The government of Brazil privatized inefficient state-owned companies. The strategy provided the source for the flow of Private Equity/ Venture industry. The strategy ended the government's financial crisis. Although through this strategy the Private equity/ Venture Industry commitments from international investors have reduced, there is moderation in economic growth. On the other hand, Advent International after spinning off from the TA Associates had an aim of creating global private equity firm (Talmor, Campos, & Stolk, 2014). The Advent International introduced a funding model that allowed the firm to spread in many countries. It had the combination of the local knowledge and global flexibility that limited the country's specific risks.
In contrast, Cetip established a non-profit mutual organization whose participants came from a fixed income market. The members who included the banks, brokerage houses and management firms were to pay a fee for membership and the annual access fees for the services.
Another strategy of Advent International is the improvement of the global economic environment. The improved macroeconomic fundamentals of the Brazilian government have led to a gradual increase in Private Equity/ Venture Industry Investments. The PE/VC industry in Brazil has grown at the rate of 19.5% per year between 1999 and 2012 with the years between 2004 and 2009 is at the peak with annual growth of 45.6%. However, the penetration of PE/VC asset is still very low in Brazil despite the high growth of the industry sector.
The Advent International has expanded its private equity sectors. The expansion is related to the increase in the fund size hence the successful track record. With significant expertise in the Advent International finance service sector, the firm is able to invest in over 42 financial service companies.
Advent International operates as a single global organization. It has a well-dedicated team that drives the investment program. However, the Advent International has found it difficult to maintain cultural unity through partnership meetings. It has also been a challenge to integrate the structure of management and information in their systems.
In contrast, Cetip was captive to the larger banks. With the impending global financial crisis in 2008, the Cetip listing was pulled off. It was under pressure from non-bank shareholders to solve the governance problems. Therefore, the Cetip was to launch a process to attract strategic minority investors. In preparation for the external investment, Cetip was reconstructed and turned into a for-profit company. The reconstruction was due to the cooperation with the government and the active management that aimed at resolving the conflict of interest and creates transparency.
The Opportunities of Cetip Transaction
Advent had a hand in the transition of Cetip from the non-profitable organization to a grown business with a high profile. The organization the reinforced the management team capable of implementing governance practices. The unlocked potential of the Cetip brought value in the investment through various opportunities.First, the low competition and the best market leaders of the Cetip transaction gave it an opportunity in the organization. The competition landscape with the clear segment of leaders prevented aggressive competition among the members of the organization.The dominant position in the segment of Cetip brought about a fixed income. The undisputed leaders in the corporate segment that was the main competitor had a small share.
Cepit had the unlocking value through the demutualization opportunity. Since Cetip was founded as a non-profitable organization, the demutualization converted its member's equity rights changing the company into a for-profit organization. The company through the demutualization created value by adjusting the prices and developing new products.
The opportunity for advent expertise in the Cetip helped the company in its transaction.The relevant experience of the advent expertise which included the leading income technology firm, software and data services provider brought professionalism that elevated the transaction in Cetip. The advent expertise also had connections with the logical buyers for an exit that benefited the cetip transaction.
Also, the high growth potential of Cetip was a potential opportunity in its transaction. The impressive growthrate of private debts globally was minimized by the high growth potential of Cetip. This ensured that the Brazilian market developed a strong growth in terms of penetration.In the long run, the Brazilian market developed a significant growth potential for Cetip.The Brazilian macroeconomic fundamental were also improved and led to the shift towards low-interest rates and low leverage banks.
Risksof Cetip Transaction
The history of Cetip, its functions was driven by the changes in financial market regulations. The regulations were one of the risks of the Cetip. They contributed to the development of the Cetip business models. Through the regulated entity, the Cetip developed its market as an infrastructure provider. Changes to the regulation had an impact on the company's business and the investment values. Also, the regulation by the Cetip was well established in Brazil with the lack of legislative barriers that could prevent the regulated exchanges.
Another risk taken by the tip in its transaction was concentrating on its customers. Since Cetip was key in the provision of the interbank payment clearinghouse services, the interface funds transfer system was efficient. The concentration of the customers by Cetip led to the bank costs being minimized.
Aspects of the Deal Made That Made the Negotiation More Complex than a Typical PE Deal
The key aspect of negotiation was to establish a proper structure of corporate governance. The governance structure was to solve inherent issues and protect the investors. Although the firm had a high level of influence as compared to the private equity transaction, the Advent find it more complex as it was difficult to make future changes.
The nomination of the Board of directors made the negotiation deal complex. The structure of nomination meant that no shareholder could control the board. The committees of the board that could comprise pricing, management, compensation with the Advent appointing one member to each also was a complex process. Advent, a minority shareholder was to have standard veto power over the key decisions. This made its minority position to be at stake and thus asked to sell his shares to a third party and this was to be under certain circumstances. This aspect of the deal made it be a complex negotiation since no approval was needed but the board had to approve it without reason being withheld.
An operating principle agreement suggested by Advent was another aspect that made the negotiation deal very complex. The agreement was to determine certain operational decisions such as pricing policy and new product development.
The negotiation process was challenging since Advent was to negotiate with other counterparties that included the large banks and Board of Directors of Cepit. It was a complicated task since the shareholders had various interests in the organization.
The execution of the deal was intricate since the shareholders made it impossible to agree with the Advent. The terms and governance structure became an issue in the company. This meant that the Advent was at risk of losing its special rights and the veto power.
How Advent Created Value with Only a Minority Stake
The advent through the unlocking of the value in Cetip made it possible for Cetip to transact. It was through modernization, and developing the necessary resources that made the transaction of Cepit to a market-focused business successful. Advent encouraged the Cepit transaction to market pricing making it benefit greatly from the new pricing policy.
The management of the new team was brought up. Cetip hired a world-class CEO due to the Advent investment. The advent brought in a more experienced team both in financial and market derivatives. The compensation programs were implemented by advent for Cepit employees that were based on the profit and innovation creation solutions.
Advent also adopted the best practices for corporate governance. This ensured that the company requirements were fulfilled. A new solution for effectively doubling the size of the company was acquired.The new products were also introduced by Advent to ensure that the Cetip do away with the traditional products and infrastructure.
The Advent Deal Structure and Valuation
Advent had the vision of continuing the process of the company despite the global economic climate and the investment risks. Advent proposed that Cepit buy stakes from the demutualized firm of about 20% to 30%. The entry multiple had very attractive comparable transactions from the Advents perspective.
The Advent was to agree with the Board of Directors and the bank shareholders so as the proposal could be presented. After the meeting with over 600 shareholders, the shares of Cetip tender were successful.
Advent opened the negotiations with other shareholders and reached an agreement to buy the shares together with a pro rata basis hence increasing the ownership stake to 32.4%
The Various Exit Scenarios Available for Advent
Before Advent invested in Cetip, a number of exit scenarios had already been considered. First, Advent had an option of a trade sale to a strategic player with the interconnection exchanges. The appetite from the trade buyers required regular approval and support from large banks strengthening the dominance of Cepit in the Brazil market. Another exit scenario available to the Advent was the right to force an IPO within the 18 months of investment in Cetip.
Advent also considered the transfer conditions that are stated in the governance rights. In addition to these considerations, Advent added other stages of PO which allowed Advent to exit the Cetip partially after five months. Another stage was the block trade which was a negotiable private transaction involving a stake and could demand the executed off-market. The trade sale was another stage that advent could exit Cepit by selling its remaining 25.2 million shares.
Talmor, E., Campos, L. H. S., & Stolk, S. (2014). Cetip and Advent International: Private Equity in Brazil.
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