Banco Sul America Launches PE Fund

In a move that expands its investment portfolio and leverages its name, Sao Paulo-based Banco Sul America, the largest insurance company for the Latin American region, has launched its own private equity fund, the Sul America Private Equity Fund.

The fund will be managed by Sul America Capital Partners (SACP), and the general partner has set a target of $200 million. Banco Sul’s parent, Sul America Group, has already pledged $40 million to the initial effort.

In regards to the $40 million Sul America Group is contributing Linton said, “This makes my job easier because we are more aligned as a significant limited partner,” said Robert Linton, assistant director at Banco Sul America. “We will look to do five to seven investments over four years … and will look at one, maximum two, investments per year.”

Additionally, SACP will manage a local Brazilian fund that will invest alongside the new private equity fund on a pro-rata basis. And SACP is discussing partnership opportunities with Chase Capital Partners, Linton said.

The investment team on SACP will be led by Joaquim Felipe Cavalcanti and Helektra Karnakis, both of whom handled all aspects of the structure, management and exit of BSA’s principal private equity transactions since 1994. The firm will supplement these resources with BSA senior executives.

“We have advisers in tax, due diligence, legal and our chief administrative officer is often involved in restructurings, but is not [technically] part of the team,” Linton said. “So we have a senior level of economic advisers [because] in Brazil, you still need the back bone of an institution.”

One of Banco Sul America’s core strategies has been to invest in long-term private equity transactions for its own portfolio. The firm has used proprietary funds to invest directly in emerging companies, joint ventures, financial restructurings, IPOs and privatizations.

BrasilSeguridade, for example, is the result of four joint ventures between BSA and Banco do Brasil. BrasilSeguridade is composed of insurance companies in the auto, health and savings plans areas, BSA uses it to spread its name across 5,000 bank branches throughout Brazil.

BSA regards the formation of SACP as the culmination of Sul America’s commitment to long-term control investing in Brazilian companies on a non-hostile and collaborative basis.

“We consider this a natural development,” Linton said. “We were looking at more deals, and more interesting deals than we’re capable of handling [due to] lack of resources, or lack of time to actually put into the deals.”

The macroeconomic situation also contributed to Banco Sul’s decision to create its own fund. Brazilian President Henrique Cardosa’s government has overseen relative stability, steady growth and low inflation despite last year’s devaluation. Linton said SACP believes, as one of the few local institutions with previous private equity experience, it will be in a privileged position as investor confidence returns to Brazil.

Gaining Ground

Linton added that Banco Sul has been gaining recognition as a funding source for mid-sized companies, as well. Citing investments in the Microlite Group, Supergasbras, Industrias Villares and Fosfertil as examples.

Linton said Banco Sul has a solid track record in private equity. Microlite for example, a Brazilian battery company, had three divisions when Banco Sul took it over: consumer, systems (construction) and automotive.

“We sold the [automotive division] the day we came in,” Linton said. “We waited on the systems division because there was a construction boom in 1996, but eventually sold it. The entry price practically paid for these two sales, and the consumer division was a jewel.”

SACP will consider investments across a broad range of capital commitments, including less than $10 million to multi-billion dollar deals. However, Linton noted that deals of $10 million or less must have exceptional enterprise value, and he does not consider multi-billion dollar deals “real private equity.”

“We like companies with more than $100 million in sales,” he said. “That’s not a minimum, but we do look at that because these are three-to-four year investments.”

Moreover, Banco Sul demands control of the companies in which it invests.

“The results are clear: if you don’t have control, you don’t have access. You need to be involved at the board level and in day-to-day management,” he said. “Microlite is a good example. We own 30% of it, [German company] Varta owns 50% and the Latin American Enterprise Fund has 20%. We’re on the board of the company and have a group of strategic investors. We have a consortium where we control the consortium.”

Banco Sul will invest primarily in Brazil, and SACP sees no reason to expand beyond it, except when investments elsewhere in Latin America add value to other of SACP’s portfolio investments.

In regards to the special challenges, however, of investing in Brazil, such as the complications of due diligence, to name one example, Linton said, “That’s where we bring added value. I could manufacture a reason to source deals regionally, but as soon as I stepped into Columbia I’d be lost. I believe you can have international synergies if you’re like Hicks[, Muse, Tate & Furst], and bring industry expertise [for example] in cable and media.