Seeking accelerated growth or even a social bent, private equity targets middle-to-low income classes
Higher income, lower interest rates, higher access to credit mechanisms, government incentives, employment on the rise. Brazil's lower-middle class – known as "class C" – is the country's fastest-growing demographic. According to data from Fundação Getúlio Vargas, this social stratum advanced from 42.36% to more than half (53.03%) of the Brazilian population between 2003 and 2009. Earnings tied to the minimum wage – such as the government's Bolsa Família ("family aid") and other assistance programs – accrued a real gain in recent years. To illustrate, the income produced by the work of the poorest 10% advanced 4% in 2008, according to the employment and income coordinator at the Applied Economic Research Institute (Ipea), Roberto Gonzalez. All of this helped many families move up from poverty into the middle class, which is currently estimated at over 90 million Brazilians. This political campaign-worthy scenario has been serving as the banner for private equity investors to put their money in companies that target the middle-class crowd. "Because this is a segment with significant pent-up demand, increases in income have a direct impact on the food, clothing, construction and mobile phone industries", says Gonzalez.
The population of northeastern Brazil, a demographic historically neglected by both the public and private sectors, is one of the most prominent representatives of this movement. And this explains why venture capital funds – perpetually thirsty for potential for high and rapid growth – are turning their attentions in that direction. The Rio Bravo asset manager, for example, has two equity funds exclusively focused on northeastern companies. One of them invests in the infrastructure, information technology and food industries. The second fund, which is still in the investment stage, will acquire stakes in approximately eight northeastern companies by the end of the year. The investments may range from R$ 10 million to R$ 25 million. "We will focus on companies that need capital to grow and expand their activities, in the food, agribusiness, education, healthcare, tourism and entertainment industries, as well as the industrial segment (metals and electronics)", Rio Bravo says on its website. The firm did not grant CAPITAL ABERTO an interview.
The fund seeks profitability in companies with a potential to reduce poverty given their scope of activity. The strategy includes buying minority shares (25%-40%) in non-traditional start-ups that innovate in some way. Vox's first fund has already completed its fundraising stage, and a part of the investments has already been made. The launch of a second fund is planned for next year. The investors are mostly from outside Brazil.
A company named Solidarium is one example of the type of enterprise favored by Vox Capital. The transaction between the company and the fund has not been completed, but Solidarium's executive director and co-founder Tiago Dalvi says that the possibility may be considered when the company is further consolidated. Solidarium sells artisanal products sourced from cooperatives and associations that follow principles of social responsibility, such as absence of child labor and lack of gender or racial discrimination. In addition to selling on the internet, the company also has points of sale in major retail chains such as Wal-Mart and Lojas Renner.
The inspiration for Vox Capital came from a Mexican fund, Ignia, which invests in companies that target the low-income population and that have a positive impact on society. "Traditional companies have been ignoring this population of approximately 560 million people in Latin America, which accounts for an estimated market of US$ 510 billion", says Ignia's investment manager, Joshua Motta. The firm's clients range from individual investors to private foundations, including funds-of-funds and multilateral institutions. "Although everyone's focused on the social effect generated by our investments, the fund's financial success is equally important and an additional indicator of the success of our mission to create fundamental system-wide change", Motta says. Among the fund's current investors are names such as the Omidyar Network (owned by eBay founder, Pierre Omidyar), the Soros Economic Development Fund (owned by George Soros) and the World Bank's International Finance Corporation (IFC).
CLASS C ON THE TRADING FLOOR — For investors not too keen on venture capital, there are also some options on the stock exchange for betting on the potential of the emerging classes, especially class C. One example is construction companies that are taking advantage of the federal low-income housing program, Minha Casa, Minha Vida ("my house, my life"), whose objective is to build one million new houses and apartments for families with a household income of up to ten times the minimum wage. The government increased its subsidies, cut insurance costs and provided easier access to the Housing Guarantee Fund, which refinances a part of the payments if a program participant becomes unemployed during the acquisition process. The companies benefiting from all this include MRV Engenharia, PDG, Cyrela Realty (with its low income-targeted subsidiary, Living) and Tenda, highlights Flavio Sznajder, a founding partner of independent asset manager Bogari Capital. Also in for the ride are construction supplies manufacturers such as Eternit, which produces water reservoirs for the low-income demographic.
The program's strong presence in the northeast of Brazil cause some companies to be favored by the region's development, Sznajder points out. He cites the example of M. Dias Branco, the proprietor of such popular cookie, cracker and pasta brands as Adria, Basilar, Fortaleza, Isabela and Zabet. Yet another company that could benefit from the expansion of income and credit among the middle-to-low tiers of the population – despite operating all across Brazil and practically all social classes – is Cielo, more than its competitor Redecard, the manager pinpoints. He notes that credit card brands end up tagging along with the banks that distribute them, in this case Bradesco and Banco do Brasil, which both operate extensive networks in northeastern Brazil.