Electra Fleming, which over the last two years has made a concentrated effort to expand its investment business into the major Continental markets, is now looking further afield in its bid for greater geographical diversification.
The latest market to catch the group’s attention is Brazil, the world’s eighth largest economy, where it has joined forces with the Pactual Group, one of Brazil’s leading investment banks. The partners have formed a joint venture management company, Pactual Electra Capital Partners, which plans to raise a $400 million (ecu 360 million) fund for investment in the rapidly growing Brazilian private equity market.
Fred Vinton, Electra Fleming’s chairman, says that the group identified Brazil as a target market two to three years ago, recognising that its position as the geographic and economic centre of the largest trade bloc in Latin America, and changes in the economy in recent years, should generate substantial opportunities for private equity investment.
Pactual Group, an established leader in corporate restructuring and M&A advisory work, has developed a strong reputation for its work with underperforming assets with high growth potential, the sector Pactual Electra will target. The fund, Pactual Electra International LP, will look for buyout and development capital deals in the $20-50 million size range. Fred Vinton expects the majority of opportunities to be change of ownership situations arising from privatisation and consolidation, but stresses that this is by no means predetermined, since Pactual Electra will adopt an entirely opportunistic approach in the rapidly changing Brazilian market.
Pactual Electra plans to raise $200 million from Brazilian investors and $200 million from international sources, and both partners plan to commit a significant amount to Pactual Electra International – “over $50 million and not much more than $70 million in total” – according to Fred Vinton.
To date, Electra’s only exposure to the Brazilian market has been gained indirectly through investments in the Guarantia II and Latcap II funds, which together amount to only some 1.5% of the group’s assets. Now, in addition to its commitment to the Brazil fund, Electra Fleming may also co-invest directly alongside the vehicle in the larger funding opportunities. Fred Vinton stressed that co-investment would be confined to the deals Electra feels most comfortable with, explaining “though we have a certain desire for exposure to Brazil, this is obviously not unlimited”.
Discussing the appeal of the vehicle to institutional investors, Fred Vinton pointed to Pactual’s outstanding track record in M&A and restructurings in Brazil, and added that the bank has also managed a number of private equity situations for third parties. Pactual Electra has allied this local market experience and access to deal flow with Electra FlemingOs proven private equity expertise, gained both in the mature and competitive UK and US markets and in less developed markets such as South East Asia and India: “Electra Fleming has shown that it can successfully avoid the pitfalls in newer markets, and we are confident that a formula which combines private equity investment discipline with local knowledge will continue to serve investors well”.
Luiz Cezar Fernandes, chairman of Pactual, commented that Pactual Electra has been established “at a time of favourable market conditions, brought about by the unprecedented degree of corporate restructuring, a massive privatisation programme, and good prospects for exit strategies”.
The Pactual Electra board of directors will include two of Pactual’s founding partners – the bank’s chairman, Luiz Cezar Fernandes, and its senior investment strategist, Paulo Nunes Guedes – alongside Fred Vinton and Electra Fleming Inc’s Diane Smith.
Because of the time-zone issue, Electra has decided to handle day-to-day contact with the joint venture through Electra Fleming Inc. The Pactual Electra investment committee will include senior executives of both Pactual and Electra Fleming Inc.