Advent International wrapped up its third Latin American deal of 2004 in April, acquiring Brazilian surety bond provider J. Malucelli Seguradora (JMS). The transaction comes on the heels of the firm’s purchases of Dufry Group in February, which has a foot firmly placed in the Mexican market, and private courier S.A. OCA in January. The JMS transaction still needs regulatory clearance before it is completed.
In the firm’s deal to buy JMS, Advent acquired the control stake from the family-owned conglomerate of the same name. The family is holding onto a minority position in JMS. Terms of the deal were not disclosed, although a source said it was an all-equity transaction valued roughly at $25 million.
Erwin Russel, a director in Advent’s So Paulo, Brazil, office said, “The surety bond market is still a niche type of industry in Brazil. It focuses on the business-to-business area of insurance and basically insures any contractual obligation between two companies.”
Regarding the industry dynamics, Advent is excited about both the past and expected future growth seen in Brazil’s surety bond market. Its market has expanded by more than 30% a year for the last five years, and based on the industry’s slim share of Brazil’s total insurance sector, the surety bond space still has a lot of room to develop. Brazil is also one of the few remaining countries that has yet to deregulate its reinsurance market, which allows for potential upside when the market is deregulated.
Russel also said that a good portion of the company’s financial performance has been driven by recurring revenue, making the business less susceptible to the ebb and flow of the economy. He added that potential growth will be found in expanding the services the company provides. “One of the real motivators in acquiring JMS was that within the industry, there are so many applications and niches that are not yet developed in the Brazilian surety bond sector,” Russel said.
JMS controls a 34% market share of the surety bond market in Brazil, and in 2003 underwrote surety bonds for guarantees worth $2.5 billion. The firm will not look to add on any acquisitions in Brazil as part of its growth plan, although Russel did not rule out possible surety-bond sector deals in other parts of Latin America.
To grow the business-outside of relying on the appealing growth projections -Advent will look to increase the company’s exposure to the major players in the reinsurance industry, which would enable the company to take on more business. “The bonds that JMS has underwritten have shown historically a very low instance of losses. Of the $2.5 billion in surety bonds that JMS underwrote last year, about 80% of that risk is reinsured to the reinsurance companies,” Russel said. “However, after Sept. 11, there has been a retraction in the availability of the reinsurers. We will make a significant effort to introduce ourselves to the reinsurers and make more lines available for JMS… Even if we could just add a few more large policies, that would have a significant effect on profits.”
Red Hot In Latin America
While JMS represents the third Latin American deal for Advent this year, it is the sponsor’s sixth investment in Brazil. The firm’s recent activity in Latin America is not the result of any specific market trends, Russel said, pointing instead to the maturity of the firm’s offices in Latin America. “The team down here has been in place for about four years, and our activity is a result more of the presence we’ve built in that time,” he said.
But there’s no question Russel is optimistic about private equity in Brazil. “We do see that the market is improving, and there has been a slight pickup in activity… The economy had been at a standstill when there was a change in administrations in the government, but now it’s picking up again, and also sellers have become more realistic than two or three years ago.”