Political Uncertainty May Slow 2H 2018 Brazilian M&A Performance

As the election in Brazil approaches, political uncertainty may slow investment activity in the second half of 2018. Questions about who will lead the country has led many investors to delay closings until post-election in October.

Besides the election, a number of unexpected socioeconomic events have affected Brazil's gross domestic product (GDP), which grew at a slower pace than expected for the first half of the year. GDP for 2018 was initially predicted at 2.3% but is now closer to 1.5%, according to a Central Bank report. The change is attributed to the truckers' strike in May, higher than expected inflation, continuing high unemployment rate (at 12.3%, according to IBGE), a persistent fiscal deficit and high government debt (at 77% of GDP, according to the Central Bank) and the interruption of the voting in Congress.

Despite these factors, M&A activity in Brazil has gained momentum. In the first half of 2018, M&A activity grew 18% compared to the same period in 2017, with 471 transactions announced and a total value of R$ 101 billion (US$ 28 billion), according to Fusões & Aquisições. Driving this are lower interest rates (the basic rate is at a record low of 6.5% per year) and a depreciated Real against the Dollar (a trend observed worldwide, where the Dollar has strengthened). As a result, Brazilian assets are very attractive propositions in terms of purchase price and many buyout opportunities are being explored. But in the second half of the year, business in general is awaiting the outcome of the election before making important decisions - a behavior that is holding back M&A transactions.

The deal flow would have been even more robust if there were no disagreement between buyers and sellers, particularly on target company valuations (driven mainly by different points of view on short and mid-term perspectives and projected risk). Sellers are asking higher prices, expecting the same value as those seen prior to Brazil's recent economic crisis. However, buyers are not in a position to pay.

According to Transactional Track Record, technology was the most active sector in the first half of 2018, followed by financial services. The same report concludes that transactions involving venture capital funds increased 23% compared to the first half of 2017, showing an increased appetite for riskier assets even in a less-than-favorable economy.

Private equity investment remains strong, with fund managers expecting to raise between US$ 3.5...