UP TO THE END OF LAST YEAR, FERNANDO BORGES FROM GOIS had no more than a supporting role in the Brazilian

business scenario. Head of the local operation of the American investment fund Carlyle, Borges commanded a team of seven people and shared with a bank the 12th floor of a building at Faria Lima Avenue, the financial heart of So Paulo. The most important transaction in his rsum was the successful purchase of a slice of the airliner Gol for 26 million dollars, in 2003. Eleven months and three checks later, Borges' situation is dramatically different. In January, he bought the control of the biggest travel agency in the country, CVC. Six months later, he purchased the health plan manager Qualicorp. Next, he bought the socks and lingerie manufacturer Scalina, owner of the TriFil brand. It is calculated that Borges and Carlyle invested about 2.5 billion reais in the three purchases. It seems too much for just one year, but Borges apparently thinks it is little.

EXAME found out that he tried to purchase the information company GRV Solutions for about 2 billion reais - but ended up losing the dispute to Cetip in the beginning of December. Despite the recent defeat, one can say that Borges has categorically left behind the condition of supporting role. From his half-floor at Faria Lima, he currently controls companies that together rake in 4.5 billion reais and employ 12,000 employees. This is more than traditional companies like Alpargatas, Klabin and Lojas Renner. Funds like Carlyle, specialized in the purchase and sale of entire companies or part of them, have once been called capitalists in pure state". Its objective on controlling a company is one, and only one: to increase its value. Other variables are not important. There are no emotions at play, like in family-based companies. Or varied pressures from stockholders with conflicting interests, as in the case of public companies. Or the use of sectarian and political conveniences, as in state-owned companies. The sudden wave of purchases led by Fernando Borges is one of the signs that the power of these personages has never been so great in Brazil. Like him, the market made up of private equity funds (as they are known) has moved from supporting role to the lead role of our economy. According to a study recently concluded by Fundao Getulio Vargas, these funds currently have 17.8 billion dollars available for the purchase of Brazilian companies a historical record. It is enough money to give the economy a capitalism injection. During the first nine months of the year, a total of 3.8 million dollars was invested in the country, and the last quarter was able to keep up the pace. In December, a fund group led by GIC, from Singapore, bought for 1.8 billion dollars an 18-% share in the investment bank BTG Pactual. EXAME found out that two more relevant transactions were about to be concluded. The Advent fund was concluding the purchase of half the capital of the Paranagu Container Terminal, in Paran, for 750 million reais. And the Argentinean Southern Cross was negotiating the last details to purchase the cosmetics division of Grupo Bertin, owner of the OX brand, for 500 million reais. (Sought out by EXAME, Bertin denied the information.) What is most impressive, however, is the certainty that this growth curve is far from its peak. Private equity funds depend on the appetite of foreign investors to make purchases. Its managers raise funds with big global institutions pension funds, for example, and use the money to buy companies. The promise, which is not always met, is to give large returns when returning this money to investors.

In exchange, the funds managers obtain a management fee of 2% per annum and about 20% of the profit obtained from the sale of companies. If everything works out, therefore, the investor ends up having a good return, and the manager, pocketing one-fifth of the profit, becomes rich. For the wheel to turn, however, there must be foreigners willing to invest in Brazil for a term that may reach up to ten years. This is exactly what is happening

today. Brazil is one of the three most attractive markets in the world for investors like us, Urs Wietlisbach, from Switzerland and founder of the Partners Group, one of the biggest private equity investors in the world, told EXAME. Together with his partners, Wietlisbach administers 26 billion dollars and invests 2 to 3 billion dollars every year in funds.

"In addition to investing directly in companies in Latin America, we are in six funds dedicated to the region, and we want to raise this number to 15 by the end of 2011." The Partners Group is opening an office in So Paulo to follow up on the performance of its investments closely. The euphoria of investors like Wietlisbach is causing commotion in Brazil. Never before has so much money been raised as nowadays. A year ago, Brazilian managers wasted plenty of time selling the economic virtues of the country when they the donation bag in front of international investors. Today, the panorama is different. The person responsible for Advent in Brazil, Patrice Etlin, accompanied this change in real time when he raised its fund from 1.65 billion dollars, between 2008 and the beginning of 2010. More than 500 meetings were held in 14 countries. Up to January 2010, he had obtained only 800 million dollars, still far from the initial goal of 1.3 billion. This was when everything started to change: the perception that Brazil had survived the crisis relatively well awakened the appetite of the same investors who had ignored Etlin months before. From January to March, Advent had demand to raise another sum in the amount of 2.2 billion dollars. Today, no one needs to sell Brazil any longer, says Etlin, who has 2 billion dollars at hand to invest. "Never before has there been so much interest in the country." According to a survey conducted at EXAMEs request by the financial information company Preqin,

21 funds are being raised by managers interested in investing in Brazil. The amount they intend to raise is eye-widening: 9.2 billion dollars. Gvea, founded by Armnio Fraga and his cousin Luiz, intends to conclude in the first quarter of 2011 the raising of the biggest private equity fund dedicated exclusively to Brazil, which will have 1.5 to 2 billion dollars.

"TODAY, NO ONE NEEDS TO SELL TO BRAZIL ANY LONGER, SAYS ETLIN, FROM ADVENT. "NEVER BEFORE HAS THERE BEEN SO MUCH FOREIGN INTEREST IN THE COUNTRY"

Until recently, the Brazilian private equity market was made up of a little world dominated by funds like GP, Advent, Gvea and Ptria. The professionals were the same of old and the rivalries as well - one of the biggest specialties of Brazilian private equity managers is to badmouth the purchases of others. The current torrent of foreign money is causing a multiplication of competitors never before seen in the country "today, private equity manager is the profession en vogue in the national financial market. This multiplication is divided into two aspects. The first is made up of national companies that are creating their first funds, in some cases without their managers having any experience in the venerable art of making money by buying and selling companies. BTG Pactual, of Andr Esteves, is raising 1 billion dollars. So is Vinci Partners, led by Gilberto Sayo, former controller of Pactual. Ita intends to raise half a billion dollars for its new manager, Kinea. Rodolfo Landim, former president of OGX, of Eike Batista, has plans to raise 2 billion reais to invest in oil and gas companies. And so it goes. The second aspect is made up of the large foreign funds, which today, past

the years of promises, have decided to disembark in Brazil. Today, these funds have more than half a trillion dollars to invest and the whole world to choose. With the sudden economic braking of the rich countries, the developing countries emerge as the obvious option Brazil, as the recent purchases of Carlyle show, has entered this course for good. In September, Blackstone, biggest private equity fund in the world, bought a 40-% share in Ptria, for 200 million dollars. "As of now, our life changes, since we can do much bigger business using resources from global funds from Blackstone", says Alexandre Saigh, one of Ptrias founders. EXAME found out that the new partners have already made a bid of 500 million dollars for a share in the capital of Odebrecht Oil & Gas, but they lost the auction to the sovereign fund Temasek, from Singapore. In October, the American bank J.P. Morgan bought 55% of Gvea, for 270 million dollars. Other funds, like General Atlantic, Actis and Warburg Pincus, have decided to open offices in the country and hire local teams. "We want to buy medium and large-sized companies and invest at least 100 million dollars in each business", says Alain Belda, responsible for Warburg Pincus office in Brazil. At the age of 67 years and after a career spanning 16 years in the American mining company Alcoa, Belda is one of the new faces of the Brazilian market. He hopes to invest 1.5 billion reais in five years. KKR, founded by American magnate Henry Kravis, is the only one out of the global megafunds that did not make its attack in Brazil. Sought out by EXAME, KKR informed that it is "seeking opportunities and is drawing its strategy for the country.

Historically, sectors like that of food and beverages, real estate and financial services are the ones that attracted the most private equity investments. The new lot, however, has a much more encompassing range of targets - health, education, power and consumption are among those most cited by managers. "We are operating at the limit, says Borges, from Carlyle. "Our team is always evaluating between ten and 12 purchases, not more than this." In a typical month, a large private equity fund receives about 20 business

proposals, usually brought by banks hired by companies seeking a partner or a buyer. Advent has a non-remunerated team of 250 people who work as pointers in the hunt for companies. They are executives or former bankers who can use their relationship networks to find good targets. In case Advent buys a company brought by one of the pointers, they can make up to 1% of the total amount of the purchase. "They sniff out the business and make the bridge to the companies", says Etlin. In an economy thirsty for capital like the Brazilian, the arrival of foreign funds is highly welcome. For medium-sized companies especially those that are not part of the select club of the BNDES (Brazilian Development Bank), access to resources is still scarce in Brazil. Borrowing is expensive. To open capital is difficult. Who will the one in need of 200 million reais call? Private equity gives capital to those who lack it", says Luiz Fraga, from Gvea, which has relevant investments in 12 companies. The record shows that being associated with a fund can be the key for a company to raise its level and distance itself from competitors. There are several examples. Diagnsticos da Amrica, of Ptria, in the laboratory market, and BR Malls, of GP, in the shopping mall sector, are two of them. In both cases, the companies no longer have the funds as partners. The entrepreneur Carlos Wizard Martins, founder of the Mlti group, from the English course network Wizard, intends to follow a similar path. In November, he sold a share of about 15% to Kinea, of Ita, for 200 million reais. "We were sought out by ten funds, he says. The Mlti group made five purchases in 2010. The biggest one for 100 million reais. Now, with the new partner, Martins states that he will dream bigger - with purchases of up to 700 million reais. "We can boost our ambition, he says

BEING ASSOCIATED WITH A PRIVATE EQUITY FUND CAN BE THE KEY FOR A COMPANY TO RAISE ITS LEVEL AND DISTANCE ITSELF FROM COMPETITORS
Access to capital, however, is only part of the story. In the obsession to increase the value of companies purchased, private equity funds use management improvement as one of the main points of attack in the words of a manager, "to transform familybased companies into excellent companies" is the key to catapult returns. A recent case of a transformation of this type occurred in CVC, bought by Carlyle in January. A remuneration package linked to the performance of stocks in a possible opening of capital helped attract a group of executives led by Luiz Fogaa, the new financial vicepresident, formerly from Coca-Cola. Cutback in costs and efficiency joined the order of the day: the profit margins went from 5% to 9%. The company sought out new sources of growth and started opening four stores per week. In January, there were 400. In December, there were 580. CVC should open capital in the second half of 2011.

"THEY ARE PAYING HIGH BECAUSE THEY MUST SHOW THAT THEY ARE MAKING BIG DEALS IN BRAZIL, SAYS ONE MANAGER. AND THIS IS THE WRONG REASON"
For the veterans of the private equity market - that is, those with over a decade of experience in the field, the current moment has dangerous similarities with the euphoria of the 90s. At the time, big foreign funds were also the protagonists of a wave of investments in local companies. But Brazil set them a trap. The economy did not grow, the fixed exchange skyrocketed, the stock exchange did not prove to be a feasible way out for investments. In short, it was a fiasco. Investments in soccer clubs were the height of the madness in those times. The American Hicks Muse became a partner of the Corinthians soccer club in the end of the 90s,

invested 60 million dollars and promised to build a new stadium for 45,000 fans. The team even went well, but the investments were disastrous and the partnership ended in 2003 (the stadium, as we all know, never left the drawing board). Another cause for trauma in the 90s was the relationship of banker Daniel Dantas with Brazilian pension funds. Dantas Opportunity was a private equity fund manager that united money from pension funds and from Citigroup. Both sides ended up disagreeing; the fight to remove Dantas from the management entered the history books of national capitalism. In view of this combination, the private equity market experienced what was agreed to be called "nuclear winter. Between 2001 and 2005, the level of business was minimal. Traumatized, national and foreign investors did not want to put their money in the hands of funds set up in Brazil. The faux pas of the 90s reminds of the old maxim of the financial market - it is in the best of times that the worst deals are made: with sky-high prices, any economic jolt can render the obtainment of decent returns difficult. There are more recent examples. In 2007, amidst the euphoria that preceded the burst of the world asset bubble, GP loaned money to make the biggest purchase in its history - the purchase of the oil company San Antonio, for 1 billion dollars. Since then, the market has turned, the price of oil has dropped by half and GP was forced to negotiate the debt. Will it be different this time around? Will the current wave of purchases become a wave of profits in the next decade? These, of course, are the billion-dollar questions.

It is at least curious to note that, amidst so many purchases and with so much money being raised to buy Brazilian companies, the three most traditional funds in the country have adopted a clearly careful stance in 2010. Advent and GP did not make any investment this year. Ptria spent only 150 million dollars in four businesses. We have seen this film a couple of times, says Saigh, from Ptria. With prices at the current level, we must really be cautious." There is a kind of consensus that the time of bargains has been left behind. Two recent businesses did not proceed because the funds deemed the price charged too high. The event organizer, Time for Fun, was unable to obtain proposals at the desired level and will move on to opening its capital. The same occurred with the health plan operator, Intermdica, probed by several funds in the second half of the year. The price asked 1.4 billion reais - scared off potential buyers and the business cooled off.

Private equity managers use a system of multiples to calculate a companys worth. The calculation base is the Ebitda, number that measures the cash generation. The lower the multiple, the cheaper the company. Five years ago, it was common to find companies worth four times their cash generation. That era is no more. The two biggest purchases of the year are exactly the ones that attract the most skepticism from the competition. It is estimated that Carlyle has evaluated Qualicorp for over ten times its cash generation. And the American Apax, which does not yet have an office in Brazil, bought control the technology service company Tivit for almost ten times its Ebitda, evaluating the company at 1 billion dollars. These guys are paying high just to show that they are making big deals in Brazil", says one competitive manager". And this is the wrong reason."

The purchases of Qualicorp and Tivit, be they expensive or cheap, show that the market is becoming sophisticated. Both companies had among their main private equity fund stockholders: Ptria and Votorantim Novos Negcios, in the case of Tivit, and General Atlantic, in the case of Qualicorp. The fact that they sold the companies to competitors shows that there are in the Brazilian market funds with distinct objectives and different levels of hunger for risk. The local market, however, is still far from the complexity seen in other countries. Although it has grown at a fast pace, the number of private equity funds in operation in Brazil is very small compared, for instance, to the purchasing fury we have seen for years in China and India. As shown in the table page 29, the penetration of private equity funds in both countries is much greater than in Brazil. It is estimated that over 3,000 funds are being operated in China; here, the number does not reach 200. For those who are optimistic, data like this help show the growth potential of the local market. "Brazil has many medium-sized family-based companies. The market is still very fragmented", says Urs Wietlisbach, from Partners Group. For those who are pessimistic, foreign funds will quit Brazil as soon as things improve in the rich countries or the moment the local economy hiccups. At 47 years of age and with 16 years of experience in the sector, Etlin, from Advent, has a piece of advice for newcomers. "This is a profession where we learn by doing", he says. And, in the end, you will be covered with scars."