As developed markets remain ensnared by public-debt worries and modest prospects for GDP growth coming into 2011, the sustained robust expansion in the major emerging markets around the world stands out in dramatic contrast. Private equity (PE) investors have created and poured capital into the growing number of funds that target markets outside of North America and Europe. China, India and the other hot-growth economies of Southeast Asia continue to top the list of markets where PE firms and limited partners see the most promising PE opportunities. But as we describe in our recent private equity report, PE interest has broadened to encompass attractive markets in Latin America, particularly Brazil’s, and in Central and Eastern Europe, including Turkey.

We’ll examine CEE in our next post. Here, we look at the burgeoning PE opportunities in Brazil.

The competitive dynamics of Brazilian PE are in the throes of change. Through the 1990s and into the 2000s, the industry was dominated by local firms, which focused mainly on professionalizing the management of the nation’s midsize family-owned businesses. Lacking a clear IPO exit route or fully developed debt markets, the environment was neither conducive to larger-scale deals nor inviting to bigger PE firms. Now, however, Brazil’s economic momentum and the greater development of the capital markets are attracting global attention.

Although PE investors will find opportunities across all industries, companies that benefit from rising middle-class consumption and infrastructure investment are likely to continue to be attractive targets for PE funds. The Housing, consumer products, retail and financial services sectors will benefit from rising consumption trends and offer opportunities for profitable PE plays. Brazil is midway through a major infrastructure investment cycle to remedy years of underinvestment, support the growing oil and gas and renewable-energy industry, and develop the installations and systems for the FIFA World Cup and the summer Olympic games (which Brazil will host in 2014 and 2016, respectively). The infrastructure investment cycle will create opportunities in transportation, logistics, energy, sanitation, education and healthcare, among other sectors.

Brazil still presents many challenges found in other emerging markets. PE investors in Brazil must navigate a deal environment where potential target companies may lack professional management expertise and externally audited financial records. They also face complex and sometimes changing legal, tax, environmental and regulatory frameworks in many sectors. Gaps in workforce talent and education could jeopardize growth plans in some sectors and prevent companies from achieving operational full potential. Debt markets, while developing, are burdened by relatively high interest rates to contain inflation.

PE interest in the Brazilian market should remain high over the coming years. Whether returns will be as great as the interest is still an open question.