In a dramatic attempt to rescue its investment in Urbplan Desenvolvimento Urbano SA, the American-based private-equity firm Carlyle Group is stepping in to bail out the Brazilian real estate developer. In this rare move, the firm is injecting US$21.1 million, and the firm’s partners are contributing an additional US$66.9 from their own pockets.
The bailout comes after Urbplan failed to complete residential developments in Brazil, which resulted in it being hit with hundreds of lawsuits. As the majority shareholder in Urbplan, the bailout may be Carlyle’s best way to avoid losing a major investment in Brazil while putting a cap on its financial liability and saving its reputation.
Brazil’s Growing Economy Supported the Initial Investment
In 2007, Carlyle bought a majority stake in Urbplan for US$100 million. Using this new capital, Urbplan undertook a large expansion across Brazil. The timing was perfect. Brazil’s economy grew by 6% that year and a housing boom started in 2009 when then President Luiz Inacio Lula da Silva introduced his “My House, My Life” housing initiative.
However, due to the complexities of doing business in Brazil, it became difficult for the company to reconcile the various city and state regulations, consumer preferences, and local prices. The economy stalled in 2009 and again in 2011. Construction stopped, and some consumers stopped paying for their lots. This created an insurmountable cash flow problem for Urbplan.
Just as the financial and operational headaches worsened, the company was hit with 154 lawsuits. According to reports, most of the lawsuits involve consumers seeking to terminate their purchase and sale agreements and recover damages. By the end of 2012, Carlyle’s investment was virtually worthless and, according to regulatory filings, the private-equity firm decided not to put more money into the company.
Brazil’s Limited Liability Laws Offer Little Protection
Corporate shareholders, and private equity firms like Carlyle, are usually protected from being personally responsible for lawsuits against companies they own. But in Brazil, those protections don’t extend to consumer, tax, and labor claims. Also, the corporate veil can be pierced when the company files for bankruptcy or when it becomes inoperative as a result of mismanagement.
This huge legal exposure is what provided the incentive for Carlyle to bail out Urbplan and seek to turn it around to make it profitable again – or at least make it attractive to a buyer. Facing debt in excess of US$305 million, interest rates on that debt as high as 19.3%, and development commitments valued at US$125 million, Urbplan may need an additional US$200 million to continue operations.
