KKR enters arbitration over struggling Brazil investment

Kohlberg Kravis Roberts’ first direct investment in Brazil is in deep trouble.

The firm invested around $250 million into data center operator Aceco TI in 2014, but the value of the investment has plummeted to less than $30 million, according to a person with knowledge of the deal.

In addition, KKR has claimed Aceco’s former owners, including General Atlantic, tried to hide financial problems at the company, according to a separate source and a report in a local Brazilian publication Exame. KKR and General Atlantic entered private arbitration over the deal in January, according to Exame.

KKR spokeswoman Kristi Huller and General Atlantic spokeswoman Jenny Farrelly declined to comment.

KKR invested in Aceco in June 2014 using its $9 billion North America Fund XI, said the source with knowledge of the deal. As part of the deal, KKR bought out General Atlantic, which had invested in Aceco in 2012. The investment also called for Aceco CEO Jorge Nitzan to retain a minority stake and continue to run the company.

“This is an important milestone that underscores our long-term commitment to partnering with companies in Brazil and throughout the Latin American region,” Alex Navab, co-head of KKR’s private-equity business in the Americas, said in a statement at the time.

Aceco has struggled, however, and KKR was holding the investment at around $28 million, or 0.1x, as of September 30, 2015, the source said.

It’s not exactly clear what happened to the company. It has likely been a victim of Brazil’s troubled economy, which went into recession in August of 2015. The value of the Brazilian real sunk around 40 percent against the dollar last year, according to Market Realist. S&P downgraded Brazil’s long-term debt into junk territory last fall and downgraded it further last month.

Aceco operates data centers, which are affected in downturns as business slows, a separate source in Brazil said. “Companies are not growing and are spending less, and that hits data centers,” the source said.

The timeline for resolution of the case is not clear. Exame said KKR hired law firm Ferro, Castro Neves, Daltro & Gomide, while GA hired attorney Sergio Bermudes. Bermudes and representatives for Ferro, Castro Neves, Daltro & Gomide did not respond to requests for comment.

Most deals have some form of arbitration clause that can be triggered if a material issue arises, sources said. “[The] preference for many sponsors is to go to arbitration instead of court,” said Christian Nugent, a partner at Goodwin Procter, which is not involved in the case.

Private arbitration is usually used to settle M&A disputes over purchase price and earn-out disputes, according to 2014 commentary from James Moriarty, a partner with Kramer Levin Naftalis & Frankel LLP. It’s rarer for arbitration to be used in other sorts of M&A disputes, Moriarty wrote.

Action Item: Check out the Latin America Venture Capital Association’s deal volume report from September here: http://bit.ly/1YcB5Yc

Photo: KKR CEO Henry Kravis departs after meeting India’s Prime Minister Narendra Modi at a breakfast in the Manhattan borough of New York September 29, 2014. REUTERS/Carlo Allegri