THE ROLE OF PRIVATE EQUITY IN THE DEVELOPMENT OF DOMESTIC CAPITAL MARKETS

1. THE ROLE OF PRIVATE EQUITY IN THE DEVELOPMENT OF DOMESTIC CAPITAL MARKETS The World Bank = The International Monetary Fund = The Brookings Institution 5th Annual Financial Markets and Development Conference Álvaro Gonçalves Washington, DC = April, 2003

2. Agenda • Introduction • The 'recent' start of Private Equity (PE) in Brazil • PE in the capital markets ecosystem • An evolutionary approach! • The new investment environment in Brazil • Significant achievements; still room for improvement • Closing remarks: time to invest!

3. Introduction the 'recent' start of PE in Brazil

4. Introduction: 1) PE is a recent practice in Brazil • First fund in 1993; wave of fund raising in 97/98 • 300+ portfolio companies (including early stage) • Worldwide crises after year 2000 restricted exit alternatives; initial realizations only in 2002/03 • International PE firms (mainly banks) have ridden the downward cycle: 1998-2002 • Regional funds hurt by the national differences: difficult monitoring and market timing on a regional basis.

5. Introduction:2) Fund raising pattern

6. Introduction:3) Investment activity

7. A sample of solid portfolio companies (despite difficult exit conditions since the year 2000) • Cardsystem; Diagnósticos da América; UOL • Dixie-Toga; Telemar; Submarino; IT-Mídia • Multicanal/NET*; Suape Têxtil; Drogasil* • Editora Peixes; Optiglobe; Casa Cor; Chronos • Sé Supermercados*; Jornal Lance!*; Camil • Gafisa; Método; Odontoprev; Siciliano; Mr Clean • Santos-Brasil; América Latina Logística • Spring Wireless; Allelyx; Condominio; Microsiga * - PE already divested.

8. PE in the capital markets ecosystem: an evolutionary approach!

9. The ecosystem: segments can only achieve full performance if all pieces are installed PIPE* (liquidity) Mezzanine Private Equity Venture Capital Seed Capital Public Markets;ownership maturity; competitiveness Development/ Expansion Pre-market stage Start up Corporate Development / Evolution * Private Investment in Public Equities

10. The new investment environment in Brazil significant achievements; still room for improvement

11. Recent measures: a silent reform • New corporate law: 2001 • Stronger minority shareholder rights • Novo Mercado - BOVESPA: 2001 • New listing segment with requisites of governance practices; arbitrage; tag along rights; etc. • New regulation for Pension Funds: 2001 • Transparency; consistent asset segmentation • Carteira de Participações: the alternative assets class

12. Recent measures: a silent reform (cont'd) • CVM: upgrading the Brazilian SEC • Organizational improvements: shorter decision process from 2000 on • Independence: 2002 (officers with 5-year mandates) • Release of the corporate governance guide: 2002 • Broad revision of funds regulation (updating; compatibility among classes): 2002/2003 • Fundo de Participações: regulatory conditions for installing the proper PE segments (Venture Capital, PE, Mezzanine, PIPE, Fund of Funds): 2003; under public hearing since January.

13. Developing the PE cluster • The local PE community is getting better organized • Brazilian VC association founded in 2000 • LAVCA: the Latin American VC association was launched in 2002 to integrate players and experiences • Hearing process of the new PE regulation: 40+ practitioners involved; pension funds, banks and law firms: hundreds of suggestions; practice dissemination! • Corporate Venture also playing its role: Votorantim Ventures, Promon Ventures, Intel Capital, Eastman • CEPE-FGV: new center of PE/VC studies inaugurated in 2003 - research and academic support!

14. Pending issues • Capital markets taxation • Taxation on equities' capital gains: 20% (both private and public equities; same for fixed income) • Pension funds performance disclosure • Similar discussion of major markets: "how to measure interim PE performance ?" • Cultural drive: • Long term allocations V short term interest rates

15. Pending issues (cont'd) • Macro unbalances; interest rates (25+% p.a.!) • Social security system reform under discussion (main driver of government deficits) • Recent Congress vote paved the way for Central Bank independence and other important measures • Rising inflation still a threat • Restructuring of strategic sectors require intense capital allocation • Airlines; electricity; other infrastructure

16. Closing remarks: time to invest! • Installation of the capital markets ecosystem is under way in Brazil! • Achievements and lessons learned to be better explored, disseminated and consolidated! • Private Equity roots already strong in Brazil; delay in exits will be proven in line with LPs' interest! • However, establishing PE track record in emerging markets is not an obvious game Good practices / Long term commitment / Intense monitoring / Local team / International connection.

17. Stratus Investimentos is an independent Private Equity / Venture Capital firm, specialized in investments in Brazilwww.stratusbr.com+55-11-3044-4177São Paulo (SP)

18. THE ROLE OF PRIVATE EQUITY IN THE DEVELOPMENT OF DOMESTIC CAPITAL MARKETS The World Bank = The International Monetary Fund = The Brookings Institution 5th Annual Financial Markets and Development Conference Álvaro Gonçalves Washington, DC = April, 2003