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M&A outlook in 2023, Brazil
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M&A outlook in 2023, Brazil

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The M&A market in Brazil in 2022

The M&A market in Brazil in 2022 may have experienced a slight dip in the number of transactions, but it didn’t lose steam. There were still over 2,000 deals made, with an estimated value of 25 billion reais, showcasing the country’s resilience in the face of market fluctuations. 

In 2022, the most deals were in the technology, energy, manufacturing, and healthcare sectors, and there was a definite preference for using national capital. But the biggest draw in any sector was the scope for technological innovation, attracting a host of start-ups as well as veteran investors.

New regulatory frameworks from the Central Bank plus the General Data Protection Law are all having an impact, as are regulations allowing Brazilians to invest in solar energy until January 2023 without paying ICMS taxes on what is produced until 2045. And, in the face of challenging economic pressures, domestic and global, the Brazilian government’s plans for tax reform could be a game-changer for the Brazilian investment market.

In the past two years, we have definitely seen a focus on domestic transactions, largely driven by the political climate. As the M&A landscape continues to evolve, it will be fascinating to see how this trend plays out and whether it will have a long-lasting impact on the market in Brazil.

The Brazilian M&A landscape for 2023

The M&A Community held a round table where some of our experts took an in-depth look at the Brazilian landscape and shared their insights on trends, expectations, and the best growth strategy for 2023.

During the round table, the speakers discussed key specific topics, such as startups and technology, and macroeconomic factors. 

Startups and technology

The biggest driver of innovation is new technology, which is changing the landscape of the Brazilian financial markets.  This has opened up opportunities for new players to emerge and challenge the status quo. Technological innovation is also playing a critical role in driving growth, and strategic investors are already investing heavily in those sectors that offer the most opportunities for digitization.

There are great chances for startups looking to make their mark, as assets are currently discounted compared to their market value. 

By focusing on reinvestment in new products and technologies, rather than just paying out dividends, companies will create long-term value for shareholders and drive sustainable growth

Orlando Cintra

As Carlos Portugal points out, startups are the engine of economic and social development, and investing in technology, innovation, and creativity can generate immense value. Orlando Cintra agrees that digital transformation is a fantastic opportunity for Brazil: “Companies that invest in technology, innovation, and creativity generate much more value.”

Macroeconomic factors

The Brazilian commercial landscape is facing several challenges in 2023 and beyond. The biggest hurdle currently is interest rates being raised to mitigate inflationary pressures. Brazil’s high-interest rates are currently at 13.75%, prompting investors to shift their focus to fixed-income investments, directly impacting large companies’ investment returns.

“Our SELIC rate has held steady at 13.75%, but economic projections indicate a potential drop to 12.30% by year-end, so we need to keep an eye on this,” notes Carlos Cadó.

The Brazilian government is currently undertaking tax reform, aiming to bring the country’s economy closer to that of first-world countries and remove aspects that benefit tax havens. In addition to simplifying the tax system, the reforms will aim to promote fiscal justice, stimulate investment and business competitiveness, reduce tax burdens on certain sectors or social groups, increase state revenue, and more.

“To truly stimulate the stock market and encourage investment in new technologies, we must ensure that our tax policies are aligned with those of other developed economies,” says Carlos Portugal.

One of the key changes the reforms could introduce is the taxation of dividends, where investors will pay income tax on what companies distribute on the stock exchange.

Tax reform is essential for Brazil to achieve its aspirations of joining the ranks of the OECD and competing with global economic powerhouses

Carlos Portugal

The recent presidential election has significant implications for Brazil’s commercial outlook. There is still uncertainty about political plans, but measures such as allowing Brazilians to invest in solar energy until January 2023 without paying ICMS taxes on what is produced until 2045, are certainly offering encouragement to investors in renewables. 

Before the pandemic, many Brazilian investors focused their attention on foreign markets, but since the onset of COVID-19, there has been a significant increase in domestic investment, but it is not clear how far this will continue in the coming months.

“External factors, including the ongoing conflict in Ukraine, are creating ripples in global markets that are being felt in the Brazilian economy,” says Guilherme Machado.

What next? Expert insights

Orlando highlights that if interest rates begin to fall, investors will likely continue investing in companies listed on the stock exchange, further fueling investment in technology.

According to Cadó, new regulatory frameworks from the Central Bank have been essential in driving new acquisitions, particularly those introduced since 2013. The General Data Protection Law has also encouraged innovation, protecting data for better processing and facilitating decision-making.

Ultimately, the success of the Brazilian market will depend on its ability to compete with other global economic powerhouses, and that requires a tax system that fosters innovation, encourages investment, and supports growth

Carlos Cadó

New connectivity options provided by financial institutions offer more opportunities for customers and acquisitions. New laws have allowed acquisitions to be made without the need for traditional banks as intermediaries, expanding the options for both sides in negotiations.

Key takeaways

  • The M&A market in Brazil remained strong in 2022, despite a polarized political scenario and a fairly closed capital market
  • More companies have shown interest in using M&A strategically, especially in sectors such as technology and innovation
  • The angel investment market is on the rise, and many companies are using M&A to strengthen and grow in the market
  • Brazilian companies are gaining strength in the market, attracting more national than foreign investments
  • The regulatory framework for the energy transition market is creating opportunities for strategic investors to invest in companies dedicated to this purpose
  • Technology continues to drive innovation and the emergence of new players in the Brazilian financial market
  • High-interest rates have led many investors to shift their money away from the stock market and into fixed-income investments, directly impacting large companies’ investment returns
  • Brazil’s 2022 elections will significantly shape the country’s commercial outlook in the coming years
  • Domestic investment has increased since the pandemic’s onset, with a significant focus on technological and energy development
  • Tax reform is underway, aiming to simplify the tax system, promote fiscal justice, stimulate investment, and increase state revenue.

Tech startups in the healthcare industry

The COVID-19 pandemic has brought unprecedented changes in the healthcare industry, triggering a shift towards health tech companies. These companies are focused on developing intelligent software and online platforms to enhance the experience of hospitals and patients in general. Since 2020, the crisis of COVID-19, along with the surge in remote working, has provided a conducive environment for the development and growth of health tech companies.

According to a recent report, health tech funding reached $15 billion in 2020, and the industry is expected to grow by 25% annually over the next five years. This exponential growth is driven by the increasing demand for remote health solutions, rising healthcare costs, and the need for more efficient healthcare delivery systems.

Health tech: A market with unique characteristics

Health tech startups operate in a market with unique characteristics that require careful analysis. Startups looking to endeavor in this industry need significant investment to fund complex research and development efforts.

The healthcare sector also has ample room for technology to bring new and improved solutions with accessible costs to the population that needs it most

Guilherme Machado

Guilherme also comments that “health tech is a tough business to survive in, and ideas alone are not enough. Corporates need to innovate, but they also need to follow the rules and regulations to avoid the high risk of failure.”

Innovative ideas come with high risk

When it comes to health tech startups, innovative ideas are associated with high risk. The healthcare industry is heavily regulated, and startups have to comply with strict guidelines and regulations to avoid legal repercussions. New ideas may pose a higher risk, as the sector may not be well-regulated, or the product may require significant investment to meet regulatory requirements.

Key takeaways

  • The COVID-19 pandemic has accelerated the growth of health tech companies, which are developing innovative software and online platforms to enhance healthcare delivery systems
  • The health tech industry is expected to grow by 25% annually over the next five years, driven by increasing demand for remote health solutions, rising healthcare costs, and the need for more efficient healthcare delivery systems
  • Health tech startups face unique challenges, including strict regulations, high costs, and the need to find buyers willing to purchase their products
  • Startups must innovate, but also follow the rules and regulations to avoid the high risk of failure