PRIVATE EQUITY AND VENTURE CAPITAL INVESTMENTS IN

BRAZILIAN COMPANIES IN THE LAST 30 YEARS

Andrea Maria Accioly Fonseca Minardi (Insper)

Rafael Bassani (Spectra)
Ricardo Kanitz (Spectra)
Jos Candido Moreira Neto (Insper)
Karim Mohamed Pechlyie (Insper)

This study presents an overview of Brazilian Private Equity and Venture Capital (PE and
VC) investments in portfolio companies between 1982 and 2014. Main source of
information is Private Placement Memoranda. According to our data, the majority of
capital was invested in PE, and most of the deals were in late stage companies (PE type).
We observe that deal size has a cyclical behavior for PE and VC, and that the cycle reflects
the dynamic of the economic environment and regulatory changes. PE deals have a mean
MoM of 3.4. Although 15% of the deals were total losses (or close to total losses), 18%
of the deals had extraordinary performance (MoM greater than 5 times invested capital).
VC deals have a mean MoM of 1.5, less than half of PEs MoM. Total losses correspond
to 39% of the deals, what is usual in the international industry, but only 5% of the deals
were high performers. VC industry was basically sponsored by government resources
before 2010, and our sample reflects this period. In an underdeveloped VC ecosystem, it
is difficult to fund new rounds for early stage companies growth, and therefore to create
a high number of outperformers. We expect to have higher returns for VC in future
analysis, since there has been significant evolution in the Brazilian early stage ecosystem
in the last three or four years.

Key words: private equity, venture capital, performance, emerging market, Brazil

I. Introduction

A healthy Private Equity and Venture Capital industry is important for the
economic development of a country. Articles as Samila and Sorenson (2009) and
Hellman and Puri (2000) find that VC investments in the United States increased
employment and the number of new companies, and also fostered innovation. VC funds
finance early stage and growing companies. PE funds finance the growth of late stage
companies, as well as restructuring opportunities for mature companies. As
entrepreneurial capital ecosystem becomes more developed, investment return becomes
higher, and the number of investors interested in investing in the PE and VC increases.
A higher flow of entrepreneurial capital attracts new entrepreneurs, that will create more
successful startups, that will turn into future profitable late stage companies, creating a
virtuous innovation cycle.

Electronic copy available at: http://ssrn.com/abstract=2600355

 PE and VC funds are active investors that usually buy equity stakes in private
companies (see Lerner et al. (2012) and Metrick (2007)). They examine exhaustively
many investment alternatives before selecting one. The shareholders agreement has
many affirmative and negative clauses to protect their position. PE and VC funds have
seats on boards, monitor actively portfolio companies, and usually appoint key
executives, as CFO and marketing director. They contribute also with networking and
mentoring, increasing the probability of a successful investment.
Although some few pioneer VC funds existed in the 80s, Brazilian PE industry
development started in 1994, with the adoption of Real Plan (see Minardi (2008) and
GVCepe (2010)). Since then, many global and local PE firms raised funds either focused
exclusively in Brazil, or that included Brazil in their geographic target region. Reputation
was created in late stage (see Minardi et al. (2014)). VC industry development started
later. According to Global Entrepreneurship Lab (2013), the Silicon Valley Model started
only more recently, in the last 2 or 3 years.
Brazil is an emerging market that attracted significant attention of international
investors in the last 10 years. As the industry is quite recent in the country, there are few
information about its performance. This paper is based on a unique dataset that contains
performance at deal level. It contributes with literature by analyzing how performance
has evolved both in PE and VC industry.

II. Sample information

Our sample contains data of 556 deals in Brazilian companies, representing USD
22.1 billion of investments realized between 1982 and 2014. It does not include
corporate VC and PE deals.
Most of the data is in USD, however some cashflows were originally in BRL.
We converted the BRL data to USD using the dollar PTAX (Brazilian Central Bank
dollar offer exchange rate) in the entry day. We did the same procedure to convert cash
inflows in BRL for USD, using the PTAX in the exit day. We segmented the sample in
PE, VC and others. The last category groups mezzanine, infrastructure, agribusiness
and distress deals. We classify a deal as VC if it is in a company that has not reached
breakeven yet.
Figure 1 contains the number of deals grouped according to the year the fund
invests in the company. We observe that before 1993 there are only VC deals. There
was a peak in PE investment in 2007 and 2010.
When we analyze only fully liquidated deals, the sample is reduced to 244
observations: 127 PEs and 116 VCs, corresponding to USD 5.2 billion of investments
that produced USD 11.7 billion of divestments. Reported performance measurement:
MoM and IRR are gross of fees, that is, administrative and performance fees are not
deducted.
Our analysis is based on the Spectra-Insper database, a comprehensive set of
information about private equity organizations, funds, deals and people in Latin
America. This private dataset has been built through a partnership between Spectra
Investments, a Brazilian investor in PE and VC funds and Insper Institute of Education
and Research, a leading Brazilian Business and Economics School. In order to protect

Electronic copy available at: http://ssrn.com/abstract=2600355

firms, funds and deals identities, Spectra Investments sanitizes the data before filling it
in the database.

Figure 1. Number of deals according to strategy (PE, VC and others) and the year of
investment
55

50

45

40

35

30
PE
VC
25
others

20

15

10

0
1982 1983 1984 1985 1987 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

III. PE x VC Investment Size

Although there were a significant number of VC transactions in our sample: 34%

of total, they correspond only to a small fraction of the total resources: 2% of total (see
Table 1). This is explained by the difference in investment size per deal. The average
size of PE investment per deal is USD60.2 million, almost 26 times the average size of
VC investment per deal (USD2.3 million).

Table 1. Proportion of VC and PE in number of deals and invested capital

Strategy n. of Volume
deals invested
PE 63,5% 96,1%
VC 34,4% 2,0%
others 2,2% 1,9%

(*) Others include mezzanine, infrastructure, agribusiness and distress deals

IV. Control x Minority Investments

The proportion of PE deals with control is almost the same as deals with minority
stake (see Table 2). This reflects the fact that both strategies make sense for the industry.
Control allows more decision power and to run the company, while minority stake allows

Electronic copy available at: http://ssrn.com/abstract=2600355

partnership with entrepreneurs of companies with high growth opportunities, who usually
want to run the business themselves, with the help of the fund.

Almost all the VC deals correspond to funds buying a minority stake (see Table
2). The role of an entrepreneur is crucial for companies in earlier stages, and for keeping
him motivated and aligned, is important that he has control.

Table 2. Proportion of deals with control and minority stake

PE VC
% control 45,5% 8,2%
% minority 54,5% 91,8%

V. Deal size is cyclical

Average size of deal is very cyclical (see Figure 2), as it is the case in developed
countries (see Gompers and Lerner (2006), Chapter 3). The cyclicality reflects the
dynamic of the economic and institutional environment. There are some differences in
the Brazilian dynamics for PE and VC.

Figure 2. Evolution of Deal Size for PE and VC

Real Plan,
foreign investment

Economic
160,000 Private Equity stability, industry 14,000
Venture Capital matures
140,000 12,000

120,000 Economic instability,

International crises, 10,000
high inflation,
BRL devaluation,
100,000 absence of capital market
internet buble
8,000
burst
80,000
Average PE deal size: US$ 60M 6,000
60,000

4,000
40,000 Average VC deal size: US$ 2,2M

20,000 2,000

- -

Figure 3 contains the mean deal size for PE and VC in different time periods.

For PE we have that:

- 1982-1993: period characterized by three digit inflation, many Economic Plans and
a very unstable environment for doing business. Foreign investors avoided Brazil,
and it was very hard to raise PE funds focused in the country. This reflects in deals
of small size. There is only one PE deal in our sample in this period.
- 1994-1998 is characterized by the adoption of the Real Plan, which brought economic
stabilization to the country. The period is also characterized by the privatization of
many public companies, which attracted the attention of international investors. Some
 foreign PE organizations opened Brazilian offices, as some local organizations raised
their first Private Equity Funds. The average deal size in this period increased to USD
87 million. But, at that time, there was a lack of fund managers with PE experience
or specialized intermediaries. Entrepreneurs and family companies did not
understand the active role of private equity fund either.
- 1999-2005: the lack of experience of the PE industry combined with a devaluation of
the Brazilian currency were responsible for a bad performance of many funds raised
in the previous period. Many international organizations closed their Brazilian
offices. It was very difficult to raise funds focused in Brazil. This explains the drop
in the average size per ticket to USD 16 million.
- 2006-2014: many important regulatory changes that started in the previous period
improved the Brazilian institutional environment. In 2000, BOVESPA created the
differentiated Stock Listing Segments according to Corporate Governance best
practices; in 2003 CVM (The Brazilian Security Exchange Commission) launched the
391 instruction, creating FIP, a vehicle that allowed Brazilian public pension funds to
invest in PE; in 2004, Brazil launched the New Bankruptcy Law and since 2005 the
Supreme Court recognizes conflict resolutions through Arbitration Chambers. Brazil
showed good economic indicators and that allowed the country to benefit from
international liquidity. The stock market boomed, allowing many funds to have
profitable exits. This attracted international attention to the Brazilian PE industry,
and some PE organizations were able to raise funds over USD1 billion. The larger
average deal size (USD70 million) reflects this movement, since these organizations
moved to invest in larger companies.

For Venture Capital we observe that:

- 1982-1993: Some pioneer VC organizations raised money mainly from Brazilian

government for investing in small deals. As explained, the very unstable economic
and institutional environment shied away international investors. Ticket size was less
than USD 0.5 million.
- 1994-2000: VC activity accelerated because of the internet bubble and Economic
stability brought by the Real Plan. CVM (The Brazilian Security Exchange
Commission) launched in 1994 the 209 instruction, creating FMIEE, a vehicle that
allowed Brazilian public pension funds to invest in VC. Ticket size increased to USD
7.5 million.
- 2001-2005: VC activity was deeply hurt by the global internet bubble burst, and it
was not different in Brazil. FINEP (that is associated to the Ministry of Technology)
launched INOVAR program with the mission of developing the VC ecosystem
(Leamon and Lerner (2014)). Many organizations (including PE organizations)
raised funds with government players (BNDES, FINEP, public pension funds)
through INOVAR. VC deal size dropped to USD0.8 million.
- 2006-2014: Learning experience was acquired from VC funds raised in the previous
period. Some funds managers with track record emerged, as well as entrepreneurs.
Some international VC organizations also spotted Brazil and opened Brazilian offices
 or co-invested with local funds. Angel activity was more active, as well as the
emergence of accelerators. Some local organizations were able to raise money with
foreign investors and family offices, increasing the private resources share in the
industry. This reflects an increase in deal size to USD2 million.

Figure 3. Average deal size by different sub periods

Private Equity Venture Capital

Average deal size: US$ 60M

Average deal size US$ 2,2M

VI. Sector Concentration

We group the deals in sectors according to the IBGE classification. In the long
term, we do not identify concentration in any specific sector. Table 3 illustrates the
sectors that received higher volume of investments in USD, and the sectors with higher
representativeness in Brazilian GDP in 2013 (according to IBGE).
Industry diversification reflects the dynamism of the Brazilian industry. Sectors
that received 49% of PE and VC investments: retail, manufacturing, electric power and
water, telecommunication and real estate, represent 42% of Brazilian GDP in 2013,
according to IBGE.
Table 3. Percentage of PE and VC investment volume by industrial sector and
representation of industrial sectors in Brazilian GDP

Investments Brazilian GDP

Retail 12% Real estate, rental and leasing 14%
Manufacturing 11% Manufacturing 13%
Electric power and water 10% Retail 13%
Telecommunication 9% Agribusiness 10%
Real estate, rental and leasing 8% Financial Services 7%
Financial Services 6% Educational Services 6%
Transport and warehouse 6% Sade 6%
Oil and Gas 6% Transport and warehouse 5%
Educational Services 4% Mining 4%
Technical and professional services 4% Technical and professional services 3%
Agribusiness 4% Electric power and water 2%
Others 20% Others 17%
VII. Investment Returns Multiple of Money (MoM)

MoM means Multiple of Money, that is, the cash returned for 1,00 monetary unit
of investment. PE deals have returned a mean MoM of 3.4x for USD 1,00 of investment,
more than the double of VC mean MoM of 1.5x.
In Private Equity and in Venture Capital a significant share of the deals incurred
in losses or returned only the invested capital without profit (see Figure 4). The majority
of deals for both industries have MoM concentrated between 1 and 2.5 times the invested
capital. But deals with outstanding performance (MoM equal or higher than 5x)
corresponds to 18% of total PE deals, while they represent only to 5% of the VC deals.
The mean Mom of outperformers for PE is 11, and the maximum is 34. VC had fewer
outperformers, also with mean MoM of 11, and a maximum of 19.

Figure 4. Frequency Distribution of PE and VC MoM

Private Equity Venture Capital

39%

30%

26%
24%

15%

10% 10%
09% 09%
07% 08%

03% 03%
02% 02%
01%

MoM=0 0<MoM<0.5 0.5<MoM<1 1<MoM<2.5 2.5<MoM<5 5<MoM<7.5 7.5<MoM<10 MoM>10

Outperformers are crucial to generate high performance for both, PE and VC

industry. Figure 5 illustrates this fact. Note that the 18% of the PE outperformers explain
57% of mean MoM. As the share of outperformers is significant, the average
performance of the PE industry is high: 3.4 times invested capital. Meanwhile there were
very few outperformers in VC, only 5%. These few outliers explain 43% of the mean
MoM, resulting in a mediocre performance for VC: 1.5 times invested capital.
Figure 5. Decomposition of the mean MoM according to performance range

3,4x
MoM>10
7.5<MoM<10
37%
5<MoM<7.5
7% 2.5<MoM<5
1,5x
13% 1<MoM<2.5
26% 0.5<MoM<1
25% 7%
10% 0<MoM<0.5
22%
16% MoM=0
29%
2% 6%
Private Equity Venture Capital

VIII. Investment Return Internal Rate of Return (IRR)

We analyzed the average gross IRR an investor would have had if he or she
invested in PE and VC throughout the period.
For doing so we proposed two different methods to estimate IRR: Value Weighted
(VW IRR) and Equal Weighted (EW IRR).
Value Weighted IRR (VW IRR) represents the average return an investor would have
if he replicated funds portfolios. It corresponds to the performance an investor would
have if he or she invested an amount proportional to the funds investments in all deals in
date 0: larger deals have higher weights, while smaller deals have lower weights. We
consider that the investor exits each deal after the holding period, in date 0+t, receiving
the proportion of the cash inflow the fund receives for selling the deal. Write-offs do
have cash outflow at date 0, but no cash inflow. The VW simplifies the problem,
considering that all cash outflows happen at date zero, and all cash inflows are received
in date 0+t. Cash inflows are estimated as invested cash flows multiplied by MoM.
Although the methodology weights deals according to value invested by the fund, it
underestimates IRR, because it does not consider the appropriate time intermediate cash
inflows are received.
Equal Weighted corresponds to the return an investor would have had if he invested
in all deals an equal amount of money at date 0, independently of the deal size. It
represents the average of the individual deals returns. We consider that the investor exits
each deal after the holding period in date 0+t, receiving the MoM. All cash outflows are
disbursed at date 0, and all cash inflows are received at date 0+t. MoM value includes
value of intermediate cash flows, reducing the underestimation of IRR, although it does
not appropriate the flows in the correct time. This measure attributes the same weight for
all the deals, and does not consider the size effect.
Figure 6 contains the results of our analysis. PE investments have a gross IRR in
USD between 19% and 34%, while VC investments have a lower return 12% to 11%.
Even in the presence of significant losses, the PE and VC funds produced positive
returns.
 PE deals had on average a very high gross return: 34%. This was much higher
than the average yearly return in USD of IBOVESPA and of CDI (Certificate of Interbank
Deposit): 14.8% and 16%, compensating investors for the risk of the asset class.

Figure 6: Average Performance of PE and VC industry

VC deals however had a more modest gross return of 11%, lower than IBOVESPA
and CDI.
VC ecosystem was not mature enough to allow for multiple rounds of financing,
forcing the funds to sell their stakes earlier. Therefore, the VC exits in our sample reflect
that in most cases VC could not benefit from the early stage growth opportunity,
generating a small number of outperformers. Before 2010, VC industry has been very
dependent to government funds.
We expect that with the increase in the number of VC funds investing in Brazil,
and the evolution of the VC industry in the Silicon Valley model, the proportion of VC
outperformers will increase, improving the profitability of the industry in future studies.

IX. VC and PE MoM and holding period in different periods

We estimate VC average MoM in three sub periods according to the year the fund
invests in the deal: 1982-1993, 1994-2000 and 2001-2005 (see Figure 7). We observe
that the maximum average MoM in all three subperiods is 1.6, confirming the previous
analysis that VC had more modest performance so far. We also observe that the average
holding period is around 6 years in all of the subperiods.
We do not report average MoM and holding period in 2006-2013, because most
VC deals are still in the portfolio. VC funds have recognized only the write offs. This is
an indication that some deals in funds portfolios had follow on rounds. We expect that
the average VC holding period will increase, as well as the average VC MoM, since funds
will be able to benefit from the growth in companies value.
Figure 7. Evolution of VC average MoM and average holding period

We analyze PE average MoM in 1982-1993, 1994-1999, 2000-2005, 2006-2013.

Figure 8 shows the evolution of MoM and holding period.
The weak capital market activity from 1982 until 2003 reflects in longer holding
periods (10 and 8.2 years) for deals originated between 1982-1993 and 1994-1999. These
deals also have low average MoM, and the causes are: lack of experience of many fund
managers at that time, Brazilian real currency devaluation and also liquidity pressure, that
forces some funds to accept lower prices at strategic or secondary sales.
The heat in the IPO market that started in 2004, created good exit opportunities
and also increased competition in M&A market. This reflects in the 5 average year
holding period for deals originated in 1999-2005, and a higher MoM of 3.4. The 3.4
average MoM persists in deals originated in 2006-2013, but the average holding period
decreases to 2.8 years, indicating that funds took advantage of the IPO window to sell
winners.
Figure 9 compares the evolution of average IRR with the return in dollars of
IBOVESPA and CDI (Brazilian Certificate of Interbank Deposit rate, a proxy for the risk
free rate in the country) in the same sub periods. Higher IRR is a product of higher MoM
and shorter holding period. We can observe that PE deals originated in 1982-1993 and
1994-1999 performed poorly, and worse than IBOVESPA and CDI. Deals originated in
1999-2005 have on average a very good IRR (33%), higher than IBOVESPA and CDI in
the same period. Deals originated in 2006-2013 had exceptionally high IRR (51% to
63%) because of the shorter holding period. But as 82% of the deals originated between
2006-2013 are still in funds portfolio and the IPO market is not as warm as it was before,
we expect a decrease in the IRR and a longer holding period.
Figure 8. Evolution of PE average MoM and average holding period

Figure 9. Comparison of PE IRR with IBOVESPA and CDI (dollar return) in

different sub periods

Concluding remarks

PE and VC returns are driven by few deals with exceptional performance. These few
deals compensate losses. Although the VC total loss rate is higher (39%), PE total loss
rate is not insignificant (15%).
PE deals had a high average return in USD (34%) and a MoM of 3.4 times money
invested. This was higher than the yearly return of IBOVESPA and of CDI in USD,
compensating the investors for the risk. Although the high performance of PE deals are
partially explained by the IPO window and good economic environment of Brazil
between 2004 and 2012, it is also explained by the development of the industry: the
appearance of fund managers with good track records and experience, the development
of specialized intermediaries. PE IRR was especially high for deals originated in the last
8 years: 51% to 63%. However, this is due to the fact that funds had the benefit of a
strong IPO window and kept the deals for a short period of time in the portfolio. As 82%
of the deals originated in this period are still in funds portfolios, and the IPO market is
bearish, we expect that IRR will drop.
 VC deals had an average return of 11% in USD and a MoM of 1.5 times money
invested. It was below the IBOVESPA and CDI yearly return in USD in the period. VC
industry was not as mature as PE industry was, and the deals in our sample are from funds
mainly sponsored by the government. Because the ecosystem had few funds, they were
not able to raise more resources for follow-on rounds, and were forced to sell earlier their
portfolio companies. On average they did not lose money, but they did not compensate
for the risk. Government sponsorship and the pioneer funds that suffered from a very
incomplete ecosystem were very important though to promote a learning curve in the
industry. This led to more experienced managers and entrepreneurs and to attract
international interest for Brazil.
As the share of private funding increased recently and more VC funds (local and
international) in the Silicon Valley model appear, we expect that some deals that are still
on funds portfolios will have more rounds and better performance. Although we are
aware that there are still gaps in the VC ecosystem, the number of players has increased
since 2010, and we expect that future researches capture higher performance in the
industry. Our analysis does not capture the effect on performance of more follow on
rounds and longer holding periods. The vast majority of VC deals originated after 2010
are still in funds portfolios.

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