region

is also enlisted on planned work. The expand project of urban regions focuses on

construction of slopes to keep away from flooding in the Lowlands. The total

approximation cost of this project is US $1.8 billion and the opportunity available for

private investors is through procurement.

Foreign investment in Electricity generation:

The project is located in the municipality for Angra dos Reis at the Almirante Alvaro

Laberto Nuclear Centre (CNAA). This electricity generation unit already houses two

nuclear stations: Angra 1 (600 MW) and Angra 2 (1350 MW) The Angra 3 project will

have a gross capacity of 1,350 MW, which will have the capacity of generating 10.9

million MWH per year. The energy produced by Angra 3 will be equivalent to one-third of

the total energy consumed by Rio de Janeiro State. The power station is expected to have a

life of 40 years and it will help meet over 80% of Rio de Janeiro‘s electricity needs in

conjunction with the two existing power stations.The total investment estimate for this

project is US $2.274 billion. The project is scheduled to be completed by the year 2014.

Foreign investors can participate in this energy project in procurement to supply

engineering work, products and services. The construction of Angra 3 is considered the

most important project for the government because it will use one of the important

Brazilian sources of energy, uranium. The Brazilian government has announced some

ambitious plans for development of infrastructure. The spending on infrastructure will rise

from 504bn reals ($289bn) to 646bn reals ($370.7bn) under the state, PAC and private

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spending. This move has been proposed to cover the economic damage caused due to

financial crisis. The Brazilian Government believes infrastructure remains the key for

development of other sectors and stimulates foreign direct investment in country. The

World cup alone represents an investment potential of 10-30 billion pounds. Foreign

investors continue to make returns by investing in infrastructure projects in Brazil.

5.2.5) INDIAN INFRASTRUCTURE

Infrastructure Industry in India has been witnessing rapid growth in its different sectors

with the growing urbanization and the increasing rate of foreign investments in this field.

The Indian government has taken various initiatives to develop the infrastructure sector.

Liberalization of Foreign Direct Investment (FDI) regulations, extended tax holiday

periods and introduction of Public Private Partnership (PPP) are some of the factors that

have led to the growth of infrastructure sector in India.

The major Infrastructure development initiatives require a substantial inflow of investment

capital. The policies of the Indian Government seek to encourage investments in domestic

infrastructure from both local and foreign private capital. The country is a hot destination

for foreign investors.

Some of the top infrastructure companies that are involved in infrastructure activities in

India include Larsen &Toubro Ltd, Punj Lloyd Group, Lanco Infratech Limited and GMR

Group to name a few.

Indian Roads The road infrastructure in India plays an important role in connecting different parts of

India. Over the years after independence there has been large-scale development of the

network of roads across the length and breadth of the country. Indian road network of 3.3

million Kilometers is second largest in the world and consists of:

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Indian Road Network (11)

Indian Road Network

Length(In Km)

Expressways 200

National Highways 70,934

State Highways 1,31,899

Major District Roads 4,67,763

Rural and Other Roads 26,50,000

Total Length 33 Lakhs Kms (Approx)

Sources: National Highways Authority of India

The growing interest by private players in the highways sector has assisted National Highway

Authority of India (NHAI) to award 17 projects worth over Rs 25,500 crore (US$ 5.15

billion) in the past few months. Of the 17 projects, 12 were won by private firms at premium

since April 2011, according to a senior Road and Transport Ministry official. All these

projects will be built under National Highways Development Project (NHDP), the flagship

road building programmed of the Transport Ministry.

Under NHDP, the NHAI has developed about 16,000 km, while process for improvement of

another 10,000 km is still going on. All the seven phases of NHDP will cover up gradation of

about 50,000 km of roads.

Indian Ports

India has a more than 7,500 km-long coastline, which is being further developed to support

trade. The Government of India (GoI) is focusing on port infrastructure development in the

country and is also promoting private participation and foreign direct investment (FDI). Most

of the cargo ships that pass through East Asia and America, Europe or Africa, pass through

Indian territorial waters. Hence, India has the potential to develop itself as a transshipment

hub.

There are 12 major ports in India and approximately 200 non-major ports. In 2008–09, the

total cargo handling capacity of major ports was 574.5 million tonnes per annum (MTPA).

The capacity of major ports is further anticipated to increase to 1,000 MTPA by 2011–12.

Non-major ports are projected to more than double their capacity by the end of 2007–12, to

support major ports in handling the growing cargo traffic.

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Recently, Belgium's Port of Antwerp, the second largest port in Europe, announced its plans

to pick a stake in Essar Group's Hazira Port in Gujarat by the end of 2011.

Indian Airports

India is one of the fastest growing aviation markets in the world. With the liberalisation of the

Indian aviation sector, the industry has seen transformation with the entry of the privately

owned full service airlines and low cost carriers. The sector has also seen a noteworthy

increase in number of domestic air travel passengers. Some of the factors that have led to

higher demand for air transport in India include the growing middle class and its purchasing

power, low airfares offered by low cost carriers, the growth of the tourism industry in India,

growing outbound travel from India, and the overall economic growth of India. In addition to

these factors, the importance on modernization of non-metro airports, fleet expansion by

airlines, service expansion by state owned carriers, development of the maintenance, repair

and overhaul (MRO) industry in India, opening up of new international routes by the Indian

government, establishment of new airports and renovation and restructuring of the existing

airports have further led to growth of the industry.

India's domestic aviation market has tripled in the last five years, according to a latest report

of the International Air Transport Association (IATA).

According to a report ―Indian Aerospace Industry Analysis‖, by research firm RNCOS, India

is at present the ninth largest aviation market in the world, the government's open sky policy

has attracted many foreign players to enter the market and the industry is growing in terms of

both the players and the number of aircrafts. Given the strong market fundamentals, it is

expected that the civil aviation market will register more than 16 per cent Compound annual

growth rate (CAGR) during 2010-2013.

Conclusion As we have analyzed the Infrastructure sector of Brazil, we have found that there is huge

Potential Investment requirement due to the two major events which are: 1) FIFA World Cup

2014 and 2) Olympics 2016. So Indian Private Equity Players can play a major role in these

events as a investors. Due to these major events, the Brazilian government needs to develop

their Airports, Hotels along with standard transportation facilities. It will also attract the

Global Tourist towards Brazil if the events are successfully hosted.

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5.3. Information Technology Sector

5.3.1) Overview of Brazilian Information Technology

The Brazilian IT market symbolizes an attractive opportunity for private equity

investments. Brazilian IT industry in 2011 should grow 13.1% - almost double the

global rate of growth of 7% - to achieve total revenues of US$39 billion. Brazil has

wide experience in technology outsourcing, with a well developed local market in

information technology outsourcing (ITO) and business process outsourcing (BPO).

The offshore ITO and BPO markets likely represent a significant growth opportunity

for developing countries as major global players continue to increase their presence in a

few well-positioned low-cost countries such as Brazil. Business models with an

efficient delivery platform, typically centered on cost-advantaged locations and clear

skill sets to develop a strong competitive position show a strong potential for value

creation and thus for private equity investments. In May, Apax Partners paid $921

million for a 54.25 percent stake in Tivit, an information technology and outsourcing

company listed on Brazil‘s alternative stock exchange, Novo Mercardo. It was the first

Brazilian deal by a U.K.-based private equity firm since 1995.

Graph-16

The IT industry goes forward to attract substantial attention from private equity

investors, moving up to be the third most active industry for P/E investment.

Investment is being repelled by the realization of many, that the industry has grew

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importantly over the last decade and that its current performance is for real. ― P/E firms

stung from making the wrong choices in the last internet boom by trying to act early

and often and those set on the sideline too long, not convinced that the recent recession

was altogether over have re-entered and began investing again, setting in motion the

early stages of a multi-year investment cycle‖.

Private equity investor presently face the large pressure of a $466 billion capital

overhang. Private equity investment in the information technology industry has had an

active start to 2011 with deal numbering over $14.25 billion of invested capital so far.

In the starting period of 2011 the deal was totaling of $7.2 billion. The IT industry

reported for 15% of the total P/E deal flow compared to 9% in 2010. It is the third most

active industry for P/E industry. In addition, P/E invested capital in IT companies, rose

from $1.8 billion against $7.2 billion in 2011. Factors driving these positive trends

includes hot areas such as SaaS, large median deal sizes and higher valuation multiple.

The software sector continues to be the most active area for private equity IT

investment with 42% of deal flow, followed by IT services with 24%. IT services

companies are an attractive investment in the ever changing technology landscape,

because ―services companies are always required as a peripheral to the latest

technologies.‖

IT investment areas that are continuing to garner a lot of buzz include social media,

SaaS and cloud companies. Investors are willing to pay higher multiples for these

companies. The software sector continues to be strong with $5.3 billion of capital

invested. Companies in the communications and the networking sector addressing the

bandwidth demand and capacity through infrastructure based solutions will continue to

increase demand.

Despite a large inventory of mature portfolio companies, P/E firms sold less than half

of the no. of IT companies as the invested previously. The most popular method for

exiting investment is through sales to strategic acquires (corporate acquisition). P/E –

backed companies in the information technology industry as a result of the ―rapid pace

of change and development which requires constant innovation from companies, either

organically or acquisitively‖. P/E exit activity in the space to continue to be fairly

robust as investors look to take advantage of current tech valuation and market

opportunities.

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Graph-17

5.3.2) Current Scenario of Information Technology in India

Balanced to become a US$ 225 billion industry by 2020, the Indian information

technology (IT) industry has played a fundamental role in putting India on the global map.

IT-BPO sector has become one of the most substantial growth accelerators for the Indian

economy. In addition to fuelling India‘s economy, this industry is also positively shaping

the lives of its people through an active direct and indirect contribution to several socio-

economic parameters such as employment, standard of living and diversity. The industry

has played a significant part in transforming India‘s image from a slow going bureaucratic

economy to a land of innovative entrepreneurs and a global player in providing world

class technology solutions and business services.

The sector is judged to have grown by 19 per cent in the FY2011, timing revenue of

almost US$ 76 billion. India‘s outsourcing industry has saw a rebound and filed better than

expected growth according to NASSCOM.

The export revenues are estimated to have aggregated to US$ 59 billion in FY2011 and

contributed 26 per cent as its share in total Indian exports (merchandise plus services),

according to a research report ‗IT-BPO Sector in India: Strategic Review 2011‘, published

by NASSCOM. The workforce in Indian IT industry will touch 30 million by 2020 and

this sunrise industry is expected to continue its mammoth growth, expect various industry

experts.

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Furthermore, NASSCOM said that the domestic IT-BPO revenues excluding hardware are

expected to have grown at almost 16 per cent to reach US$ 17.35 billion in FY2011.

Strong economic growth, rapid advancement in technology infrastructure, increasingly

competitive Indian organizations, enhanced focus by the government and emergence of

business models that help provide IT to new customer sections are the key drivers for

increased technology adoption in India.

The data centre services market in the country is forecast to grow at a compound annual

growth rate (CAGR) of 22.7 per cent between 2009 and 2011, to touch close to US$ 2.2

billion by the end of 2011, according to explore firm IDC India's report. The IDC India

report stated that the overall India data centre services market in 2009 was estimated at

US$ 1.39 billion.

India will see its number of internet users triple to 237 million by 2015, from 81 million

registered in September 2010, according to a report titled 'Internet's New bn', by the

Boston Consulting Group (BCG). BCG said Internet insight rate in India is expected to

reach 19 per cent by 2015, up from the current seven per cent.

Telecom Regulatory Authority of India (TRAI) is targeting a 10-fold increase in

broadband subscribers to 100 million by 2014. The country has 10.29 million subscribers

now. "We will have 100 million broadband subscribers by 2014," J.S. Sarma, Chairman,

TRAI said at the fifth India Digital Summit 2010 organized by the Internet and Mobile

Association of India.

The insight of the internet in rural areas will see an all time high in 2011. In a survey

conducted by IMRB for the Internet and Mobile Association of India (IAMAI), the total

number of active internet users in rural area will rise by 98 per cent to touch 24 million by

the end of 2011 from 12.1 million in December 2010. The survey said that the claimed

internet user class is also set to grow by 96 per cent to reach 29.9 million by December

2011 from 15.2 million in December 2010. (Active users are those, who have used the

internet at least once in the past one month. Claimed internet users are those, who have

used the internet sometime but not necessarily in the past one month.)

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The Growth Story

India is a preferred destination for companies awaiting to offshore their IT and back-office

functions. It also holds its low-cost advantage and is a financially attractive location when

viewed in combination with the business environment it offers and the availability of

skilled people.

The country‘s domestic market for business process outsourcing (BPO) is projected to

grow over 23 per cent to touch US$ 1.4 billion in 2011, says global research group

Gartner. In 2010, the domestic BPO market was worth US$ 1.1 billion. The firm predicts

that the domestic BPO market would range to US$ 1.69 billion in 2012 and increase to

US$ 2.47 billion by 2014.

With the first quarter of the new fiscal 2011-12 offering positive business outlook, hiring

opinons for sectors like IT, ITeS and telecom have risen by over 20 per cent, says a study

by TeamLease Services Pvt. Ltd. As per the Employment Outlook Report for the period

April-June 2011, freed by TeamLease Services Pvt. Ltd., hiring intent from IT and ITeS

was the highest in cities like New Delhi, Mumbai, Hyderabad and Pune.

India's top technology firms like TCS, Infosys, Wipro and HCL are readying plans to gain

a bigger share of their largest market, US, by sharply going after contracts being served by

multinational competitors. Analysts expect the top IT firms to develop between 23-27 per

cent in the FY2012 on the back of more number of discretional projects, improved pricing,

and robust business volumes.

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5.4. Agriculture sector

5.4.1) The Brazilian agribusiness-Background

Brazil is the country with a diverse climate, regular rainfall, abundant solar energy and almost

13% of all drinking water available in the planet, Brazil still has 90 million hectares of fertile

land and in 10 years, will be the most agricultural country in the world .

Brazil has always been known for its important role concerning the export of commodities,

being the main exporter of coffee, soy, meat and orange juice. The recent progress

concerning the development of new technologies in the country has given it the title of

strongest economy in Latin America.

Currently, Brazil has also extended its exports to more sophisticated items such as airplanes

and cars. This change in the economic framework has characterized a moment that could

represent a transition from a more colonial world into a more technological one. However,

what is happening in Brazil is a merger between these two sectors: new technologies have

been improving agribusiness in the country.

Agribusiness

Brazil has 388 million hectares of highly productive arable land of which 90 million hectares

remain unexplored. It exports 35 per cent of its production to 211 markets. It is the second

largest producer of organic food and third largest producer of fruit.

Brazil's agriculture exports amount to $95 billion (Dh348.86 billion) or 37 per cent of total

exports, according to statistics by the Ministry of Agriculture. The top three exports were soy

beans and byproducts (24 per cent), sugar, ethanol and meat (17 per cent) and coffee (9 per

cent). Agricultural production contributed 8 per cent to GDP and agribusiness contributed 26

per cent. Brazil exported $1.4 billion worth of agricultural goods to the UAE last year.

Brazilian coffee exports to the UAE alone amounted to $10 million in beans and $8.4 million

in ground coffee. As coffee prices soared last year, the value of Brazil's coffee exports

increased 24 per cent.

Foreigners buying land in Brazil for food security are restricted by Brazilian law, Celio Porto,

secretary at the Ministry of Agriculture, Livestock and Food Supply, said. "It's a delicate

question in Brazil…the government is trying to reach a middle ground between public

opinion and the needs of development. After two years of discussion there is still no

consensus."

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Foreign investors are encouraged to partner with Brazilian companies instead. Major areas

that require investments are the ports, roads and other infrastructure for easier transport of

agri-products.

Meat and poultry

Brazil has the largest commercial cattle herd in the world, with more than 200 million head of

cattle occupying 220 million hectares of grassland. It accounts for one in every three pounds

of meat sold globally and its beef is sold in 180 countries. Brazil is also the third largest

producer of poultry. Investments in research and technology have made this a sophisticated

sector.

Brazil also complies with halal sluaghter procedures certified by Islamic monitoring bodies

and approved by the Arab Brazilian Chamber of Commerce. The revenue of the Brazilian

halal beef market last year was $1.6 billion following up on $1.88 billion in 2010, according

to the Brazilian Association of Beef Exporters. The Islamic market represented around 32 per

cent of the beef exported from Brazil last year. Iran was the top importer with 38 per cent,

followed by Egypt (30 per cent) and Saudi Arabia (8 per cent).

Why Brazil?

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The agricultural sector has for many decades been the backbone of Brazil‘s economy.

Agriculture and its related sectors such as forestry and aquaculture account for 26.4% of the

Brazilian GDP and employ 39% of the national labour force.

The variations in climate in Brazil‘s producing regions have enabled the development of a

diversified agriculture and production of both temperate and tropical crops. Currently, some

50 million hectares are planted with annual crops and 20 million hectares with perennial

crops or planted forests. Besides, there are approximately 220 million hectares being used as

grazing land. Beef is produced extensively and the introduction of new and modern cattle

raising techniques will enable Brazil to increase the productivity of areas currently used for

general farming activities.

5.4.2) Current Status of Brazil‘s Global Market Share Projections in

Agriculture Sector (Table-19)

• 15 – 20% of all the world biodiversity is located in Brazil and is found in its several

biomass such as the Amazon Forest with 3.6 million km2, the Atlantic Forest, the Pantanal

and the Brazilian Savannah;

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• The Brazilian agribusiness GDP represents 26.4% of the country‘s total GDP (US$

1,577,264.36 million);

• Agriculture accounts for US$ 174.3 bn (71.3%) and livestock US$ 70.1 bn (28.7%);

• 70% of its landmass is suitable for cultivation and the areas already in production account

for 19% of the world's arable land.

• Brazil‘s total exports in 2010 are valued at US$201.9 bn, of which agribusiness is worth

US$ 76.4 billion (37.8%). The EU is Brazil‘s largest trading partner and the main destination

of agribusiness exports;

• Brazil agriculture production is expected to grow. In 2010, Brazil used 47.4 million hectares

to produce grains, 27% more than in 2000. There has also been an increase in 40% in the

crops productivity during the same period. The rate of productivity surpasses the figures

registered for the eight major economies in the world.

• Production of sugar and ethanol is increasingly significantly. 2010 figures show sugar cane

production reached 624 million tons. This record number represents a raise of 3.4% in total

production in comparison to the cycle of 2009. Of this, 53.8% (336.2 million tons) was for

ethanol, producing 27.7 billion litres, and 46.2% (288.7 thousand tons) for sugar, producing

38.7 million tons. Gross value of production is US$10.8 billion and the industry employs

some 1.5 million workers, with 45,000 of these being farmers. Exports account for US$7.8

billion.

• Brazil is the third food exporter in world behind of the USA and the EU.

5.4.3) Challenges in agribusiness in Brazil

Brazil‘s many natural advantages notwithstanding, defi ciencies in infrastructure, including

poor transportation and storage facilities, and high port costs, have offset some of the benefi

ts for agribusiness in recent years. Other challenges include the need to import fertilisers,

environmental pressures and labour issues, as well as the double-edged sword of a strong

local currency. Although many companies have found workarounds that enable them to

flourish, only a systematic effort to overcome these barriers will enable the agribusiness

sector to fulfil its potential.

I. Insufficient infrastructure adds to costs Transport infrastructure is a major constraint for Brazilian agriculture. Only 10% of the

country‘s road network is paved, yet more than 60% of agricultural production is transported

by truck, often across thousands of kilometers. Brazil‘s rail system, meanwhile, is one-

111

seventh the size of that of the US and consists of several short-line railroads that do not

interconnect because of different gauge sizes. Thousands of grade crossings limit train

speeds.

Brazil‘s river network is about 20% longer than that of the US. But it is vastly underutilised

as a result of environmental pressures and lack of investment in ports and dredging. As a

result of a lack of foresight, most hydroelectric plants were built without locks, preventing the

passage of barges. The country‘s port system, in turn, is expensive and inefficient. Lines at

the major grain ports can

stretch up to 50 km long (about 31 miles) during the peak harvest period and trucks can wait

up to 20 days to unload. This mainly reflects the use of outdated equipment and labour-

intensive processes. Trade unions are also strong at the ports, and strikes, while less common

than in the past, remain a concern.

In addition, the country suffers from a 43 m tonnes defi cit in grain storage,3 according to the

Ministry of Agriculture. Poor distribution aggravates the problem: only 11% of capacity is on

farms, compared with 40% in Argentina and 80% in Canada. Furthermore, infrastructure

build-out has not kept pace with agriculture‘s very rapid expansion, and storage is still

concentrated in southern Brazil rather than in frontier regions, which account for 70% of the

country‘s production.

According to analysts, Brazilian farmers lose an average US$1 per bushel of soybeans

because they lack on-farm storage and must sell at harvest time, when prices are at their

lowest level. This loss can be much greater depending on market conditions: in 2010 prices

were around US$8 per bushel in Mato Grosso at harvest time (April), while in late September

they had reached US$11 per bushel.

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II. Environmental pressure

Agribusiness‘s challenges are not limited to infrastructure. Imported fertiliser accounts for

more than 70% of Brazil‘s supply and is essential to improve soil fertility, particularly in

frontier regions. The logistics of transporting it long distances, by ship and truck, increase its

cost and put pressure on the country‘s already overburdened transport system. Pressure to

preserve the environment has grown considerably in recent years, thus slowing or halting

infrastructure projects and land development, especially in frontier regions. Strict

environmental rules, including requirements that farms set aside large areas as reserves

(ranging from 20% to 80% of total area, depending on the region), are now being enforced,

placing further restrictions on farmers. Objections from environmentalists have also slowed

the arrival of new technology. Genetically

modified (GM) crops, which improve yields and can help to reduce costs, were approved for

commercial use only in 2003. Brazil now accounts for 16% of global GM crop production,

and has 21.4m hectares under cultivation. While there are still objections to GM products in

Europe, this is not an issue in other

major markets such as China.

III. Labour and currency concerns

Competitors often cite cheap labour as an advantage in Brazil, but the reality is that high

taxes and strict and often confusing labour laws make hiring in Brazil less attractive than it

initially appears. This is aggravated by a shortage of skilled labour, especially in frontier

regions, which can be a significant problem when employees are expected to manage

machinery and equipment that cost hundreds of thousands of dollars.

A major obstacle to agricultural expansion in recent years has been the rise in the local

currency, the Real. Although a stronger Real results in cheaper inputs such as imported

fertiliser, chemicals and machinery, it makes Brazilian farmers less competitive on the

international market and cuts into already tight profit margins. Soybeans provide a clear

example of the impact of currency variations on competitiveness. When the Real was

devalued at the end of the 1990s, making Brazilian products more competitive on the global

market, the area planted to soybeans expanded rapidly, peaking in 2004. When the Real

started to strengthen in 2003, the expansion of soybean acreage halted. (There is a lag

between the decision to plant, which is influenced, among other things, by currency

expectations, and the actual planting. Since 2007, acreage has increased again despite the

strong Real as a result of factors such as vibrant demand from China and low corn prices.)

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Promising areas

Brazil‘s immense potential for agribusiness offers a huge scope for investment and

opportunities to foreign companies in the use of biotechnology for the development of new

varieties and strains resistant to parasites, pests and diseases, water stress and drought

resistant varieties as well as IT solutions for agriculture management and precision

agriculture.

Foreign companies should also exploit opportunities in the following areas:

• Biotechnology with direct application in agriculture and food production;

• Food safety; Traceability;

• Animal genetics;

• Organic and food: production, technology and market trends

(consultancy services);

• Basic minerals such as potash, phosphate and nitrogen;

• Precision agriculture, remote sensing and precision machinery;

• Post-harvest technology;

• Prawn and fish farming technologies;

• Deep sea fishing and fishing vessels;

• High added-value machinery to boost productivity and reduce wastage.

5.4.4) Opportunities for Private Equity firms in Agribusiness

Agribusiness in the region is well positioned to take advantage of the structural changes that

have already occurred and are now underway in a majority of Latin American

countries. Many companies, a majority of which are privately owned, have already

completed modernization programs during the 1990s. In addition, Brazil holds a competitive

advantage in global agribusiness sector and is now outperforming all other industries in Latin

America.

Brazilian agribusinesses offer high export ratios combined with well established internal and

regional distribution networks. Many of the companies in the region have introduced state of

the art technologies for production, post harvest, processing and information system

management Brazil have well developed infrastructures for the handling, storage, and

distribution of product.

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The high export ratios of Latin American agribusiness are secured, in part, because of their

counter-seasonal production cycles vis-à-vis production in U.S., Canada, Europe and Japan.

The seasonal advantage offers special opportunities for establishing strategic alliances with

other origin suppliers and facilitates the establishment of market share worldwide. Under the

present climate of political instability and economic downturn, investors can take advantage

of the agribusiness export niche in Latin America to hedge their exposure and hence,

minimize the risk to their investment position.

Combined with this positive outlook for the agribusiness sector in the region, it coexists now

a dramatic economic downturn, particularly in Brazil, that presents opportunities to

restructure many local agribusiness companies. Although the commodities based industries

are riding an export crest induced by realignment of domestic currencies in Brazil, there

remain structural impediments –failure of domestic financial systems to provide adequate

financing, lack of experience of local management to target export markets, etc. – which

impede the maximization of these present growth opportunities.

Brazilian agriculture responded positively to the opening of the domestic economy in 1990.

This sparked a race to introduce modern technology and mechanization and to improve

breeding stock through better genetics. Cutting production costs remains a priority and there

are plentiful opportunities for foreign companies interested in technology transfer projects

and joint ventures. There is no such thing as a typical Brazilian farm. Sizes, land prices and

sophistication vary hugely around the country. Foreign visitors to most farms in the South,

Southeast and Midwest expecting to see "Third World" technology and practices will be

taken aback by the degree of efficiency and mechanization. Soya yields per hectare in the

Midwest for example are unsurpassed anywhere in the world. Soybean and maize are the

main cultures planted in Brazil, responding for 42.8% and 37.8% respectively of the total

grain production. The Southern region ranks first in the production of grains, being

responsible for 42.93% of the total Brazilian production of 149.5 million tones - rice, beans,

maize and soybean account for 90.9% of the regional production. The Midwest is the second

most important region, accounting for 35.1% of the Brazilian production, with soybean,

maize and cotton as the main cultures, followed by the Southeast region with 11.4%,

Northeast with 7.9% and the North with 2.7%. As to livestock, with the world‘s largest

commercial herd, beef production in Brazil reached 9.2 million tons in 2009, of which 18.2%

was destined to exports. Poultry production reached 12 million tones and exports represented

31.6% in 2010. Although studies envisage a huge growth in Brazil agriculture production, the

country still faces serious problems with logistics, considered inefficient and inadequate. The

problems include several deficiencies in transport infrastructure and storage. The government

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is aware they have to promote investments to reduce the loss in the fields, improve the quality

of roads (major type of transport used to transport the commodities) build and expand

railways as well as implement use of waterways. However, the speed of the investments is

still very slow. In addition, the need for imported fertilizers and the rush to open markets and

new technology created high levels of indebtedness and there is heavy reliance on official

credit. The UK has an important share of the market in both fertilizers and defensives such as

pesticides and herbicides.

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5.5. Education Sector

Education in India

Brief Introduction

India has emerged as a strong potential market for investments in the fields of training and

education because of its favorable demographics (young population) and a services-driven

economy. The fact is all the more illustrated looking at the country‘s global presence in

sectors like software, generic pharmaceuticals and other areas which require high level of

learning and training.

Education is one of the largest service sector industries in India characterized by a unique set

of attributes which are highly favorable for the development of the sector.

Education - Market Size and Trends

Education is one of the largest services market in India with a combined market size of more

than 450 million students and revenue worth US$ 50 billion per annum, according to a report

by research firm KPMG. The highly fragmented industry is projected to require an

investment of about US$ 100 billion by 2014 to meet burgeoning demand. KPMG anticipates

the sector to grow by around 10-15 per cent over 2011-2021.

Source: Netscribes, KPMG - ‘Investing in India’, CLSA, KPMG analysis

According to the 2011 census, the total literacy rate in India is 74.04 per cent. The female

literacy rate is 65.46 per cent and male literacy rate is 82.14 per cent.

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Foreign direct investment (FDI) inflows in the education sector during the period April 2000

to July 2011 stood at US$ 427.85 million, according to the Department of Industrial Policy

and Promotion (DIPP).

Strong Growth Drivers

The income level of the Indian population is rising day by day which induces the families to

spend more on the education of their dear ones with a view to brighten their future.

Parents prefer to send their children to private schools with more facilities and activities

which grow a student in all different aspects.

There is a huge demand-supply mismatch in the Indian Education industry where investment

is required of approx USD 100 BN by 2014 to meet expected demand.

Competition for professional courses is increasing among students with a view to make a

glorious career in their respective field. Such as, CA, ICWA, CFA etc.

With the overall development of the country, the demand for skilled labour is increasing

which taps the education sector for the same.

Education sector in India provides higher rate of returns with attractive margins considering

volumes and propensity of people to pay for Higher Education.

According to a renowned research and advisory firm KPMG, the industry in India is expected

to grow at robust growth rates of 10 to 15% over next decade.

Government is under process to pass Foreign Education Bill, which will allow foreign

universities to have campuses in India.

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Challenges for PE in Education in India

1. Regulation

At present, the Indian education market, specifically the K-12 and higher education, is

heavily regulated by the government. The unregulated areas include vocational training,

exam preparation, tutoring services, etc. Regulation goes hand in hand with accreditation

– if an institution wants to be accredited, it will need to subject itself to a government

mandated intake acceptance quota and follow rules related to affirmative action for the

underprivileged classes of people. While public institutions have to fully comply, even

private institutions have limited choice for fear of losing accreditation and/or lower

intake quota. Accredited institutions have a higher draw of students as the students feel

that they are getting an internationally recognized degree. Archaic rules mandate all

formal educational institutes in India to be run as ‗not-for-profit‘ centres under a society

(registration under the Societies Registration Act 1860) or a public trust (Registration

Act 1908). Any investment in an accredited institution, such as an education trust, will

limit the ability to exit from that investment as distributions of dividends cannot be

made. In such cases, the PE firm sets up another vehicle external to the trust that

provides services to the trust.

2. Corruption

We see corruption as another big challenge to PE firm operation in India. Nicholas

Macksey (SVP, Barings Private Equity Asia) and Simon Griffith (Partner, EQT Asia)

during a panel forum on PE in Asia at INSEAD, both cited corruption as a huge problem

in the legitimacy of company operations in India. Most of the accredited private

institutions are notorious for accepting ―donations‖ from individuals to compensate for

shortfall in fees mandated by the government. Not all of the transactions are recorded

and a lot of transactions occur with cash, often with payments for unexplained purposes.

Most school operators do not show this money in their books and effectively siphon off

the excess cash. These institutions have to live within the means of the base fees

collected and not on the donations - a challenge that is difficult to overcome. In the

unregulated education market, this is much less of an issue as the service providers here

do not have any quota to abide by and can thus offer supply to match demand and do not

have to resort to artificial pricing. PE firms have to exercise extreme caution in this area

and have to expend more time in due diligence.

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3. Valuations

Because of the investment interest from large number investors, there is tremendous

competition to seek out and find the best possible deals. The Bombay Stock Exchange

(BSE) index, SENSEX, a reflection of the Indian stock market, has gone from a high of

20,800 in Jan 2008 to a low of 8,200 in Mar 2009 and back to a high of 16,600 today.

This extreme bullishness on the market again has driven up valuations of companies.

However, as more PE poured in it could lead to overcrowding again. This is becoming

more evident as there has been increasingly more shopping around of deals to get a better

price or better terms.

This is especially the case when the founder/promoters have an emotional attachment to

the firm and feel that by shopping around a deal, they may be able to get terms that are

favorable to their position in terms of control.

Government Initiatives

The Indian government is under a process to pass the Foreign Education Bill which would

allow foreign universities to have campuses in India. The Bill, tabled by Mr Kapil Sibal,

Union Human Resource Development Minister would 'regulate the entry and operation of

foreign educational institutions which are imparting, or intend to impart, higher education in

India.' The Bill, if implemented, will not only facilitate the much needed investment in the

education sector, but will also attract foreign students and help India resolve the issue of brain

drain.

Meanwhile, the Government of Australia has strengthened its commitment to India‘s

education sector wherein it would assist the country to satiate its demand for skilled

workforce in the areas of faculty capacity building and curriculum renewal.

Moreover, India wants to set up 14 theme-based universities, encourage research, train

teachers and brand a group of leading educational institutes the 'Indian Ivy League' under the

Obama-Singh 21st Century Knowledge Initiative (OSI), an Indo-US collaboration in the field

of education and training. The government allows up to 100 per cent FDI in education sector.

Road Ahead

India plans to enhance its formally skilled workforce through vocational education and

training from the current 12 per cent to 25 per cent by 2017, thereby adding about 70 million

people in the next five years. Hence, the higher education segment is expected to undergo

intense changes and activities in terms of foreign partnerships and foreign players entering

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the market in the coming years, with Indian players rejuvenating and improvising their

methodology, technology and course content to match the competition. Consulting firm

Technopak is very positive about the growth of the sector and estimates private education

sector alone to grow to US$ 70 billion by 2013 and US$ 115 billion by 2018 in its study 'A

Report Card on India‘s Education Sector'.

Education in Brazil

Introduction

Education in Brazil is regulated by the Federal Government, through the Ministry of

Education, which defines the guiding principles for the organization of education programs.

Local governments are responsible for establishing state and education programs following

the guidelines and using the funding supplied by the federal government.

Today Brazil spends 4.3% of GDP on education, but spending per student is low given the

youthful population skew, the large amount of resources directed toward tertiary education

and high spending on teacher‘s pensions. The educational system suffers from the highest

repetition rate in Latin America and low education attainment. Individuals more than 15 years

old have on average only 4.8 years of schooling. The situation is worse for the poor, who tend

to enter the system late, leave early and repeat more grades. By age 15, poor youths have

completed three years less schooling than the non-poor. The quality of education is a key

issue: Over half of Brazil‘s 15-year-old students are functionally illiterate and close to 80%

fails to perform at basic levels of mathematical competency. The situation is even worse

considering that these tests don‘t include those who are not attending school.

Education Market Size and Trends

Brazil is regarded as one of the largest markets for investing in the education sector in the

whole of South American continent. There are more than 70 million students in Brazil. Out of

the 70 million students, approximately 93% of them are enrolled in receiving basic education

and only 7% of the student population enrol themselves for undergraduate and postgraduate

level education.

Only 8% of the students attain schools, which are run by the Brazilian government, and more

than 19% of students enrol themselves in private schools. This huge difference is mainly

because the there is a vast difference in the quality of education provided by the state-run and

privately-run educational institutes. The state-run quality schools have poor amenities, they

lack quality teaching and non-teaching staff, and the curriculum taught in the government-run

school is very basic and outdated.

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As per the Higher Education census released by the Brazilian government in 2007, the

country had about 2.281 higher educational institutes and a majority of these institutes are run

by private players. This is mainly because the government of Brazil neither had the intention

to invest in the higher education sector nor did it have the essential resources required to

build an educational institute that provides top-class education.

Public education systems across the globe are coming under the hammer with severe

competition coming from the private players. Several private investors are tactfully taking

over the government funded educational institutions and are transforming them into privately

funded profit-making organizations.

Brazil is no exception to this; the education system in Brazil has always been divided

between the public and the private sector. However, due to the Brazilian government‘s focus

to develop other sectors of the country, the education industry in Brazil is bearing the dent.

However, the neoliberal policies introduced by the International Monetary Fund (IMF) and

World Bank following the debt crisis radically transformed the education system of Brazil.

As a result, several private educational institutions have sprung up in different parts of Brazil.

In order to attract foreign direct investment in the educational sector of Brazil the government

provides tax benefits to investors. The Brazilian government provides the same protection to

foreign capital investment as it gives to investments made by Brazilian locals. The Brazil

government has also formulated favorable FDI policies to attract investments.

Thus, the favorable policies of the government and the huge student base, backed by the

substandard education system, provide foreign investors a favorable ground to invest in the

education industry of Brazil.

Incentives for Investing in Brazil Education

The Brazilian economy is one of the fast growing economies in South America. It is also one

of the economies that attract huge foreign direct investments.

Investors investing in Brazil stand a great chance to gain significant returns due to the

following advantageous reasons:

Brazil is the fifth largest country in the world, thus it provides a great student base.

Very little investment by government of Brazil in Education which comprises only 4.3%

of the GDP.

Standard of public education has been dropped and majorities of families are shifting

their children to private schools.

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Education is open to free enterprising under official supervision.

Brazil has a very good political setup. It is a democratic country and has a stable political

system.

It has a very stable currency.

The government of Brazil encourages foreign investment in the country in its diverse

sectors including education. The government provides several incentives to the investors

and allows the investors to have 100% ownership of land and property.

Brazil has a low-skilled labor force. Need to invest to improve quality of education – by

diversifying tertiary education, acquire/adopt the knowledge/technology from abroad.

Challenges for PE in Education in Brazil

Rampant corruption: Transparency international corruption index 0f 3.5, 80 out of 180

nations i.e. slightly behind china and ahead of India and Russia

Brazil government collects multiple taxes with fast changing legislation which affect business

plans and increase risks of contingencies.

Poor infrastructure leads to poor service quality and less customer satisfaction.

High crime rate which also includes illegal drug cartels arise threat of violence.

Conclusion

The more that better-off families pay for education (as they do when they choose

private education), the more the government can use its resources for the poor. (World

Bank 1999a: 19)

This ‗common sense‘ statement is strongly persuasive in promoting policies of privatization,

but can be seen to be highly problematic. Firstly, the statement says nothing about quality:

when public education is only for the poor, or any politically marginalized group, it is likely

to be of a lower quality. Secondly, there is inequity among those paying fees, as quality

varies between different private institutions and is usually linked to cost. State intervention in

the private sector can mitigate some of the inequitable effects of the market, but countries like

Brazil with their weaker state apparatuses have less power to regulate fees, provide grants

and ensure quality. Even the most developed countries have difficulty in compensating for

the poor‘s disadvantage in a highly privatized system.

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Considering the current situation and future prospects of both the country, the education

sector in India seems to be more promising sector with huge potentials for large PE

investments. However, regulatory restrictions have prevented a floodgate of PE investments

in the regulated education market which can be overcome by investment in the non-regulated

educational institutions or by investing in the regulated education institutions through

―innovative structures‖

We conclude by advocating an optimistic position whereby Indian Private Equity players take

advantage of the growth potential of the market in the country. We believe that the first

movers in this sector will have a have a significant market advantage in terms of market

knowledge, deal flow and overall better deal economics.

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5.6. Oil and Gas Sector

Indian Scenario

Oil and gas sector is one of the key catalysts in fuelling the growth of Indian economy. With

a 1.2 billion population and an economy that has consistently at approximately 8 per cent

annually, India's energy needs are increasing fast, warranting a robust demand for oil and

natural gas in the country. India has emerged as the 5th largest refining country in the world,

accounting for 4 per cent of the world's refining capacity. India exported 50 million tonnes

(MT) of refined petroleum products during 2010-11. With our refining capacity increasing

further, this figure is likely to touch about 70 MT by 2014, making India one of the world's

major exporters of petroleum products.

The share of oil and natural gas in India's total primary energy demand is 40 percent. The

planned investments span across the oil and gas value chain including exploration and

production, oil and gas pipelines, petroleum refineries, R-LNG terminals, city gas distribution

networks and petrochemical plants, according to KPMG's November 2011 sector report,

KBuzz.

With an enriched resource position, India ranks second in BMI's upstream business

environment ratings while India shares first place with China in BMI's downstream business

environment ratings. India will account for 12.4 per cent of Asia Pacific regional oil demand

by 2015, while satisfying 11.2 per cent of the supply, as per the BMI forecasts.

In addition, India is also the world's fourth largest importer of oil. The petroleum and natural

gas industry in India has attracted foreign direct investment (FDI) worth US$ 3.280.72

million from April 2000 to September 2011, according to the data provided by Department of

Industrial Policy and Promotion (DIPP). The Department further recorded US$ 144 million

during April–September 2011-12, in the industry.

Oil & Gas- Market Dynamics

Production and Consumption

From about 22 million tonnes per annum (MTPA) during 2004-05, the import of crude oil

from the African continent has increased to more than 35.31 MT during 2010-11. Investment

in oil and gas sector over next 5 years is expected to reach US$ 65- US$ 70 billion, according

to KPMG's November 2011 sector report, KBuzz.

According to the provisional production data released by the Ministry of Petroleum and

Natural Gas in a press release:

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Crude Oil production was recorded at 22.44 million metric tonnes (MMT) for April-October

2011, as compared to the 21.54 MMT in April-October 2010 Natural Gas production was

28,431.4 million cubic metres (MCM) during April-October 2011

During April-October 2011, 96.95 MMT of crude oil was refined, compared to 93.58 MMTof

oil refined during corresponding period in 2010.

Oil and Natural Gas Corporation (ONGC) has the onus to maximise domestic oil production,

which in 2010 stood at 909,000 b/d of estimated average. Due to incredible efforts made by

ONGC and UK-based Cairn Energy, BMI predicts oil production at around 1.2 million b/d by

2013 in its report for the third quarter (Q3) of 2011.

Oil consumption in India is projected to increase by 4-5 per cent per annum by 2015,

indicating a demand of 4.01 million b/d by 2015.

Diesel & Petrol

India's fuel demand may rise 3.8 per cent in 2012 led by diesel and petrol (gasoline), as per

International Energy Agency‘s (IEA) forecast. Diesel comprises for about 40 per cent of the

total fuel consumption in India. Its demand is expected to increase to 1.37 million b/d in 2011

rising by 5.8 per cent and further to 1.44 million b/d in 2012, increasing by 5.5 per cent.

India's petroleum refining capacity is expected to rise to 240 MTPA by March 2012 from the

current 188 MTPA, attracting an estimated investment of US$ 13.5 billion - US$ 14.6 billion.

This will boost the country's exports of petroleum products, according to Mr S Sundereshan,

Secretary, Ministry of Petroleum and Natural Gas. Moreover, demand for petrol is expected

to expand by 7.6 per cent (363,000 b/d) in 2011 and eventually by 6.7 per cent (388,000 b/d)

in 2012. The Ministry of Petroleum anticipates a growth of 4.6 per cent in the sale of oil

products in the FY12.

Gas

The natural gas demand in India is expected to increase from current 166 million standard

cubic meters per day to 320 million standard cubic meters per day by 2015, as per Global

consultancy firm McKinsey's analysis.

India's share (in the Asian pacific region) of gas consumption in 2010 was an estimated 10.9

per cent, while its share of production is estimated at 11.1 per cent, according to BMI's Q3

2011 report. BMI expects that the India's share of gas consumption would reach to 11.7 per

cent by 2015 while that of supply would stand at 13.1 per cent.

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Gas consumption is expected to increase from an estimated 55 billion cubic metres (BCM) in

2010 to 76 BCM in 2015, while domestic production is anticipated to increase from around

45 BCM in 2010 to at least 73 BCM in 2015.

City Gas Distribution (CGD) is another downstream segment set to see a spurt in investment

opportunities, due to increased availability of cheap domestic gas and favourable government

policies. The PNGRB has plans to expand the CGD network to 100 Geographical Areas (GA)

by 2012 and to more than 240 GA in the next five years.

Liquified natural gas (LNG) re-gasification terminals have been planned at Mundra and

Ennore that would require capex investments of about US$ 4 billion by 2015.

Oil & Gas - Key Developments and Investments

India and Nepal have decided to take forward the proposal to build a 41 kilometers (kms)

petroleum pipeline between the two countries at a cost of about Rs 100 crore (US$ 19.23

million). The pipeline is to be laid between Raxaul in Bihar to Amlekhgunj in Nepal

Kerala State Industrial Development Corporation Ltd (KSIDC) has partnered with Gail Gas

Ltd to set up a joint venture (JV) company, to implement Supplementary Gas Infrastructure

in Kerala. The JV company formed is known as Kerala Gail Gas Ltd (KGGL)

Oil and Natural Gas Corporation's (ONGC) overseas investment arm, ONGC Videsh, sealed

a deal to take 25 per cent stake in Kazakhstan's Satpayev acreage in the Caspian Sea, marking

India's first firm foothold in the hydrocarbons-rich Central Asia

Reliance Industries Ltd (RIL) and British Petroleum Plc (BP) on November 21, 2011, have

announced the formation of India Gas Solutions, an equal joint venture (JV) that would focus

on global sourcing and marketing of natural gas in India

Gas Authority of India Ltd (GAIL), the country's largest marketer and transporter of natural

gas, has become the first Government-owned energy company to get a foothold in the US

market. It has entered into a deal with Carrizo Oil and Gas Inc for acquiring 20 per cent stake

in Eagle Ford shale acreage.

Bharat Petroleum Corporation Ltd (BPCL) plans to achieve refining capacity of nearly 42

MT by 2015-16 where the focus will be on low-cost expansions. These initiatives on the

refining front will form part of BPCL's Rs 40,000 crore (US$ 7.67 billion) investment outlay

over the next five years.

India has grown phenomenonally from 194 MTPA currently, and this is projected to reach

238 MTPA by 2013. The boost in refining capacity will be initiated by BPCL and its partner

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with a 120,000 b/d refinery coming up at Bina in Madhya Pradesh. In 2011, HPCL and Mittal

will commission an 180,000 b/d plant at Bathinda in Punjab.

Essar Oil will be expanding its capacity of Vadinar refinery from 300,000 b/d to 375,000 b/d

in 2012, while Nagarjuna Oil and Indian Oil will be adding capacities of 120,000 b/d and

300,000 b/d, respectively, by 2012-13.

Oil & Gas - Government Initiatives The India Hydrocarbon Vision 2025 envisages a demand of about 391 million standard cubic

feet per day (MMSCMD) of gas by the year 2020-25. The current production of natural gas

in the country is about 150 MMSCMD and is expected to go up to about 192 MMSCMD by

the year 2011-12.

New Exploration Licensing Policy (NELP), implemented by Government of India, permits

100 per cent FDI for small and medium sized oil fields via competitive bidding

Public-private partnerships (PPP) as well as only private investments can foray into the

refining sector. In case of an Indian private company, 100 per cent FDI is allowed

100 per cent FDI is allowed for petroleum products and pipeline sector as well as natural gas/

LNG pipeline, for infrastructure related to marketing of petroleum products, market study of

formulation and investment financing

Minimum 26 per cent equity is covered over five years, in case of trading and marketing

The Government is determined to protect the interest of common man while providing

quality petroleum products at reasonable prices, asserted Mr S Jaipal Reddy, Minister of

Petroleum and Natural Gas in a recent meeting. He further added that with a view to reduce

burden on consumers as well as oil marketing companies (OMCs), the Government has

eradicated the Customs Duty on Crude Oil and trimmed Customs Duty on petroleum

products by 5 per cent. Excise Duty on diesel was also reduced by US$ 0.056 per litre

Oil & Gas - Road Ahead

India's demand for liquid petroleum products is projected to grow at a 4.7 per cent compound

annual growth rate (CAGR), during the next five years, while the demand for gas is expected

to grow at a CAGR of 14 per cent. Presently, natural gas accounts for around 10 per cent of

India's primary energy basket. India is also increasing its current RLNG re-gasification

capacity from the current 13 MTPA to well over 30 MTPA by 2015. To carry gas across the

length and breadth of India, 8,000 kms of gas pipelines are being laid while another 5,000

kms are under the bidding process. All these are pointers to the attractiveness of India as a

stable gas market with an assured demand.

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India's oil companies are present in around 24 countries including Egypt, Kenya, Uganda,

Tanzania and Mauritius. The total overseas investment by our public sector oil undertakings

is about US$ 13 billion which includes two pipeline projects in Sudan and Myanmar. India

being a US$ 1.8 trillion economy, aims to grow steadily at 8-9 per cent per annum, it seeks

to build a long term partnership with oil rich African countries to meet its growing energy

needs.

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Chapter 6

Findings and Suggestions

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1) The most important matter in healthcare is that it is prohibited for foreign direct

investment thereby we would like to suggest the government that if they can open it

for F.D.I , the situation in this sector can be improved.

2) The government should try to improve the public health system in brazil as patients

have to wait in long queue.

3) Even though the public health care spending is constantly increasing, the access of the

population towards the healthcare facility is very low as compare to other countries so

government should try to penetrate to the remote areas in order to increase the

coverage.

4) Private equity is an alternative modal to public companies that place unique role in

helping transform companies & remove inefficiencies.

5) In Brazil there are prohibitions in the development of activities involving nuclear

energy, health services, post office & telegraph services & aero space industry so,

there is no opportunity of foreign investment in these sectors.

6) Total No. of cities in Brazil where there is no development of BRTS facilities.

7) Brazil requires Metro facility.

8) Ports are not developed in Brazil and it is overworked also because it requires

technology up- gradations.

9) Despite of spending of government , there is insignificant growth in infrastructure.

10) Find out reasons why Brazil lacks stable and credible regulatory environment which

impacts on the private sector infrastructure investments.

11) Improve Infrastructure size as per market size because Brazil has large market size.

12) Oil and gas investment in private equity should be defined.

13) IT industry has the huge potential to be the most attractive sector for private equity

players for investment.

14) One of the weakness of the economic system of brazil is income inequality. It has a

negative effect in the country and it makes difficult for lower people to increase their

living standards. Thus the government should make or develop a tax system which

distributes the income equally.

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15) The rate of crime is very much higher in Brazil. It creates a negative image of a

country in front of the world. Thus government should take strict action against the

criminals so as to reduce the crime.

16) The country can use its youth population in the politics. As the population of the

youth is comparatively very low.

17) There is a very strong correlation between light color and higher income, education

and social status. Just a few blacks reach positions of wealth, prestige and power,

except in the arts and sports.

18) The investments in science and technology of the previous years were insufficient to

ward off the forthcoming debt crisis and uncontrolled inflation. Thus government

should attract the foreign investors to increase the level of science and technology.

19) Our Hypothesis suggested that opportunities for private equity players in brazil is

more than India

20) Role of international private equity players in brazil is as low as 5% there by there is

a scope for them to improve their position and tap the opportunities in brazil.

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Chapter 7

Conclusion & Future Scope

133

This report studies various sectors of Brazil where Indian Private Equity players have

opportunities. The major sectors which are mainly covered under this Report is

1) Healthcare

2) Infrastructure

3) Information Technology

4) Agriculture

Out of these 4 sectors, there are 3 sectors where Indian Private Equity players have

opportunities where as there is only sector where Indian Private Equity players don‘t have

opportunities. As we are studying the opportunity for Indian private equity players, we have

to compare these sectors with Indian sectors.

The sectors where Indian Private Equity players have opportunity are

1) Healthcare

2) Infrastructure

3) Information Technology

Sectors (Opportunity)

a) Healthcare

Health care sector in Brazil is having huge potential for Indian Private Equity players

but the problem with this sector is government restrictions on FDI. As FDI is ban in

this sector, it restricts the Indian Private Equity players from investing,

The Opportunity can be taped by Indian players only if there is any change in the

regulations or in the FDI policy by the Brazilian government.

b) Infrastructure

The Infrastructure sector is on the high front and is expected to boom mainly because

of two reasons

FIFA World Cup 2014

This event will receive almost R$ 105 billion in investment projects. The investment

will be required mainly in the area of Development of Airports and constructions and

modernization of Stadiums.

CONCLUSION

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Olympic Games 2016

The Rio Olympic Games of 2016 are expected to see an investment of R$ 30 billion.

Rio de Janeiro plans to develop a better metro system for easy and safe access to the

game site. In order to house the millions of new tourists the city projects it will need

about 300 hotels, or 86 thousand new rooms.

c) Information Technology

The Brazilian IT market represents an attractive opportunity for private equity

investments. Brazilian IT industry in 2011 should grow 13.1% - almost double the

global rate of growth of 7% - to reach total revenues of US$39 billion. Brazil has

extensive experience in technology outsourcing, with a well developed local market in

information technology outsourcing (ITO) and business process outsourcing (BPO).

The offshore ITO and BPO markets potentially represent a significant growth

opportunity for developing countries as major global players continue to increase their

presence in a few well-positioned in Brazil

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FUTURE OPPORTUNITY IN BRAZIL FOR PRIVATE EQUITY &

INVESTMENT

There used to be a saying about Brazil, it is the country of the future and will always be. But

it appears that now the future of the Country has arrived.

In the last two years, Investment firms have taken notice of Brazil‘s growth and have been

increasing their activity in the country. For local PE firms already active in the market, this

means a time of unprecedented deal flow and new opportunities. For mega firms with the

interest and the resources but not necessarily significant experience investing in Brazil, it

means opening new offices, raising new funds, adding new professionals who are familiar

with the local market and putting assets to work in handful of initial deals.

Brazil‘s rising status on Investors‘ lists and increasing prominence in the global arena are a

confluence of many factors: favourable demographics, vast natural resources, a stable

political climate and significant infrastructure needs, which are combining to drive interest

and activity.

Brazil has the largest population in Latin America

Brazil has nearly 200 million people, making it the most populous country in Latin America

and providing an ample workforce to sustain the country‘s rising exports. Equally important,

it represents a growing market for consumer goods and services. Government policies

designed to assist the poor through direct subsidies, as well as a nationally mandated

minimum wage, have added additional consumers to Brazil‘s middle class. As a result,

private consumption is expected to outpace the country‘s overall growth rate for the

foreseeable future. Brazil‘s population is young by developed-nation standards and

increasingly mobile. Many workers are reversing a long-standing trend of north-to-south

migration, as more employers locate in the less-developed northern regions.

Maturation of Brazil‘s capital markets

Brazil‘s capital markets have undergone a significant maturation over the last decade,

inspiring confidence in investors worldwide. Increased transparency in the banking system

has enabled better oversight by the country‘s central bank and regulators. Brazil‘s bank

settlement system now operates in real time, enabling regulators to see issues as they emerge

and take appropriate action before problems escalate. Likewise, Brazil‘s financial markets

have undergone a transformation in recent years that has emboldened investors. Changes to

rules for publicly traded companies have empowered minority shareholders and improved

corporate governance. Among the most important of these is Brazil‘s convergence with IFRS.

Listed companies in Brazil are now beginning to report their consolidated financial

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statements under IFRS, as are Brazil‘s financial institutions. The increase in transparency,

reliability, and comparability with a growing number of international adoptees is likely to

draw even more foreign investors to Brazil in the coming years. Already the BM&FBovespa

boasts a market capitalization in excess of US$1.1 trillion. While still small relative to larger

exchanges (the NYSE has a market cap of approximately US$12 trillion), it demonstrates the

impact that regulatory changes can have in attracting investors to Brazil.

Industry fragmentation and family succession issues

Certain industries in Brazil are characterized by a high degree of fragmentation - as such,

they can present rich opportunities for investors with the expertise and resources to

effectively consolidate. Sectors including education, healthcare, and retail are defined by

large numbers of smaller firms competing for market share, providing fertile ground for PE

roll-ups. One reason for the lack of industry concentration is the number of family-owned

business operating in Brazil. Like much of Latin America, family-owned businesses

dominate Brazil‘s small and- medium-size business landscape, and family succession issues

have historically driven a great deal of Brazil‘s PE activity. Many businesses are now several

generations removed from their founders, and with growing social mobility and increasing

opportunities for children of business owners, traditions of passing down the enterprise to

successive generations have diminished over time. Even many family-owned businesses

without succession issues are in need of PE; the lending markets in Brazil are significantly

underdeveloped and PE represents a viable source of growth capital to take their businesses

to the next level – attracting top talent in the form of professional management, making

capital improvements, acquiring competitors, and entering new markets.

Multiple industries with outsized growth potential

While Brazil‘s economy as a whole has outpaced those of developed nations, not all

industries are growing at the same rate. The country has many sectors that provide investors

with a risk/ reward profile that they would have difficulty duplicating in more advanced

economies. For example, energy, agriculture, consumer goods, manufacturing, technology

and the budding renewable industry all represent high-growth opportunities in Brazil. Brazil‘s

vast natural resources are well known, but they remain full with potential. Brazil grows crops

on just 20% of its cultivatable land. Additionally, recently discovered oil reserves are driving

investment in the region. In 2007, Brazil‘s state controlled oil company announced that it had

discovered new oil deposits that could contain more than 33 million barrels of oil, opening

the door to increased investment in oil service companies, transport and storage. At the same

time, investment in renewables in emerging economies grew from less than US$2 billion in

2001 to over US$65 billion in 2009, with Brazil alone raking in over US$7 billion. Over 84%

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of the country‘s domestic automotive fleet is accommodative of ethanol, and with a growing

number of foreign vehicles running on ethanol as well, investment is expected to grow.

Significant need for infrastructure investment

Brazil‘s infrastructure is in need of substantial investment. Less than 10% of the country‘s

highways are paved and most are in poor condition. Population migration is increasing the

need for water and utilities projects in urban centres. The rise in the number of the middle

class translates into increased consumption, which can be witnessed in the significantly

increased volume of automobile purchases. Many of these are by first-time buyers. As there

is limited mass transit, the increase in autos will create more congestion on already busy

roadways. The Lula administration‘s Growth Acceleration Program, which initially allocated

US$250 billion in government funds toward investment in transport, housing, sanitation and

water supply infrastructure between 2007 and 2011, was recently renewed for another three

years, with an additional US$880 billion commitment. At the same time, the World Cup in

2014 and the 2016 Olympics are estimated to require an additional US$50 billion in

investment. While a small percentage is earmarked for stadium development, much more will

be spent on inter-urban transport, including airports and roads, urban transport and sanitation.

In fact, more than 1,600 separate projects have already been identified for the World Cup.

Brazil‘s Oil Boom

Before the pré-sal finds, which started in 2007, the country‘s total proven and probable

reserves were 20 billion barrels. Conservative estimates for the total recoverable pré-sal oil

now come in at 50 billion barrels: a little less than everything in the North Sea, all in the

waters of one country. Optimists expect three times as much. ―In the pré-sal area, our

exploration has a success rate of 87%, compared with a world average of 20% to 25% for the

industry,‖ says Sergio Gabrielli, the president of Petrobras, Brazil‘s state-controlled oil

company. (The Economist)

Conclusion

Even though experts are pointing towards a strong deceleration in emerging market growth,

and alternative opportunities for investors, Brazil still seems like a place to bet one‘s cash

on. With the 2014 World Cup and the 2016 Olympics coming up, ―voracious‖ commodity

demand from East Asia and especially China, Brazilians could be right to stop thinking about

the future, as the CFO of Petrobras told to the forbs.com, ―the future is now.‖

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www.countrystudies.com

1) International Monetary Fund- 2011 World Economic Outlook

2) www.indexmundi.com

3) www.countrystudies.com

4) Private equity trend report 2012

5) Morgan Stanley Research report-2010

6) Private equity in brazil report-2011

7) www.geographia.com/brazil/brazihistory.htm

8) en.wikipedia.org/wiki/History_of_Brazil

9) www.ey.com/.../Private_Equity...Brazil/.../EY_Private_Equity_in_Brazil

10) www.brazilprivateequity.com.br/

11) www.ey.com › Home › Industries › Private Equity

12) www.insead.edu/...private_equity.../INSEAD_PwC_BrazilPEreport.

13) www.terrapinn.com/2012/private-equity-world-brasil/index.stm

Chapter-8-

BIBLIOGRAPHY