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"The PAC is like any medicine. When it's too much, it harms the patient."

Writer's picture: Seneca Evercore | NotíciasSeneca Evercore | Notícias

CEO of Seneca Evercore Sees Strong Interest from Foreign Investors in Brazil and Suggests the Government Should Prioritize Projects with Higher Economic and Social Returns. He Also Highlights That PAC Depends on the Fiscal Framework.


By Glauce Cavalcanti and Luciana Rodrigues — Rio

08/11/2023 3:00 AM


With 30 years of experience in the mergers and acquisitions market, Daniel Wainstein sees Brazil at a unique moment to attract foreign investors. These investors have turned their attention back to the country after the turbulent 2022 election period and are drawn to the ESG potential of Brazil's economy, particularly in energy transition projects.

Following a “devastating” start to the year for the credit market of Brazilian companies—pressured by high-interest rates and events such as the Americanas crisis—Wainstein observed a turnaround in the market starting in April.


Wainstein, founder and partner of Seneca Evercore, the leading independent advisory firm for mergers and acquisitions in Brazil, previously served as Brazil director for Greenhill and Goldman Sachs. The executive emphasizes the importance of government efforts to enable infrastructure investments essential for the country's growth.


However, he is critical of some premises of the PAC (Growth Acceleration Program), such as prioritizing unfinished projects or basing project selection on suggestions from congress members.


How do foreign investors perceive the current moment in Brazil’s economy?

There is a market called credit default swap (CDS), which is essentially insurance that investors purchase to protect their investments if Brazil defaults. At the end of October, just before the elections, this market priced Brazil's default risk at 5.8%.


Today, that figure stands at 2.8%. You know that jazz song “What a Difference a Day Makes”? That sentiment applies here. In just a few months, Brazil underwent a market reclassification, which is being recognized by investors.


Since April, we have seen a drastic improvement in our transactions. The first half of the year saw extremely low M&A (mergers and acquisitions) activity. In the second half of 2022, nearly all processes stopped, and no new operations were launched.

In fact, we advised our clients not to launch unless absolutely necessary due to high uncertainty and perceived risks, except for those investing in distressed situations. As a result, the total transaction volume in the first half of 2023 was $7.6 billion, compared to $27 billion in the first half of 2021. This level was comparable to the first half of 2020, during the height of the pandemic.


How is strategic investor appetite for Brazil looking, especially in medium- and long-term projects?

The CDS metric, while widely followed by financial investors, also reflects the strategic risk perception of Brazil abroad. Strategic investors don’t focus on perfect timing but on opportunities that they believe will perform well over the long term. This sentiment has started to return.


Previously, Brazil was seen as a pariah in many aspects by strategic investors. Today, global corporations are deeply committed to environmental agendas, and Brazil’s reputation as a leader in environmental disregard has shifted dramatically. In the first half of 2023, deforestation in Brazil dropped by 33% compared to the same period in 2022.

Another concern was the sustainability of Brazil’s democracy. Strategic investors are especially wary of entering a country on the brink of political turmoil or potential democratic erosion. Following the elections, Brazilian companies heavily impacted by pandemic-related revenue losses—while simultaneously dealing with skyrocketing debt costs—struggled with liquidity in ways I had never seen in my nearly 30-year career.


You mentioned April as a turning point. What triggered this shift? Were the new government’s economic policies also influential?

Even before the Selic rate was reduced, there was a growing sense that it would happen, as inflation was under control.


The approval of the Tax Reform in the lower house of Congress marked a significant milestone, something Brazil has been striving for since democratization. Hopefully, the Senate will ratify it with minimal changes. The discussion around the fiscal framework is also critical from an investor’s perspective, as it provides reassurance about public finances. Lastly, the moderation shown by the government and Finance Minister Fernando Haddad's proactive engagement with stakeholders have been positive.


What about the PAC? How do you assess this program?

The PAC’s success depends on the fiscal framework. There needs to be clarity on how much funding will be available for the government to invest. However, I was surprised by the government’s emphasis on resuming halted projects. From an economist’s standpoint, decisions shouldn’t be based on what was left unfinished but rather on where every real invested will yield the greatest economic and social returns.


Investments should focus on maximizing productivity and long-term growth, not just quick wins or politically driven priorities. Public-private partnerships (PPPs) could play a vital role here, ensuring private sector involvement in infrastructure projects.


What sectors in Brazil have the most potential to attract investors?

Renewable energy is a clear area of interest, aligned with the global ESG agenda. Sovereign funds, private equity firms, and other investors are increasingly targeting Brazil’s energy transition projects. However, the government must support these efforts, as renewable energy generation often remains more expensive than fossil fuels.


Additionally, Brazil needs substantial investments in infrastructure—roads, railways, airports. The previous government invested only 0.5% of GDP in infrastructure, compared to 1.5% during Lula’s earlier administration. The new PAC aims to invest around 1% of GDP, which is critical to avoid the country’s infrastructure falling into disrepair.


Are there investors exploring Brazil for the first time?

Yes. Currently, we are involved in over 35 transactions, with strong international interest. We are seeing investors from Asia, Japan, the Middle East, Canada, and the U.S.—including those new to Brazil. Brazil has become a key focus for these investors, and the first half of 2024 should reflect this with over $30 billion in M&A transactions.

You mentioned that in 30 years of experience in this market, you had never seen a corporate credit crisis like the one Brazil experienced earlier this year. Was it only due to the interest rate hike, or did the Americanas case and the judicial recovery of other companies also play a role?


I had never seen a crisis at this level, but I had also never seen the Selic rate increase nearly sevenfold. So, the decision made by the CFO (of the companies that later faced liquidity difficulties) wasn’t a mistake. They chose the capital structure and debt levels based on the company’s growth prospects and the expectation of stability in borrowing costs.


The company's growth plummeted with the pandemic, and then you had an increase in borrowing costs. In 2008 (during the global financial crisis), we saw some stress in the financial market, but not as much at the corporate level. Brazil, in a way, wasn’t as heavily impacted. I didn’t feel the ripple effects we experienced, for instance, in the overwhelming way we did during the first half of this year.


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