Private equity firms are scooping up bargains in Brazil’s public market as stock valuations sit at the lowest levels in more than a decade.

Brazilian shares trade at about six times forward earnings, the lowest since 2008 and below historical averages — even when famously undervalued oil producer Petroleo Brasileiro SA and mining giant Vale SA are excluded from calculations.

Like many stock markets around the world, Brazilian equities got crushed by surging global interest rates. They then took a further hit when local funds struggled with redemptions and were forced to sell indiscriminately. Through Aug. 1, prices of 2021 IPOs were down by a size-weighted-average of 39 percent, Bloomberg data show.

The selloff is proving too enticing for some opportunistic private equity firms to resist. London-based Actis LLP recently built a 19 percent stake in renewable power company Omega Energia SA. General Atlantic LLC, which is headquartered in New York, has amassed an 11 percent stake in Locaweb Servicos de Internet SA, a web services provider that’s down 80 percent from its 2021 peak.

“There’s still this dichotomy in the private-equity world between the valuation at which funds are willing to buy assets, and the price asked by entrepreneurs, who still have in mind previous rounds at richer multiples,” said Eduardo Mendez, head of equity sales and equity capital markets for Latin America at Morgan Stanley. “Given the public equity market has de-rated, and listed firms already took the hit, we should see some private-equity funds deploying money on the public side.”

Unlike hedge funds, which are largely trading vehicles, private equity firms typically target longer-term investments, holding stakes for five years or more. They also often gain influence or control over the managements and boards of publicly traded companies without necessarily taking them private.

Private equity investments in Brazil rose by 617 percent in the first half of this year from the same period in 2021 to 16.5 billion reais ($3.1 billion), according to Brazil venture capital and private equity association Abvcap. Two deals from Brookfield Asset Management Inc. accounted for almost 60 percent of the total: a 5.9 billion-reais purchase of real-estate assets from BR Properties SA and a 3.57 billion-reais acquisition of assets from Localiza Rent a Car SA..

Election Risks

Analysts and bankers in Brazil are anticipating more transactions like these.

Felipe Thut, head of Banco Bradesco SA’s investment-banking arm Bradesco BBI, said he is in talks with some private equity firms seeking potential purchases on Brazil’s public market. Beyond attractive valuations, investors like a public track record of financial results, a widely known board of directors and a relatively easier due-diligence process, he said. Companies in both education and health-care sectors are “obvious” targets, since their stock prices have been among those hardest hit.

General Atlantic had already boosted its holdings in U.S.-traded Brazilian education technology company Arco Platform Ltd last November through a private investment in public equity, or PIPE. Meanwhile, Advent International recently raised $25 billion for the second-biggest private equity fund on record. The global fund also may co-invest in Brazil along with the firm’s $2 billion Latin America-focused fund, according to a May filing.

However, some players are waiting for the October presidential election before putting money to work because they want more information about the new government’s economic plans and who will be on the economic team, said Piero Minardi, head for Warburg Pincus in Latin America and president of Abvcap. “Private-equity funds will continue to be opportunistic in the second half,” he said.

If Brazil signals it will be on a sustainable fiscal trajectory and economic growth prospects improve, some private-equity capital originally earmarked for China could end up in the South American nation, Minardi said, noting that the massive deterioration in the Brazilian real in recent years has weighed on global funds’ appetite.

Morgan Stanley’s Mendez also believes Brazil could be a target for Middle East sovereign funds, which are well capitalized after getting a boost from high oil prices. Abu Dhabi’s sovereign wealth fund Mubadala Investment Co. offered earlier this week to take control of BK Brasil Operação e Assessoria a Restaurantes SA, which operates restaurants in Brazil including the Burger King fast-food chain.

“If that money is heading for Brazil or not, that’s yet to be seen,” Mendez said. “Brazil will need to compete against the rest of the world.”