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Fund Forum Latin America 2012

Brazilian unfilled capital demand: Sectors, estimated risks and returns* Malcolm McLelland Nilson de Lima Barboza Valdir Jorge Mompean

* This presentation should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of

Equilibrio Capital. Marco Lyrio (Insper) and James Hunter (Green River Advisors and Business School Sao Paulo) provided a number of helpful conversations. All errors and oversights in the presentation are due to Malcolm McLelland.

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Investment premises

Recent experience and current conditions generally suggest …

A1: Brazilian public capital markets preclude arbitrage opportunities.

A2: Only long-horizon Brazilian investments are advisable.

A3: Brazilian alternative investment transaction costs are generally high.

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Economic data: Brazilian GDP component growth

:: Investment capital demand has been increasingly filled over the last 5-6 years.

:: Consumer spending is stable and growing faster than government spending.

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Economic data: Brazilian import and export growth

:: Rapid import growth under high tariffs reflects strong domestic opportunities.

:: Recent flattened export growth reflects stagnant global economy.

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Economic data: Brazilian production growth

:: Brazil recovered rapidly from 2008-2009 due to a strong domestic economy.

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Economic data: Brazilian manufacturing industry outputs

:: Brazilian manufacturing with significant forex and cross-border risk exposures was damaged by the global economy beginning in 2008.

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Economic data: Brazilian service industry outputs

:: Brazilian services firms with significant forex and cross-border risk exposures were damaged by the global economy beginning in 2008, but recovered easily because of domestic growth.

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Economic data: Brazilian selected production inputs

:: Fuel consumption correlates closely with industrial output; electricity consumption correlated closely with private consumption.

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Economic data: Brazilian price level and foreign exchange (in)stability

:: Brazilian prices since 2004 are remarkably stable given forex volatility, but 2008 forex volatility severely damaged Brazilian SMEs with foreign-source production inputs selling to domestic consumers.

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Preliminary implications*

Characteristics of Brazilian investment opportunities (circa 2012):

1. Mid-market private equity (and debt) transactions

2. Increased domestic consumer demand risk exposure

3. Decreased foreign input-output and forex risk exposure

4. Increased domestic production and input development

* With the caveat that such investments must be properly priced and controlled, which leads to …

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Capital market data: Brazilian equity and debt issuances

:: Brazilian public equity and debt markets are quite small relative to the size of the Brazilian economy, suggesting general capital constraints and high capital costs.

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Capital market data: Brazilian and US equity returns are highly correlated

:: Brazilian private equity transactions are priced based on US equity markets.

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Capital market data: A sector model of Brazilian equity returns

1

1 4 02

4

4

.425 1

3.41724

.303 1.055 .21.91

.005 4.061

.863

MFG

SERV

INVEST

t t

BVSP BVSP NASDAQ PEt t t t t

t t

t

SELIC Cn

R R Y RR

BRLUSD Y

GDP

.007

.524

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Brazilian capital demand: Segmented by life cycle stage (circa 2012)

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Brazilian capital demand: Pricing and control issues

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Principal suggestions

Brazilian investment opportunities are optimally* …

R1: … centered in mid-market private equity (and related vehicles);

R2: … centered in growth- and mature-stagnant-stage firms;

R3: … the result of planned liquidity and management change events ; and

R4: … focused on Brazil’s internal (supply and demand) economy.

* At November 2012.

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