Brazilian consumer products company Hypermarcas three latest acquisitions announced in mid-November are also good news for start-up boutique BR Partners.
The deals R$85 million ($49.2 million) for soap brand Pom Pom, R$84 million for drug brands Diderat, Peridal and Lopigrel, and R$82.5 million for dental brand Bitufo bring the number of M&A transactions that BR Partners has advised on to 14 this year, according to Dealogic. The firm is ranked fourth by number of deals.
The fees generated will enable it to report a 2010 operating profit, two years ahead of the business plan projections. The partners have agreed unanimously to receive this years non-basic annual compensation in equity to enable the firm to build its working capital.
|"We want to really take advantage of the vacuum that comes below Pactual. We dont think Brazil has an independent player of mid-size that is a full-service financial institution thats the space we want to occupy"|
Ricardo Lacerda, BR Partners
The M&A success is just one part of the story; the firm is aiming at investment bank status, having applied for its banking licence, and is now looking closely at acquisitions of broking operations to fast-track this part of the firms development.
One issue, however, is that prices of potential acquisitions are prohibitive.
"Its true prices are high and we are very conscious of the cost of our own capital, given that we are small and the opportunity cost of that capital is very high. We dont intend to get into a bidding war or overpay," says Lacarda. "But there are some opportunities that are interesting, are non-competitive and we have an angle to make that happen. The licence approval process takes about a year; if we do an acquisition that could be accelerated, but either way by the end of next year we are either going to have underwriting capability or be very close."
BR Partners opened for business by concentrating first on the non-capital intensive advisory services with M&A at the forefront. This year it will have managed the amount of business it had been expecting to achieve in 2012, just one of the benefits of launching in a booming market.
Standout deals, according to Lacerda, include acting for Hospital São Luiz in its sale to BTG Pactual/Rede DOr, advising Grupo Qualicorp on the sale of a controlling stake to the Carlyle Group and in turn acting for Carlyle in the private equity companys purchase of Scalina.
Lacerda aims to add a further 45 M&A professionals by the end of next year and attain a run rate of 20 to 25 M&A advisory mandates every year. If achieved, however, that will be about its peak. "The bad news [about the rapid growth in the M&A business] is that we are very close to where anyone can be in the market," Lacerda says. "We anticipated our growth would happen over a longer term, but the saleability of that business is more limited."
According to Lacerda the firm can compete on about 90% of Brazilian-related M&A. Only on outbound acquisitions does the firm stand aside. It is working with European, US and Australian companies and an Asian company looking to conduct acquisitions of Brazilian assets.
Of the firms 14 deals to date, four have been valued at more than $1 billion; Lacerda estimates the firm has achieved total combined fees worth between 1% and 1.5% of transaction volumes. Some smaller transactions, especially when the firm has been working for the sell side, have generated between 3% and 4%, but the average percentage shrinks when combined with the lower fees on larger deals and those transactions to achieve flow and client diversification.
This lack of growth potential is why BR Partners is looking to build the other areas of its business plan as fast as is practicable. It aims to launch a private equity business in January, as well as an asset management business and the addition (acquisition or otherwise) of its planned trading and underwriting capability.
"Our model is modular we have initially started with an advisory business that has low capital requirements before going into private equity, asset management, becoming a financial institution with trading and underwriting and potentially also getting involved in some fixed-income products," explains Lacerda. "But we will stop at the more capital-intensive areas such as lending or some of the capital-intensive fixed-income products."
BR Partners target return on investment
The term private equity is something of a misnomer for the new fund. BR Partners will be looking for minority, primary capital investments with no leverage in companies with good growth potential. The firm will also take seats on company boards and advise on company development, help recruit chief financial officers, and help develop financial sophistication and corporate governance through to sale, merger or IPO.
"We are going to be much more like the UK merchant banks in the 1980s than todays private equity companies," says Lacerda. "The firm will aim for between 20% and 25% return on investment on token bets in the range of R$30 million to R$50 million".
The firm, is, however, determined to keep its focus on being a sell-side operation. Lacerda believes there is a gap in the market for an independent financial institution, created by BTG Pactuals ascendancy into the top tier. "BTG Pactual has very quickly become a very large player thats very good news for them, but they are now competing in a different spectrum," says Lacerda. "We want to really take advantage of the vacuum that comes below Pactual. We dont think Brazil has an independent player of mid-size that is a full-service financial institution thats the space we want to occupy."