The Goldman Sachs Group Inc. (GS - Analyst Report) plans to infuse more capital in its Brazilian unit, Reuters reported on Tuesday. It strategizes to double capital to about $400 million.
The decision by this major U.S. Bank came on the heels of fast-growing activities such as corporate lending and private equity fund-related investments in Brazil. These activities are yielding higher returns than equities and government debt.
To successfully execute its plan, Goldman intends to close down a unit which is managing the administration of local investment funds, having approximately $159 million under its management. However, the bank will continue offering off-shore funds services to clients.
Previously, in September, Goldman planned to re-initiate its private-equity (PE) investments in Brazil. 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 consolidating its foothold 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.
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.
Based on well-developed agricultural, mining, manufacturing and service sectors, Brazil's economy overshadows other South American countries. Also, it is gradually increasing its penetration in world markets. After reporting robust 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 is encouraging for firms.
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. Among Goldman’s peers, Citigroup, Inc. (C - Analyst Report) also retains a Zacks #3 Rank.