The acquisition of Carlyle’s operation in Brazil by SPX in 2021 has proven to be a (very) more complex business than Rogério Xavier probably imagined.
The private equity manager has faced problems in several of its investments, and fund investors have questioned some management decisions.
The problems, which began before the transaction, have intensified over the past two years.
The most emblematic of these involves Tok&Stok, where SPX is at odds with the founding family over what to do with the furniture and decoration retailer.
While SPX wants to merge Tok&Stok with Mobly – selling its stake in exchange for shares in the listed company and thus gaining an exit strategy – the Dubrule family advocates for a capital injection of R$ 220 million and a debt extension – which would provide breathing room for a turnaround.
SPX accuses the family of supporting this path to regain control of the business, as the manager would not be able to follow the capital increase and would be diluted in the operation.
The Dubrule family, on the other hand, says that SPX is only thinking about its exit strategy, without caring about the future of the business.
The founder of Tok&Stok even said in an interview that the operation with Mobly would be a “last resort,” as Mobly has been burning cash every month.
In the end, neither of them is wrong.
Carlyle invested in Tok&Stok in 2010, through its FBIE fund (Brazil Fund for the Internationalization of Companies). Two years later, it injected more capital into the company using two other funds: TSCO and FSCO.
All three funds have already matured, and the manager had to request an extension of deadlines, as provided for in the bylaws.
Investors’ dissatisfaction with the performance of these funds and others managed by SPX/Carlyle is evident in the minutes of assemblies published on the CVM website.
At the most recent FBIE assembly, which took place on July 8 with the aim of requesting an extension of the fund’s deadline for another year, three investors requested that the minutes include a message demanding management for a divestment plan of assets and requesting a reduction in the management fee.
In addition to Tok&Stok, this fund has a stake in Rede D’Or.
The message from investors also asks to verify “if it makes sense to approve minimum conditions for the sale of Rede D’Or in the investment committee to avoid delays in approval processes and to seize any opportunity windows.”
These investors also ask the fund to send the budget for the following year, including the time dedicated by each team member.
“In addition to that, the manager must detail their involvement in invested companies,” the message states. “Finally, considering that the fund is going for its fifth extension, we recommend that SPX reduce the management fee by 10%.”
Another investor stated in the minutes that they would only approve the fund extension if management agreed to distribute Rede D’Or shares and reduce the fee by 20%.
Investor dissatisfaction is also clear in FBIE II minutes, which also holds Rede D’Or in its portfolio. The tone is similar, with investors requesting visibility on the divestment strategy and fee reductions.
In FBIE, SPX accepted investors’ request, reducing the management fee and committing to find a solution for the assets by July next year, when the fund’s last extension ends.
Tok&Stok: The furniture and decoration retailer is not the only problematic asset in the SPX/Carlyle portfolio. The manager also has investments in Ri Happy, which had to restructure a debt of R$ 300 million last year; in Madero, which also recently underwent a major debt restructuring; and in Scopel, a land developer that Carlyle purchased in 2007 and underwent a long turnaround.
“In most of these cases, the problem seems to follow a pattern. Carlyle entered with a professional investor mindset, making a lot of changes without listening to those who had been in the business for years,” said a private equity investor.
This behavior led to conflicts with founding families, such as that of Tok&Stok. In the case of Scopel, Carlyle also clashed with the family and bought its remaining stake six years after the initial investment.
Fernando Borges, the Carlyle executive responsible for the investments and now leading the strategy at SPX, told Brazil Journal that the issue needs to be placed in context.
“The past years have been very challenging in the macroeconomic environment – with a pandemic, high interest rates, and a very poor stock market – culminating in a huge crisis in retail that affected two of our companies,” he said.
“Our priority was to save these two companies, including with capital injections last year. And we did so without diluting our investors, with Carlyle providing the funding.”
He also noted that all fund extensions were discussed and approved by investors, and that the manager has already found a solution for Tok&Stok, through the operation with Mobly.
Borges also mentioned that in 2022 the manager proposed to investors to sell Rede D’Or – when the stock was worth more than today – but the proposal was rejected.
“Regarding the idea of distributing Rede D’Or shares, that makes no sense. Just because the company is listed doesn’t mean I have to distribute the asset to investors. That’s not how private equity works. Going public is the beginning of the exit process, but the goal remains to maximize returns for our investors. Otherwise, what’s the incentive for the manager to go public with the company?” he said, adding that there is another complexity, as some investors cannot hold shares directly in the portfolio.
Since the incorporation of Carlyle’s assets, which gave rise to SPX’s private equity division, the manager has only made one fundraising.
Last year, it had the first closing of a new R$ 600 million fund – of which R$ 225 million has already been invested in ComBio, a biofuels company.
However, the liability profile of this fund is different. While most investors in Carlyle’s funds are Brazilian pension funds, part of the new fund was distributed by XP in retail. The remainder was invested with SPX’s proprietary capital, as well as some institutional investors.
Now, SPX is trying to make a second round for this fund, primarily seeking international investors.
Source
Arwen Volkov, A graduate of the University of St. Gallen in Switzerland with a degree in International Finance, Arwen specializes in sustainable finance and green investments. She began her career at an investment bank in London, where she developed financing models for environmentally friendly projects. Known for her analytical and strategic thinking skills, Arwen is a sought-after financial consultant. In her spare time, she mentors fintech startups, contributing to their growth strategies. She is also a nature enthusiast and an amateur photographer.
