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GS to Resume Private Equity in Brazil

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The Goldman Sachs Group Inc. (GS - Analyst Report) plans to re-initiate its private-equity (PE) investments in Brazil, Bloomberg reported on Monday. The firm’s plans are based on the expectation of about 35% return from Brazil’s private-equity market. Specifically, Goldman plans to target infrastructure, commodities and telecommunications sectors for its investment.

Despite the uncertainty related to taxes and exchange rates, transparency in regulations and improving macro environment in Brazil will help Goldman achieve high returns.

With the ambition of expanding in the country, Goldman almost doubled its workforce over the past two years, taking the total count to 300. In late 2009, it became a full-service bank in Brazil.

Previously, Goldman’s venture in the Brazil PE market ended in 2007, when the investment of $196 million (400 million reals) of its own capital in Santelisa Vale SA, a sugar-cane processor led to streamlining of debt. Moreover, in the same year, Goldman invested in BRA Transportes Aereos Ltda., an airline company, which went bankrupt later on.

The Brazilian government has shown its support by coming forward with financial assistance. BNDES, Brazil’s development bank, aims to finance about 80% of the nation’s 1 trillion reals for infrastructural needs during the next five years. During this 5-year tenure, the country targets to host the 2014 World Cup and 2016 Olympics. However, it is expected that PE investors would fund only 10% to 20% of the total amount.

In spite of a drop in new Brazilian equity sales by 53% to $5.16 billion till August and M&A transactions declining 41% to $43.3 billion, Goldman aims to sustain its workforce. The bank aims to balance the decline based on its diverse portfolio of businesses.

Among other firms, Advent International acquired a 50% stake in Terminal de Conteineres de Paranagua SA in January 2011 in Brazil and aims to invest $3 billion in the country. Further, The Blackstone Group LP (BX - Analyst Report) purchased a 40% stake in Patria Investimentos in 2010, a Brazilian private-equity and asset-management company.

Moreover, Highbridge Capital Management, a unit of JPMorgan Chase & Co. (JPM - Analyst Report) acquired Gavea Investimentos Ltda’s private-equity business in October 2010.

Based on well-developed agricultural, mining, manufacturing, and service sectors, Brazil's economy overshadows other South American countries. Also, it is gradually increasing its foothold in world markets. After reporting strong growth in 2007 and 2008, Brazil was hit hard by the onset of the global financial crisis in early 2009. However, the Brazilian market was the first to show signs of recovery.

With the expectation of a potential long-term GDP growth rate and conservative monetary policies, Brazil is a promising choice for investments and is attracting foreign investors. Therefore, with greater access to local knowledge and resources, the prospect of participating in emerging markets exists for PE firms.

Additionally, Goldman has vigorously invested in Indian private equity. Previously, the company invested $115 million in Max India healthcare. Since 2006, the firm has endowed more than $2 billion funds in India, while globally it has come up with an investment of about $8 billion in the healthcare sector spread over more than 30 companies.

Recently, the private equity arm of Goldman and New Enterprise Associates (NEA), an American venture capital fund, came together with an investment of $54 million in Bangalore-based Nova Medical Centers. Nova is a leading Indian healthcare firm for day/short-stay surgical care and fertility.

Therefore, yielding returns on such investments will accelerate Goldman’s profitability and instill investors’ confidence. Goldman currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.

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