Private equity
Investments in private equity funds are generally medium- to long-term. Returns on private equity investments are driven by one or a combination of the following: (i) accumulation of cash flow from operations; (ii) growth in earnings over the life of the investment; and (iii) sale of a business at a higher earnings multiple than the original purchase price. Exit strategies used by private equity funds include initial public offerings and sales of businesses to new investors.
Brazil's private equitysector has expanded in recent years, partly supported by an earlier period of private-sector growth from 1994 to 2000. Given Brazil's prominence as an important private equity market, many international funds that had previously invested only sporadically in Brazil opened offices here and raised local capital. This growth reflected the positive performance of the Brazilian equity market, which allowed private equityfirms to recycle portfolios and expand their funds. In addition, Brazil's growing middle class and a positive outlook for exports created opportunities to promote investment in consumer-related and infrastructure sectors.
As a result, in 2015 the sector raised a total of US$1.9 billion for private equity funds while investments made by those funds reached US$1.6 billion. Fundraising for private equity investments also increased in other emerging markets.
Although Brazil has seen strong private equity inflows in recent years, the Brazilian market remains relatively underpenetrated compared with other BRIC countries and, in particular, compared with the United States. According to EMPEA, private equity investments represented only 0.09% of Brazil's GDP in 2015, while the United States and the United Kingdom showed penetration of 1.41% and 1.95%, respectively, in 2015.
Principal investments
The Principal Investments area involves proprietary capital investment activities across a wide range of financial instruments, including merchant banking investments and real estate investments primarily in Brazil, as well as investments in a variety of financial instruments in the global market.
The Principal Investments area assumes various risks and allocates substantial resources to benefit from these exposures, leveraging and benefiting from information analysis and seeking to exploit disparities observed in asset values in trading markets and in specific macroeconomic, corporate and sector trends.
The financial instruments in which the Principal Investments area invests also include arbitrage activities across a broad range of financial instruments and equities. The strategy for these products involves making investments on a global basis through a diversified portfolio across different markets and event categories, supported by rigorous analysis of regulatory, legal, fundamental and situational issues.