The beat of Brazil

Brazil's GP Investimentos, which has raised $1 billion and counting for its fourth fund, is primed for the big leagues as it readies itself to go regional in Latin America. In its 15-year history, the firm has been through a management succession and an IPO on the Luxembourg exchange. And no one has a corner office.

July 16 is Antonio Ribeiro Bonchristiano's first day back in the office after a vacation in Europe, and he is raring to go. Just ten days earlier, GP Investimentos (GPI), the Brazilian private equity firm of which Bonchristiano is co-chairman, co-CEO and president, announced the first close on the firm's fourth fund, rounding up a whopping $1.025 billion (€745 million). This makes GP Capital Partners IV the largest fund ever raised for Latin America (for now).

?We've got a lot going on in our pipeline that we've been working on for quite some time. There are a number of deals that are quite advanced,? says Bonchristiano, fresh out of his firm's weekly internal meeting. ?It could very well be the case that by the end of this year, we could be 50 percent invested in the fund, which would be absolutely phenomenal. So it's great to be back and to get very involved again.?

Bonchristiano, who co-leads the firm with Fersen Lamas Lambranho, has plenty to be excited about. GPCP IV has not yet closed. Many investors in the fund so far have been family offices and hedge funds, and Bonchristiano is aiming for a more institutional investor base that can support the firm in the future. He and partner Danilo Gamboa are still talking to ?traditional? private equity investors; they expect to raise another $200 million or so in limited partner commitments, he says.

The fundraising success of GPCP IV is a far cry from a year ago, when the firm closed its third fund at $250 million. ?Frankly, we had to work very hard to get meetings,? recalls Bonchristiano, of the difficulties in raising GPCP III. Now investors are knocking on GPI's doors unsolicited. ?During the second half of last year, we must have seen 15 to 20 investors here in São Paulo who came to meet us. It was a much easier and very different process this time. We started fundraising in early April and got the fund done in three months.?

The affable Bonchristiano attributes the success of fundraising to the firm's IPO and Brazil's stabilizing macroeconomics. Importantly, GPI's track record clearly speaks for itself. A source close to the fundraising says the firm's LPs have been encouraged by ?triple digit? returns from the third fund. ?Every deal is in total homerun territory,? adds the source.

According to GPI's first quarter 2007 earnings release, the firm's net income for the period was $36.5 million, up 115 percent from the same period a year ago (GP Investimentos' publicly traded parent entity, GP Investments, is engaged in private equity as well as an asset management business). Revenues increased 225 percent, to $79.1 million due to higher performance fees from the sale of investments and appreciation in two portfolio companies, Equatorial Energia and BRMALLS.

With a management succession and an IPO behind it, the 15-year old GPI is readying itself for the big leagues. How big? Think multibillion dollar fund. Bonchristiano is aiming for a fifth fund that will be four or five times the size of the fourth fund. This will lead to other expansions relating to the firm's strategy. ?We're beginning to look at expanding outside of Brazil for the first time. We're actively looking at deals elsewhere in Latin America and we're also considering opening one or two offices outside of Brazil at this moment. These are the things we're able to do today. We're very lucky to be where we are today,? says Bonchristiano.

The journey hasn't been easy, particularly with the country's extreme macroeconomic volatility and political uncertainties, but GPI is primed for its place in the private equity limelight.

GP Investimentos

Notable exits:
Founded: Key personnel:
1992 Antonio Ribeiro Bonchristiano, co-chairman, co-CEO and president
Office: Fersen Lamas Lambranho, co-chairman, co-CEO and vice president
São Paulo
Assets under management:
$1.5 billion (private equity)
R$2 billion ($1.1 billion; €778 million) (asset management)
Carlos Medeiros, partner
Eduardo alcalay, partner
Allan Hadid, partner and chief financial officer
Márcio Tabatchnik Trigueiro, partner
Danilo Gamboa, partner
Publicly traded parent entity:
GP Investments
Listed on the Luxembourg Stock Exchange with Brazilian Depositary
Receipts on the São Paulo Stock Exchange
market capitalization:
$1.4 billion (as of july 16, 2007)
Funds raised:
GP Capital Partners I, $500 million, in 1994
GP Capital Partners II, $800 million, in 1997
GP Tecnologia, R$130 million, in 2000
GP Capital Partners III, $250 million, in 2006
GP Capital Partners IV, $1.025 billion (initial close), in 2007

Monetizing the firm
Volatility is also why GPI has searched for, and secured, a source of permanent capital. In many ways, Brazil's oldest private equity firm is ahead of its US counterparts, many of whom are just now confronting the complexities of public offerings and management succession.

GPI went public on May 30th of last year, raising $308 million through offerings of shares on the Luxembourg Stock Exchange and Brazilian Depositary Receipts on the São Paulo Stock Exchange. The firm sold 75 percent of the shares in the management company, GP Investments, in the form of non-voting shares, with the remaining 25 percent of the company and 100 percent of the voting shares in the hands of the firm's nine partners. The firm has options to buy another 20 percent of shares over the next five years; partners also make available options to some associates and plan to share the wealth with other employees.

?The decision to go public was essentially because we had been working in an environment for the past 15 years where we saw lots of ups and downs. We saw the benefit of having permanent capital,? says Bonchristiano. ?Having your own capital base, from a strategic point of view, is something we think makes us much stronger as an organization.?

The timing to go public was oddly enough, advantageous. ?The appetite from public market investors for [Brazilian] private equity was higher a year and a half ago than from traditional private equity investors,? says Bonchristiano. ?At that time, public market investors wanted new stories, new ideas.?

Interest in the IPO was particularly strong from hedge funds that profited from investing in the portfolio companies that GPI took public. ?I think a very important element in their desire to buy shares in our firm was the fact they had already invested in us, gotten to know the quality and standard of the management teams we had in place, and made money,? says Bonchristiano.

Indeed, GPI has had several successful exits on the Bovespa. The listings of a few companies that helped sell the firm's own IPO story are railway company América Latina Logística, online retailer Submarino, homebuilder Gafisa (Gafisa had a follow on offering on the New York Stock Exchange), utility company Equatorial Energia and automobile and component manufacturer Lupatech.

The performance of GP Investment's shares has been spectacular, tripling from $14.75 at offering to $47 at the close of business on July 16. Importantly, it has given the firm the security of permanent capital. Four hundred million of commitments for GPCP IV came from the balance sheet of the public entity, with LP commitments comprising the remaining $625 million.

?We have become a firm like a 3i and a Berkshire Hathaway,? says Bonchristiano. ?It's a different proposition for different investors. Our shareholders benefit from the management fees we earn from the funds we manage through the listed vehicle. They have a liquid investment but they are buying shares at a significant premium to book value. Investors that come into our funds come in at book value but they have an illiquid 10 year investment. There are pros and cons to each one of the options.?

?Where I'd like to be in five years is having as significant a network outside of Brazil as the one we have inside Brazil,? says Bonchristiano. ?We'll hopefully be fully invested in Fund IV and raise another fund significantly bigger than Fund IV. The same way that Fund IV is four times bigger than Fund III, I would say Fund V could be many times bigger than Fund IV.?

The firm also tapped another source of capital, raising $150 million of 10 percent secured perpetual notes at par in January this year.

They were placed in Asia, Europe and the US in private banking accounts and fixed income funds.

But there is a limit to the amount of capital GPI will tap from the markets. ?Provided we can raise money through funds, that is our preferred route at this time because it allows us to continue to invest in bigger deals and a larger number of deals without causing further dilution to the management company. But if for whatever reason we cannot raise funds at a certain moment but we can raise debt or equity, we'll do that,? says Bonchristiano.

Private equity in Brazil has not been particularly competitive, but size will matter in the future. Already, Advent International is said to be nearing a close on more than $1 billion for a regional fund, and local bank Banco de Negocios (Patria) is raising a $400 million fund. Patria, which has an agreement to share M&A advisory resources with The Blackstone Group, has reportedly told LPs it may tap Blackstone as a co-investor on larger deals. Blackstone has not targeted Brazil before.

Legacies and expansions
Bonchristiano is confident that his firm's history, experience, and network of managers and relationships will be an important competitive advantage for GPI in Brazil. And he wants to grow the firm outside its borders.

?Where I'd like to be in five years is having as significant a network outside of Brazil as the one we have inside Brazil,? he says. ?We'll need to hire more people and develop a physical presence in local markets. We'll hopefully be fully invested in Fund IV and raise another fund significantly bigger than Fund IV. The same way that Fund IV is four times bigger than Fund III, I would say Fund V could be many times bigger than Fund IV.?

GPI has largely been focusing on Brazil over the past 15 years, but through GPCP IV, it can invest up to 25 percent in non-Brazilian companies. Bonchristiano says the firm is ?definitely? building a pipeline outside of Brazil and intends to use that full allowance. Ideally, the next fund will have the full flexibility of allocating capital either inside or outside of Brazil. There are two natural targets for expansion: Mexico and the Southern Cone of Latin America, both in terms of investments and physical office presence.

Back home, the firm's aggressiveness, agility, investment philosophy and operating expertise is taking it many places. ?We're pretty agnostic in terms of sectors. We don't have a top-down strategy. What we're looking for is value,? says Bonchristiano. ?The main difference between us and other private equity firms is the fact that we're experts in managing firms. We're not financial engineers. The way we create value is by growing companies and making them more efficient. I think that's a compelling value proposition.?

The only way GPI can achieve the changes it wants is by getting control, which is the only type of investments it makes. ?That is something that we have built over the past 15 years out of necessity because you couldn't make money by simply using leverage as a way to create value for your equity,? he says.

If GPI's culture is any indication how it runs its portfolio companies, the traditional family-run companies of Brazil ? and Latin America for that matter ? should be aware that an investment from GP Investimentos comes with cultural change. Says Bonchristiano: ?Although we've been in business for 15 years, we're all in our late 30s or early 40s. We're very experienced but fairly young at the same time; we're very meritocratic. We're very willing to give young professionals a lot of responsibility. Also, we're extremely agile and fast-moving. We have a very transparent firm. We have an open plan office; we don't have separate rooms. There is a lot of communication. We know what each other are working on.? Bonchristiano himself is only 40 years old.

Corporate governance is key focus for Bonchristiano. A few of GPI's portfolio companies were listed on the Novo Mercado, a segment within the Bovespa for shares issued by companies that have better corporate governance and transparency standards than those required by Brazilian corporate law.

?We think that's definitely the way forward if we want to be successful in creating value and attracting investors to our portfolio companies. These portfolio companies have to have international, world-class governance standards,? he says. ?We've benefited from adopting those standards in the companies we invest in because it just makes them more attractive to the foreign investors who have typically bought around 70 percent of all IPOs and follow-ons that have taken place in Brazil since 2004.?

Much of GPI's culture is attributed to the firm's founders, Jorge Paulo Lemann, Carlos Alberto Sicupira and Marcel Hermann Telles. The trio founded merchant bank Banco Garantia in 1971, and 22 years later, GPI; they have also invested in retailer Lojas Americanas and beer company Brahma, which through a merger with Belgian company Interbrew is now InBev. In 2003, they sold the company to the current management team.

GP Investments now has nine partners and 70 employees. Two partners and 30 employees work for GP Asset Management, which is 65 percent owned by the parent company. GPAM was built from scratch and now manages R$2 billion ($1.1 billion; €778 million) across a range of strategies, including credit funds, hedge funds, equities funds and infrastructure funds. Two partners manage GPAM; Bonchristiano and Lambranho sit on the board of the directors at that firm. At GPI, which focuses on private equity, seven partners, eight investment professionals and 25 support staff manage $1.5 billion in assets.

Bonchristiano often counts luck for the successes GPI has had. And if luck continues to be on their side, the firm's future will be a very bright one. He says: ?When you look at the next 10 years, I think it's going to be much more exciting than it was in the past. Because through the pain we've had in the past 15 years, we've learned a lot. What's happening right now is that for the first time we're seeing some of the things people were expecting could happen. The truth is we haven't ever faced so many positive things happening at the same time. This is the best we've had for the past 30 or 40 years. So maybe the future is alive, is here. And that is very exciting.?

antonio Carlos a. Ribeiro Bonchristiano joined GP Investimentos in 1993 and became a managing partner in 1995. Since 2001, he has been co-chairman, co-CEO and president of the firm, which he co-leads with Fersen Lamas Lambranho. Prior to joining GPI, Bonchristiano was a partner at johnston associates, a London based financial advisory firm. He has also worked at Salomon Brothers in London and New York. Bonchristiano has a bachelor's degree in politics, philosophy and economics from Oxford University.

In his spare time, Bonchristiano, who was recently named one of Private Equity International's ?global movers? ? the 50 most influential people in private equity, collects antique books and is an avid long distance runner. He has completed five marathons in the past 10 years, and has been building a library of books written on Brazil from the 16th to the 19th centuries. ?I find that reading about Brazil as it was in the past is very interesting because you understand a lot of the issues we face today, where they came from, and the reason for the problems we have,? he says. ?and also because Brazil does not have a history of investing in culture and preserving Brazilian culture and history. I hope to be able to provide a service to my country one day in putting together a fairly important collection of Brazilian books.?