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Firms Eye Growth of Brazil’s Nascent Secondary Market Added in 9/6/2018
A secondary market for stakes in private-equity funds is slowly developing in Brazil, boosted in part by the country’s economic woes.

Although the market is still young, secondary purchases represent a sizable portion of the deals private-equity investors such as Hamilton Laneand Spectra Investments made in Brazil in recent years. Secondary deals accounted for about 30% of a fund of funds Hamilton Lane closed in 2013 with 145 million Brazilian reais (roughly $64.8 million at the time) that now is fully deployed, said Ricardo Fernandez, a managing director at the firm’s Rio de Janeiro office who oversees Brazilian investments.

The two fund-of-funds managers said they initially found many private-equity stake sellers
among wealthy families and other investors worried about the Brazilian economy, which was
hit by a recession in 2015 and 2016. An ongoing corruption investigation that was launched in
2014 and ensnarled the country’s top politicians also contributed to their fears.

“Most of [those investors] were scared about the situation. They wanted to move toward more liquid types of investments,” Mr. Fernandez said.

More recently, Spectra is finding opportunities to back fund restructurings and purchase
residual stakes in mature vehicles from pension funds seeking to streamline their portfolios,
said Ricardo Kanitz, Spectra’s managing partner.

Spectra acquired stakes in a 2011-vintage-year fund managed by Brazilian private-equity firm
Vinci Capital Partners in six separate transactions from 2015 to 2017 with individual investors,
Mr. Kanitz said. The stakes originally were valued at $12.7 million. Other Spectra secondary deals involved funds managed by Brazilian private-equity firm Angra Partners and investment
bank Brasil Plural, he added.

Hamilton Lane also bought stakes in the same Vinci fund, according to documents filed with the Securities and Exchange Commission of Brazil, known as CVM.

Spectra has purchased private-equity stakes from various types of investors, including wealthy individuals, family offices, pension funds and development finance institutions, Mr. Kanitz said.

The firm expects secondary investments will represent about 36% of the portfolio of its current fund of funds, which closed on $96.6 million in 2017 and is about 84% invested, he added.

A large portion of Spectra’s secondary deal flow going forward likely will come from fund restructurings, particularly for funds raised in the years around 2006, when Brazil’s private-
equity industry was beginning to gain traction and fundraising was robust, Mr. Kanitz said.

“Those first funds are coming to the end of their lives,” he said. “That’s why restructurings are occurring now.”

Brazil’s firms raised a total of about $7.69 billion in private capital across 31 funds from 2006 to 2008, according to data from the Emerging Markets Private Equity Association.
New rules in Brazil requiring private-equity managers to value their funds’ assets based on fair market value, instead of at cost, also is helping to lift the secondary market in the country, industry executives said. Enacted by CVM in 2016, the so-called instruction 579 has facilitated transactions by giving investors more clarity about the value of their stakes, the executives said.

“One of the questions investors ask is always, ‘Am I selling at the right time and for the right
price?’ said Nicolas Ballian, a director at Duff & Phelps LLC who leads the corporate-advisory
firm’s valuation practice in Brazil. “The valuation [at fair market value] helps to bring comfort to these investors.”

Despite the regulatory improvements, the industry needs to do more to educate market
participants about secondary private-equity deals in Brazil, Mr. Fernandez said. The idea of
selling stakes at a discount still is met with prejudice by some, and investment teams of public pension funds often find it difficult to approve secondary transactions, he said. Some local investors, he added, also have unrealistic expectations of what they can sell in the secondary market.

“There’s no discount that can make up for a bad investment decision,” he said.

Source: Wall Street Journal


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