latin private equity journal - digital magazine - june 2014

Gávea InvestimentosChris Meyn, Partner

Page 7

Patria InvestimentosMarco Nicola D’Ippolito, Partner

Page 24

Denham Capital

Victor Muñoz, Managing Director2

Berkeley Research Group’s Latin America-focused litigation support, forensic accounting investigation, and dispute resolution team is among the most experienced in the industry.

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complex problems.EXPERT ADVICE.

EDITOR’S NOTE

The Latin Private Equity Journal (LPEJ) is a Latin Markets weekly newsletter and quarterly publication featuring interviews with LPs, GPs, government officials and private equity thought leaders active in Latin America. Latin Markets is the world’s leading provider of Latin America focused investment forums, regional summits, and streamlined market intelligence. Our platform provides a comprehensive and fascinating perspective of the opportunities in this diverse and booming region.

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Chief Executive OfficerAdam Raleigh

ManagementGiseli AkabociKenneth BaucoKilby BrowneCharles FathersWilliam FrankPaloma LimaZaianna OrtizAmir OukiTim RaleighAhmad Sahar

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Private Wealth GroupHeriberto AcevedoMaria TatisJohn Zajas

Top Fund Managers

With the Brazilian trinity of events occurring in 2014 -- Carnival, The World Cup and presidential elections –- much has been made of what the future holds for investing in the Latin American hegemon. And while the streets of São Paulo may no longer have first-time managers on every corner, the opportunity set still remains for the long-term, committed private markets manager. So where are some of the top GPs finding new opportunities as valuations adjust in Brazil?

If you’re looking to gain insight into what’s really happening on the ground in Brazil and Latin America in 2014, read through the first edition of our Top Fund Managers series and see why GPs are investing in electricity, real estate, logistics, digital media and wine, among other sectors.

For those of you that missed our Q1 2014 issue, which features exclusive interviews with top international wealth managers, you can visit our newly designed web site and subscribe for free at www.lpej.org. Many thanks to those who took the time to interview for this issue! LPEJ is now a monthly magazine, so make sure to look out for the next edition this July.

Best Regards,

Seth FraserEditor at Latin Markets

LPEJ.ORG / JUNE 2014 3

The Private Equity Andean Forum will bring together 300+ local and global institutional investors, funds and advisors for two days of informative discussion and networking that offers local firms access to the global private equity industry and serves as the perfect cornerstone to any international due diligence trip to the Andean region.

Investing in Brazilian Digital Media and Wine

10 Fabio Bruggioni, CEO at e.Bricks

PLUS INTERVIEWS WITH:

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12 18

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Contents

Marcelo MichaluaManaging Partner at RB Capital

Emiliano MachadoPrincipal at ACON Investments

Patrick LedouxPartner and Co-Head of Latin America at Actis

Mare InvestimentosManaging Partners, Rodolfo Landim and Demian Fiocca

Victor MuñozManaging Director at Denham Capital

Gramercy Funds ManagementDavid Britts, Managing Director and Co-Head of Latin America Private Equity

Gustavo Ferraro, Co-Head of Latin America Private Equity and Head of Latin American Markets

LatAm Growth Equity

22 Eduardo Samara, Principal at General Atlantic

The Outlook for Brazil in 2014

26 Marco Nicola D’Ippolito, Partner at Patria Investimentos


Chris MeynPartner at Gávea Investimentos

1. Give us a brief background on your role at the firm.

CM: I head the private equity business here at Gávea, running the day to day operations, since helping to found the group in 2005. Gávea was founded by Arminio and Luiz Fraga in 2003 and our first PE fund began investing in 2006. I’ve been with the co-founders ever since I came to Brazil. Working directly for the Fragas has always been a welcome home.

2. Can you discuss the first fund in 2006 and where you’ve been focused in Brazil since then?

CM: We’re finishing investing our fourth fund now. The first fund began investing in 2006 and was fully invested by 2008. Today it has been nearly liquidated, and has generated exceptional returns for our investors. Each fund is in a different phase of life, but basically the first three funds are well into liquidation and the fourth fund is 90 percent invested.

Across these funds, we’ve had fairly consistent themes of investing. We definitely invest in the domestic story, services and products, and businesses that

Adjusting Valuations in Brazil

4. Where are you finding new opportunities in Brazil now that it is less crowded and evaluations are adjusting?

CM: A couple of factors are at play right now. For one, it’s just harder for companies to raise growth capital. The public markets are not completely shut, but virtually -- it’s very difficult to get equity capital in the Bovespa. That’s partly because of the lower risk appetite from international capital with respect to Brazil. Somewhere around 70 percent of our stock market IPOs are still funded by foreign capital. Debt is also more scarce and expensive. You have interest rates back up to where they were six or seven years ago. The banks are more conservative with lending, and many companies have already taken leverage over the past few years while terms and rates were better. So there’s not a lot of additional debt capital available to fuel growth or expansion.

The question for a company that is still finding growth opportunities has become ‘where?’ I believe that more and more the answer is in turning to private equity. I would also say there’s more opportunity for the private equity that’s already here. I don’t think there are a lot of new funds being raised. Maybe marginally, there’s likely to be less private equity because there are not a lot of new funds coming to market say as compared to 2010. But it’s still not a massive component of capital in any case. We can see that maybe some $2 billion to $4 billion per year of private equity is put to work. Not a huge number with respect to a trillion dollar economy.

The tougher and more expensive capital scenario and lower growth environment is playing into the hand of private equity. I would say valuations have dropped a bit and have some more to go. The stock market has been off 50 percent in dollars in the last couple of years. So any time you have public market issues, more expensive debt, and a less exciting view for Brazil, this translates into bargaining power to get better deal terms. That’s definitely happening. It’s not like half the previous valuation, but it’s starting to look good. In light of everything I’ve said, it’s a reasonable adjustment.

really address what we think are long-term Brazilian growth themes. Roughly, these would include consumption and the growing importance of the consumer, infrastructure and logistics, agribusiness and related services, and private services that basically reflect poor core public services, such as health care, education and transportation. We’ve done some financial services and media and technology as well.

3. What are you hearing from international investors in light of slower growth in Brazil currently?

CM: Compared to any other time before, the last eight or nine years have seen a lot of interest in Brazil and emerging markets in general. Each market has its peculiarities and there is currently a more general negative sentiment across the board, at least from a risk perspective and with respect to overall growth expectations. Asia has some newfound liquidity and growth concerns, whereas Brazil is seen as having an overall weaker macroeconomic environment, slower growth and general political policy issues. Today we see Brazil reflecting the poorer economic matrix, with higher interest rates, quiet capital markets, and slower growth. A lot of investors might simply be thinking to themselves -- why take risk? And they don’t necessarily look deeper than that.

We tend to think at Gávea that it’s never as good or as bad as it seems. In 2007 and 2010, investors were saying ‘Brazil…we have to go…it’s going to be the next China.’ Then, two years later, they’re saying, ‘Oh, what happened? It’s all going wrong.’ It never was as good as it was in 2010 and it’s never as bad as it seems today. It’s somewhere in the middle. It’s certainly not a crisis. So in general, not only in Brazil, there’s just a lower risk appetite right now. People tend to invest more in the boom and less in the bust, but that’s usually the opposite of how to make money, right? I don’t like to buy high and sell low. Somewhere in the middle there’s certainly great investment opportunities in the market. It’s crazy to say that Brazil is dying or falling off the track. It’s not. It’s just slower and investors need to price this and choose investments carefully.

5. How do you see the PE markets evolving in the next year keeping in mind elections and the World Cup coming up in Brazil?

CM: Look, an election year plus World Cup at the same time… this is a very unique year. Generally, an election year is a pretty quiet but volatile year. A lot of people don’t take risks in this type of environment. With the World Cup things will pretty much shut down in June and July, I don’t expect to see a lot of miracles this year. I think it is what it is. It’s a slower growth year, I don’t think there’s any disaster on the horizon, but you’re not going to see a lot of activity. I don’t think that changes going into ‘15 that much so I think 2015 looks a lot like ‘14.

Then, hopefully, even if we see a re-election of the current administration, or even more interestingly, an opposition party win, I believe there is positive change in place to make it a better governing backdrop to address current weaknesses – perhaps more focused than you’ve seen in the last two to four years. I’m not saying the current government is poor, but there are necessary things that can be done to stimulate more open market and fiscal control policies. Privatizations have started again, some of the exogenous taxes on capital have been removed, and things seem to be turning to be more focused on the fiscal side of things. But, in any case, there really are only upsides from the elections onward relative to what the market thinks and how Brazil performs.

I think the market today is seeing what I’ve told you. It’s a re-election year with the probability of continuance and so it’s going to be more of the same for another four years - so why get excited? I think it’s a little better than that. Maybe you’re waiting till 2016 or 2017 to see growth start to come back in earnest and have any real improvement at the macro level. However, at the micro level, there’s still a lot to do and exciting investment opportunities for PE.

LPEJ JUNE 2014: Gávea Investimentos


leaders in the market providing credit and financing solutions through capital raising instruments that are aimed at capital market investors. We invest from the most senior piece of a fixed income instrument to direct equity investments at the project level alongside developers or sponsors of these projects, thus covering all layers in a project’s capital structure. RB Capital is a leader in the market with a very strong franchise. We’ve built our platform to around 20 billion Reais in assets under management, papers and funds included, with a great team of talented people.

We have securitization vehicles that issue the Brazilian version of the MBS. We’re very much focused on the corporate side. In the CMBS world, we’ve done so far almost 14 billion Reais. Since inception of this market, we are first ranked as a securitization company. We have a fund management practice with around $2.2 billion invested in real estate equity and credit of various types. We also have a construction financing fund raised with FGTS/CEF. We have MBS funds and a business line that is proprietary investment where we also act as principal in commercial properties (build-to-suit and sale and lease back alike).

A big chunk of our capital is invested in RB Capital Holding which seeds various strategies or co-invests alongside our investors in funds and projects, with a full alignment of interest. We are also directional real estate investors in equity in commercial properties and residential developments, alongside developers. Obviously, we never do it all ourselves. It’s always with our partners and specialists on the real estate side. Our broker dealer is a vehicle that our sales team uses to act as book runner of all the papers and funds, REITs and MBSs that we

THE BRAZILIANreal estate opportunity

Marcelo MichaluaManaging Partner

RB Capital

1. Give us a brief background on your firm’s platform and experience investing in real estate.

MM: RB Capital is an independent capital and credit provider active in the Brazilian capital markets specializing in transactions, real estate and infrastructure. We make use of the capital markets to channel resources from institutional investors and family offices to finance real estate based assets and projects in the real economy. This is mainly local. The company is also aiming at the international community to buy papers or fund quotas which will be directed to the investment or financing of real estate and infrastructure projects.

Some of the Managing Directors, myself included, worked previously at Banco Pactual. In the ‘90s, we had a venture with Swiss Re and Pactual; this venture was a surety bond company underwriting performance and completion risks for Brazilian developers and contractors. That’s how we got started into the real estate arena in Brazil. So we started moving down into the value chain and started financing them. Historically the infrastructure and real estate dynamics in Brazil have been very much under banked and underserved in terms of credit and financing. So we started putting together the first, let’s say securitization papers in the Brazilian market in the late 90’s and then we left Pactual and founded what is today RB Capital.

Since then, and especially from 2007 on, under a new ownership control and management approach, we started becoming principal investors in all our activities, we’ve become

LPEJ JUNE 2014: RB Capital

LPEJ.ORG / JUNE 20148

strategies to have exposure to the Brazilian real estate market is middle income housing. It’s a self-liquidating strategy. Demand for capital coming from developers is huge. Providing off balance equity capital at a project level to them is a great alternative because they don’t get diluted at the corporate level, rather at the project level. It’s a closed-end agreement with a fund or an investor at each project (SPV).

By the time the project is delivered, the mortgages kick in. You get your money back and the SPV is finished. We also have a very strong view on mid-sized cities, malls and mid-sized towns in the countryside of the richest states of Brazil. This is also an under developed industry, mainly in cities from 300,000 to 500,000 people. Usually people who live in such towns drive to greater cities to go shopping over the weekend. They don’t have options in their own cities. So this is also a very compelling strategy because both of them -- the residential and the malls in these mid-sized cities are benefitting from social mobility, higher urbanization and credit accessibility. These macro drivers are helping to sustain the growth and the quality of projects within such investment theses.

On the fixed income side, the CRI continues to be a very compelling and attractive asset class, given it is inflation adjusted, pays a coupon and the properties act as a guarantee over collateralizing the investors’ principal exposure.

capital through the proprietary books of the investment banks like Goldman, Merrill and JP Morgan. We had ventures with all of them and then the crisis kicked in. Everybody suffered and couldn’t fulfill their commitments so we ended up buying everyone out in 2009.

Long story short, we bought everyone out and then re-addressed our strategy to fundraise locally. The international markets were very much closed because of the crisis and the volatility. Recently, we decided to go abroad again and start fundraising again because we believe that international capital will participate more systematically in the real estate and infrastructure sectors in Brazil. We started with one of our strategies for residential development and also for specific mandate on a mall operator. We also have a pool of some malls under construction that we’re raising equity for to co-invest alongside the developer.

Since 2010, because of our lack of experience reaching out to the final buyers, we engaged some placement agents in order to do that for us, which didn’t work as we expected, so we hired a senior executive with extensive experience in fund raising abroad. This is very recent and we just started our effort by internalizing such capacity.

3. How are you finding opportunities in Brazil right now given the current economic context?

MM: For us, one of the most compelling

structure and place locally. We are ranked among the top three distributors in Brazil over the last three years by ANBIMA. We also have an in-house international sales effort to reach out to big international institutional investors to raise funds for different strategies. We’ve built this as a specialized platform, acting very much like an investment bank without being a bank.

We are very active on the real estate private equity side at the project level. We’ve invested in around 140 different projects, invested or financed by our money or our investor’s money alongside 40 developers throughout Brazil. That’s only if you think of the residential sector. Thus far, we have deployed over 1 billion Reais in the real estate strategy and within 50 percent of that amount we’ve made investments in the equity pieces of these middle income housing developments. As per commercial real estate, we’ve invested or co-invested over 1.2 billion Reais in dozens of properties (logistics, industrial, stores, etc) over the last years.

2. What are you hearing from international investors and their interest investing in Latin American real estate?

MM: Before the Lehman crisis we raised some capital abroad but our main focus has been the local take-out. We have over 600 local investors, ranging from the Brazilian largest pension funds to the largest family offices, private banks and so on. Internationally, before 2008 we raised

LPEJ JUNE 2014: RB Capital



LPEJ JUNE 2014: e.Bricks

2. Why do you think digital media is an important sector to be invested in right now in Brazil?

FB: We believe that the digital space today in Brazil is a good space to invest, and not just digital media. It was natural in the beginning to look for some specific investments in digital media but if we look at our portfolio right now, we already have 18 companies, and just five of them are in digital media. All the rest are in more general digital perspective, but even from this perspective, we think that we can find many entrepreneurs and companies that can help other companies grow faster in

part of our strategy, we take minor stakes in the companies, around 15 to 25 percent.

As for the size of the investment — it’s not seed money or the real first money in their companies. The thesis in terms of market is focused on Brazil. We think that we can find many digital companies that can help Brazil’s economy. We like areas such as segmented e-commerce, marketplace and tech companies that enable e-commerce to grow faster, as affiliation companies or big data companies. Also, our main shareholder is Media Group, which is one of the largest media companies in the country.

1. Give us a brief background on e.Bricks and your career background in private equity.

FB: We started E. Bricks about two years ago. We act as a fund and also as a holding company. We have two different strategies for investments and this is all in the digital space. One strategy is for growth based companies that are making 20 million to 30 million Reais. The investment in this space is through the holding company.

On the other side, we do have a fund for investments in the early stage space. In this

Fabio Bruggionie.Bricks CEO Talks Investing in Brazilian Digital Media and Wine

Brazil. For example, we have an affiliation company, the largest comparable in the world, Link Share.

This company can provide us with software that helps retailers in e-commerce, or even in brick and mortar, to grow faster using their inventory, or internet inventory from all over the world. This kind of technology is not as disruptive as Twitter or Facebook, but we think when you are investing in a market like Brazil with the potential for growth in terms of consumption it can help to bring more efficiency to the process and we can make good returns as well.

3. How can investing in these sectors increase efficiency in Brazil’s infrastructure network and why is this important for the country as a whole?

FB: There are two perspectives on this particular issue; the first is mobile. The mobile space is growing so fast. We do have Ultra Mobile which is the largest mobile marketing company in the country. We think that through mobile we can find a very good way to grow faster because the smartphone industry in Brazil is growing faster than the US. Today, the mobile broadband is much more prepared and through mobile we can find many synergies to help the country to grow faster.

The second point is to find a way to develop new companies by pure placing in internet and e-commerce companies, and through those companies help the country to increase their capacity to offer infrastructure. One company that we have is wine.com.br which is the largest wine retailer in Brazil. It’s a pure play in the internet and we have many deals with airline companies, with the ZedEx here in Brazil which is a kind of like FedEx. Together we can help the country grow faster and increase the infrastructure capacity by pushing this demand.

4. You mentioned some of your PE strategies are control, while others are minority. How do you go about evaluating PE investments and what strategies do you typically employ?

FB: Starting in the early stage, the approach is like Silicon Valley VC. Our main interest

is in the entrepreneur at the end of the day so we try to be very friendly in those term sheets and establish a very good partnership with them from the beginning. Acquiring something around 15-25 percent of those companies in the beginning is part of it. It’s very important to keep the entrepreneur very aligned in terms of incentives and keep them in control of the company. Of course, when we do this type of investment, our idea is to sell the company in time make money. We don’t have a lot of pressure with time right now because our fund is two plus eight, so it’s 10 years and we started about 18 months ago.

On the other hand when we make investments in grow stage companies, we acquire equity directly, if not through a fund. We’re looking for control from the beginning. Sometimes we acquire something around 35-45 percent from every relevant minority shareholder. This is why we think that in terms of diversification, this a good way to approach it, because in those companies, we’re not necessarily looking for exits from the beginning. Those companies are more mature and if we need to, we’ll keep them forever. Of course, to do that, the approach is different in terms of portfolio management because we have less companies in the other strategy (today we have seven companies in this space). The way that we play in the company is completely different. We have in place the CFOs from the beginning, and also the CMO and the COO, and we leverage the company using our connections in the country including the connections of our main shareholder.

5. What is your timeline for making additional investments?

FB: In the growth stage, we are very excited to make new investments in the segmented e-commerce space. Our investment in wine.com.br was a very good investment. The company is growing so fast and we are very happy with the entrepreneurs, etc. We truly believe that we can find many opportunities in Brazil in the segmented e-commerce space over the next five years. In the early stage space, we think that the next step will be more diversified and create more critical mass for our portfolio. We have 11 or 12 companies right now and the target we have is around 25-30 companies.

We think that we can increase the amount of companies in our portfolio to diversify more and have more critical mass. The strategy will be the same, so marketplace and tech companies, but the objective right now is to create this critical mass.

6. You mentioned how wine.com.br was a very profitable investment. How did you go about selecting this opportunity?

FB: In the early stage fund, the more pragmatic way to evaluate is market value, so if we have another investor making a following round and establish a new evaluation, that’s the only way to create value in a short term. Of course we have our own TPIs and we watch to see if they are on track or off track, but this is not the pure valuation. This is a very good indicator of whether the company is doing well or not.

In the growth stage space, it’s a little bit different because we don’t have the deepest pockets in the market. I think that wine.com.br is a good investment because they are growing more than 60 percent per year and they are making money. If you look to our market in Brazil, there are not too many companies making money and growing in the wine space so we’re doing well.

7. What advantages have you found attending Latin Markets’ events?

FB: There are so few companies doing what we are doing. Having a way to share our experience, create connections and learn about trade alignments and the development of our industry is very important. Maybe one day we’ll be like Israel or even Silicon Valley, but right now we are far from it. These kinds of initiatives are very important.

LPEJ JUNE 2014: e.Bricks



LPEJ JUNE 2014: Denham Capital

VM: Emerging markets have great fundamentals. The consumption per capita of power in developing markets is way lower than it is in developed markets. In developed markets, trends of optimizing and rationalizing energy consumption could lead to a decrease of consumption. In developing markets, you see a big demand for electricity and in Latin America you see it in all the economies that are moving. You see it in Brazil as well as in Chile, Peru and Colombia. The returns are definitely higher in emerging markets for these kinds of projects.

The question is, ‘Where do you want to go?’ Once you have decided that the next question is, ‘What projects are you going to invest in?’ To me, it’s very clear that electricity in emerging markets is certainly the place to go. And, quite frankly, Latin America is no doubt one of the major opportunities for electricity right now.

5. What has been your experience at Latin Markets’ events?

VM: It’s a great place for networking and meeting colleagues in one place. It’s very convenient for that purpose.

2. More specifically, how and when do you see those Mexican reforms starting to create new opportunities in the country?

VM: I think the reforms are going in the right direction. However, putting in place the regulations and creating a market will take some time. In the next year or two, we will start to see opportunities, and we’ll evaluate them to see how attractive they are. We still have to be patient, but, it’ll get there.

3. How much interest are you seeing from international investors when it comes to investing in energy in Latin America?

VM: Interest in energy in Latin America has increased over the last couple of years, and it will continue to do so. However, I don’t see a huge amount of money arriving. I see more investments on a selected basis and in more strategic ways.

4. What is your outlook more broadly for investing in emerging markets in light of developed and emerging market capital flows?

1. Since we last spoke, what opportunities have you been focusing on in the region?

VM: As you know we invest in three sectors: oil & gas, power and mining. In power, we are actively looking at potential investments in Peru, Chile, Brazil, and more opportunistically in Colombia and some countries in Central America. Every country has its specific characteristics and therefore opportunities and challenges. We are also, to a certain extent, looking at investments in Mexico, keeping in mind the changes to the regulatory framework in energy. We know that those changes will not necessarily transform the market overnight. It might actually take a couple of years before you see an active market of opportunities.

In mining we’re focused on Chile, Peru and Brazil. We’re also tracking the evolution of the sector in Colombia. However, the regulatory framework there doesn’t seem to be completely mature, and miners are having difficulties with obtaining licenses, permits, and getting projects approved. That is of course a big concern for us because as investors want to see and stable and clear process of project approval and development.

In the oil & gas sector, quite frankly, we are not seeing a lot of transactions. We’re looking at a few opportunities in Brazil – as a result of last year rounds of auctions, and we have a presence in Colombia as well. Other than that, in Venezuela, Bolivia and Argentina, the political risk makes it difficult to find attractive investments.

Electricity in Latin America Victor MuñozManaging Director at Denham Capital

“Latin America is no doubt one of the major opportunities for electricity

right now.”

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FROM AFRICA TO LATIN AMERICALPEJ Interviews Patrick Ledoux, Partner and Co-Head of Latin America at Actis

and energy teams span emerging markets and our real estate team covers Africa.

3. What is the geographic makeup of your investor base?

PL: 60 percent of our investors are in the US, mainly endowments and high net worth individuals. 20 percent also comes from Europe and the remainder is Asia, the Middle East and Latin America.

4. Tell us about how you have selected your investments across emerging markets.

PL: We originally started in Africa, and today we cover the whole continent. Africa’s growth story is well known - six of the world’s 10 fastest growing economies are African. More than half of the world’s population growth will be in Africa between now and 2050. Take Nigeria where we have significant real estate investments – the country will have a larger population than the US (>300 million) by 2050. As local businesses expand, and the population


PL: I’m a Partner at Actis and I joined in 2007. I’m responsible for Latin America and we have a structure of co-heading, so I’m Co-Head with Chu Kong for private equity in Latin America.

2. How is your portfolio diversified across geography and asset class?

PL: We have three alternative assets: private equity, energy and real estate. Private equity and energy are what we call global emerging markets and our real estate team focuses on SSA. We were originally created under the name CDC Commonwealth Development Corporation, the financial arm of the British government in 1948. The idea was to provide debt and equity to emerging markets. We were then privatized in 2004. Today we have offices in Beijing, Cairo, Johannesburg, Lagos, London, Mumbai, Nairobi, Sao Paulo and Singapore. We also have a team in Costa Rica dedicated to energy. So in summary, our private equity

volatility, although much of the recent volatility came from the developed markets. We don’t believe in the fly-in model. We want to have a local presence. We also believe in replicating theses.

As an example, we invested in an education company in China and in an education company in Brazil. We learn from our experience in other markets and we try to replicate our investment thesis. We also have local connections among the regions. The trade flows, and capital flows have increased a lot in the past 10 years. In the last five years, Brazil and China have become very intertwined commercially. China receives 18 percent of Brazil’s exports. China is also investing a lot in India and Africa. So we have a lot of connections among the regions because we want to take advantage of this local presence across emerging markets.

10. In light of lower GDP growth currently in Brazil, how are you finding new opportunities and what is your outlook for the region?

PL: I don’t agree with the notion that Brazil is dependent on commodities. Brazil’s exports and imports are very low compared to GDP. Exports represent 10 to 12 percent of GDP. So if you have a 20 percent decrease in exports it will affect 2 percent of GDP. If you compare Brazil to other countries, it’s not very dependent. If China is doing well, of course Brazil will do better, but the impact is more internal because domestic consumption drives 60 to 65 percent of the local economy, and this is similar in India as well. Domestic consumption is driven by credibility and entrepreneurs wanting to invest more. The main concern for Brazil right now is for reform. We expected labor reforms and tax reforms that didn’t come.

The probability of re-electing President Roussef is very high and having political stability will be very important. We have an optimistic outlook for the next five years in Brazil. You have better valuations now and things will improve in the next 18 months. The key is to look for geographies and sub-sectors that are growing at a higher pace or are poised for consolidation.

PL: My colleague Michael Till is better suited to speak to our energy investments in Latin America. Specifically in Guatemala, what’s very important for that specific country is that they are respecting the rules of the game, such as being able to invest and exit.

Political and economic stability are also very important. The size of the country and GDP also come into consideration, but with energy we look for where there is a deficit of energy. This case was an opportunistic approach because the company Gas Natural was exiting from Guatemala.

7. What other companies are you investing in outside of energy with private equity?

PL: We are focused on the consumer. So this means food and beverage, education, restaurants and retail. Globally our investments are 50 percent consumer-related. Another sector that we focus on is financial services, which means bank or insurance distribution companies, broker dealers, payment platforms and credit processing platforms. This is 25 percent of our global investments. The third sector is healthcare, which we started investing in more recently. The last sector is industrials, mainly related to infrastructure and real estate.

8. What is your timeline for making additional investments in Latin America?

PL: In 2008 we raised a global fund and some regional side-pools. All of these funds have been invested and we are in the exiting process. We concluded the fund raising process for fund four in 2013 and we are in the process of investing this $1.7 billion into emerging markets in China, India, Latin America and Africa. We also closed our energy fund at the end of last year at $1.15 billion.

9. Since your firm invests across many emerging markets, how do you utilize your knowledge of each region to complement one another?

PL: We are a long-term investor in emerging markets, and there is higher

grows, demand for quality, well-designed and efficient retail, office and residential space is at an all-time high. We select investments where we see opportunity. Another example is the payments space which presents one of the most exciting areas of African emerging market financial services, underpinned by increasing banking penetration, rising consumer income, and the consumer’s desire to transact safely and affordably.

India is one of the main drivers of emerging markets, so we have an office in Mumbai. We set up in São Paulo because Brazil represents 60 to 70 percent of the private equity investments in Latin America and it’s the largest market. We have a depth of experience investing in energy in Latin America, including the largest wind farm in Central America, Cerro de Hula. Education is another area we have experience in Latin America, and emerging markets more broadly. The sector is already healthy and set to boom. We look for sectors or sub-sectors which are underpenetrated and where organic growth can be expected. Education in Brazil meets these criteria.

Because of our origin as part of the British government operation and the privatization, we have the DNA of doing business in light of ESG. This means we are eager to make some difference for the country while we invest. We want to make money and get a return for our investors, while also contributing to the broader society.

5. Which countries and sectors have you been focused on in Latin America?

PL: In energy we have invested in Costa Rica, Honduras, Guatemala, Brazil, Nicaragua and Chile. These are mainly renewable energy and wind farms, with the exception of Guatemala where we have an energy distribution company called Energuate. In private equity, we have focused on consumer, retail, education, financial services, healthcare, and industrials. Most of our regional focus has been in Brazil, where our office is located, but we have also analyzed opportunities in Mexico, Colombia and Peru.

6. How do you typically evaluate these opportunities in more frontier markets such as Honduras or Guatemala?

LPEJ JUNE 2014: Actis


Valuations have come down a bit becauseBrazil has started facing some challenges with the macroeconomic and political environment, and street protests from the Brazilian people. Despite these headwinds there are still sectors that are experiencing growth. Lower valuations, weaker currency and the scarcity of capital in the region combined with growing sectors, makes Brazil an attractive country to deploy capital. Having said that, good companies will always draw interest from investors despite the economic cycles. We’ve been very disciplined when it comes to valuation; one thing we cannot change in a deal is the purchase price you paid at entry, so we’ve been very disciplined on that end.

5. What is your timeline for making additional investments in Latin America?

EM: We are actively looking to deploy more capital in the region. We have a very flexible mandate which allows us to invest throughout Latin America, acquire both controlling and minority equity interests and invest throughout the capital structure of prospective companies. In Brazil, we have just signed definitive documents to invest in a niche services business in the media and telecom sector. This is an opportunity benefiting from important growth drivers in the region such as a young, active population, the growing middle class with increased income and an under-penetration of media and telecom services in certain areas.

The macro trends we are currently focused on are: increased consumption (consumer products/retail), increased infrastructure investments (infrastructure services), under-penetrated services (financial services, healthcare, education).

EM: We have investors from all over the world, from pension funds, insurance companies and family offices. Historically, our investors were mainly in Europe and the US, with some Latin American family offices and pension funds. More recently, important Asia-based investors have joined the pool.

3. How much interest are you hearing from international investors when it comes to investing in Latin America?

EM: I’ve talked to a diverse group of investors who invest in most emerging markets, and I think the Latin America opportunity is unique. The region is the fifth largest economy in the world, 80 percent the size of China and 2.5x the size of India. What many people don’t realize is that there’s huge scale here and valuations are becoming more attractive. Brazil for instance is cheaper than most emerging markets and the US. Brazil’s Bovespa was trading at 6.8x EV/FW EBITDA in April, compared to Mexico’s IPC at 7.9x and US’ S&P 500 at 9.2x. So I think the appetite is there.

4. What is your take on how the investment environment has changed in the past five years in Brazil?

EM: When you look back at 2007-2008, people were selling sand in the desert so valuations and expectations were very high. It has improved over the last couple of years, not because people just realized that things were expensive, but because they realized that valuations weren’t real, and that the investment environment wasn’t created by fundamentals, but by market demand.


LPEJ JUNE 2014: ACON Investments

Emiliano MachadoPrincipalACON Investments

looking to the americas


EM: ACON is a pan-American private equity investment firm with two separate businesses -- one focused on middle market investments primarily in the United States, and the other on private equity investments in Latin America. In Latin America, we have teams focused on three sub-regions: Brazil, the Southern Cone, Mexico and Central America, and the Andean Region, all reporting to one Latin American investment committee. I’m on the Latin American team covering Brazil.

2. What is the geographic makeup of your investors?

6. Why do you think logistics and ports are a good investment now in the current macro environment?

EM: The reason we like logistics, ports and infrastructure services in general is that they are the main bottleneck in most of Latin America, thus a priority in the growth plans of any country. There are significant long-term investment plans from both the public and private sectors, and these are opportunities where we can capture the strong fundamentals of the sector, yet benefit from private equity returns.

7. How did you go about evaluating this diverse set of opportunities, including the hydropower plant in Panama?

EM: We focus on industries where we have some sort of information advantage, and our flexibility gives us an advantage over other capital sources or due to the complexity of the transaction, others shy away from the deal allowing us to negotiate a proprietary transaction.

If a transaction meets one of the criteria above, we will enlist the services of management teams of our portfolio companies in the same industry, industry experts and consultants to help us conduct business due diligence. That is what we did in our Panamanian hydropower deal in Panama. We partnered with a Mexican strategic to help us evaluate the opportunity. In addition to business due diligence, we hire accountants and lawyers to help us conduct accounting and legal due diligence.

8. What is your outlook for Brazil given the current macroeconomic scenario?

EM: We are cautious but positive. We’ve been in Brazil for many years. The situation in Brazil right now resembles that of Mexico a couple years ago where bad publicity resulting from issues with drug cartels and some pockets of violence in the country scared a lot of the investor community away from the region. We were able to access some good opportunities that were outside those pockets. We were able to navigate that environment because we are long-term investors. We’ve been able to dig, and separate the good companies in the regions that were not particularly affected by those problems. If you look at private equity penetration in Brazil and Mexico, you will notice that it is an underserved region and has strong growth potential. Most of the people that left the region were not committed to the long-term; whereas we are still committed to the region.

We’ve faced some challenges in Brazil, but for Brazil to be a competitive country in the future it will have to implement its long term plans to promote investment in infrastructure, education and healthcare. I

think the long-term fundamentals are solid despite the short term volatility seen in the markets recently. What we need to do is to execute our long term investment strategy, and continue to be disciplined regarding valuations. Our flexible mandate will allow us to better navigate the cycles and better manage our investments’ risk exposure. Our ability to invest in control and minority positions and to invest in equity and quasi-equity securities, will allow us to sit down with any entrepreneur in Latin America, and tailor our investment to the needs of the company.


“People were selling sand in the desert so valuations and expectations

were very high.”


LPEJ JUNE 2014: Gramercy Funds Management

of broadband infrastructure; 2) lack of IT expertise to help mid-market companies select appropriate technology and; 3) limited access to capital. The first roadblock is being addressed aggressively with large wireless/wireline broadband build-outs throughout the region, and we hope to help solve the other two challenges. We believe that there is a big opportunity to transform parochial, modest-growth companies into world-class regional and global players through the application of technology that transforms businesses.

We also believe in the importance of operating locally, so we have offices in Lima, Mexico City and Buenos Aires staffed with local experts with backgrounds investing and operating in Latin America. In addition, we have an office in Silicon Valley to tap into our network of technology experts, and have assembled an advisory board with some of the top telecom, media and technology experts in the world. Finally, we

enabled industries such as business services, consumer, education, financial services, healthcare services, industrials, logistics, media, retail, technology and telecom.

DB: Our high level thesis is related to what we have seen happen in the small and medium-size businesses in the US, Europe and Japan over the last couple decades and how they have reaped the benefits from investing heavily in IT and infrastructure. They’ve achieved improved productivity, EBITDA margin expansion, revenue acceleration and can now sell overseas because they have supply chain management and CRM solutions to help expand globally in a cost-effective, confident way.

In Latin America, significant investment in IT hasn’t really happened by most mid-market companies. We believe that three things have held the region back; 1) lack

1. Give us a brief background on your role at Gramercy. What is your current experience in Latin America?

GF: Gramercy started in 1998 and we are an emerging market asset manager with a little over $4 billion in assets under management. Our focus is on the emerging markets across all strategies. It’s a platform that started out in distressed credit and then broadened out to include equity products as well as traditional debt products. We’ve been expanding our platform over the last 16 years and there are 60 professionals in our offices around the world. The majority of what we’ve done historically has been in Latin America but it’s across all emerging markets.

David and I are the Co-Heads of the Gramercy Latin America private equity group. Our group is focused on mid-market investments across sectors in technology-

LPEJ Interviews Gramercy Funds Management

David Britts Managing Director and Co-Head of Latin America Private Equity

Gustavo FerraroCo-Head of Latin America Private Equity and Head of Latin American Markets

have our headquarters in Greenwich, CT which brings in the extensive experience of Gramercy, including our CIO and Founder, Robert Koenigsberger, who has been investing in Latin America for over 25 years. The countries that we think will provide us the greatest investment opportunities, from north to south, are Mexico, Colombia, Peru, Brazil and Argentina.

2. What advantages does investing in private equity in Latin America provide to your portfolio?

DB: Gramercy invests across emerging markets globally, so we looked at the entire world and realized that Latin America provided a lot of opportunities and that we had extensive investment experience in the region. Compared to somewhere like China, Latin America private equity is very under penetrated. On a relative basis, there are far fewer competitors, and not as much capital

available, which results in more attractive entry prices. If you look at Latin America, the consumer market is exploding and the middle market is poised for growth. We are fairly optimistic about the exit scenario in Latin America as well.

In the end, we think it’s an attractive market because valuations are relatively low and you can typically avoid auctions. We think the vast majority of our exits will be trade sales because there’s a vast amount of interest at the corporate level to get a position in Latin America. There is also some hope on the local market capital side. An average hold period is five years, so if you look at 2019, 2020 one can imagine the local markets are going to continue to strengthen and present additional exit opportunities.

GF: 60 percent of all of Gramercy’s investments historically have been in Latin America and our CIO has been very vocal on the Latin American opportunity. Having said all that, we thought it would be important to have a local team in place that would give us access to the flow of transactions in the market we want to cover. We believe that Latin America presents the best opportunity.

3. What is your rationale behind entering private equity?

DB: Whether endowments or large pension funds, institutional investors are looking to develop deeper relationships with managers across asset categories. One of the things that our investors were interested in was private equity in emerging markets. We have the vast majority of other major asset classes on our platform, so private equity was a natural extension and we think Latin America offers the best opportunity.

4. What have you been hearing from international investors on their appetite for investing in Latin America?

DB: I would say there has been an increase in the awareness of the investment opportunity in Latin America. There’s no question it has been increasing, but they still want to see the returns of some of these earlier funds. Some of the funds back in 2000 did not perform very well. The concern that we hear from international investors is mainly around exits.

5. Given current capital flows and account deficits in certain emerging markets, what is your take on the opportunity set right now?

GF: Now is a great time from my point of view. A lot of limited partners see it that way as well. Obviously you want your entry point to be when the country or sector is out of favor. They go through cycles. We happen to be going into a cycle right now where emerging markets have been somewhat out of favor with investors in the public markets. If you’re an LP investing into a private equity fund, you’re looking for a 10 year return and when public markets are out of favor, that’s when valuations for private markets are lower. Credit markets have tightened up in emerging markets so this creates an opportunity from a private equity perspective. The public markets are in an infant stage of development, though Brazil is more developed. Five years down the road, the regional public markets will be more developed and it will be a good time to sell current private investments.

LPEJ JUNE 2014: Gramercy Funds Management


“We have an office in Silicon Valley to tap into our network of technology

experts...”


company and distribution company.After my years at Petrobras, I moved to work with Eike Batista. He was starting a number of mining projects and I became the Managing Director of his company, MMX. We did a very successful IPO, with a pre-money valuation of $1.4 billion. After two years of successfully implementing the business plan, I led the negotiation when the company was valued at $10.5 billion. We then carved out two projects for $5.5 billion cash. Then we created OGX. As CEO, I started and structured the company. We raised $1.2 billion in a private placement and later the IPO had a pre-money valuation of $18 billion. At OGX, we needed the capacity to have our own FPSOs and other services, or else we would be waiting in line after Petrobras had its demands fulfilled. Then, I went to start another company called OSX, raising $1.6 billion in its IPO.

This experience at OSX was a base for the idea to start Mare in order to invest in the O&G supply chain. I decided to leave the company and Eike’s group in 2010 to start my own company with Demian, whom I knew from the time when I was in Petrobras’ retail company and he was at BNDES.

2. What is your current timeline for making investments in Brazil? Which areas are you currently focused on?

DF: We aim to invest in the supply chain of the O&G business in Brazil. The recent oil discoveries in the country’s pre-salt offshore oil fields have created a big challenge for local

The Brazilian O&G industry expects investments of $50 billion a year by oil companies. In addition, with the local content rule, around two-thirds of these capital expenditures have to be invested in Brazil. There are currently more than 2,000 companies in the O&G supply chain. A large part of these companies will need not only capital, but also governance and guidance to face upcoming challenges.

During my career, I’ve held quite senior roles in the investment and financial sectors. As Vice President of BNDES, the national development bank, I ran the areas of energy and infrastructure. Later, as president, I sponsored a more pro-active role of the bank in its equity investments. BNDES has been investing in private and public equity for decades. My later roles as President of Banco Nossa Caixa, where I led the merger process with Banco do Brasil, and as Executive Director of Vale, a Brazilian mining company, gave me experience in managing change.

RL: I spent over 26 years at Petrobras in several positions, which gave me a very broad and senior understanding of the sector. I have been the General Manager for oil production in three out of five areas of the country, where I learned how to address challenges in oil fields, in logistics and E&P in general. This last region accounted for roughly 50 percent of the country’s oil production when I started and ended with 85 percent of the production by the time I left five years later. I was then Deputy Director of E&P countrywide, President of gas and power business and then CEO of BR Distribuidora - Petrobras’ retail

1. Give us a brief overview of your firm and your career experience in the energy sector in Brazil.

DF: We started Mare three years ago in order to take advantage of the great opportunities in the energy sector in Brazil. These opportunities are especially in the Oil & Gas sector, due to the huge amounts of oil discovered in the country’s pre-salt offshore oil fields. These fields will probably move the Brazilian reserves from the current 15 billion barrels of oil equivalent (bboe) to up to 100 bboe in the next years.

To give you an idea about the size of this market, the latest estimate for the Brazilian O&G economy was around $300 billion. This is comparable to the overall GDP of Chile or Colombia. The O&G GDP has been growing at an average rate of 16 percent per year, compared to around 3 percent for the total Brazilian GDP. We expect this sector to grow faster and mostly unattached to the overall GDP, with resilience against economic downturns.

O & G SUPPLY CHAINLPEJ Interviews Rodolfo Landim and Demian Fiocca - Managing Partners at Mare Investimentos

suppliers, especially with the local content rule. It is important to mention that our strategy is not to invest in oil companies, and therefore we don’t incur the exploration risks. We believe this strategy to be more resilient, with lower dependence on oil prices.

As we mentioned, locally established services companies will need both capital and management support to face these challenges. We target companies with competitive advantages. These could be, for instance, a strong technology or a privileged location.

RL: To give an example, the first company we have invested in is DeepFlex. It makes flexible lines, and critical equipment for deep-water oilfields. These lines connect the bottom of the ocean with the production platforms. I know this market very well. This niche market demands very specific knowledge and presents high profit margins. In Brazil, there were mainly two suppliers of those lines until today. We noticed the opportunity to develop a new technology for state-of-the-art equipment designed to have greater efficiency on deeper waters, such as the pre-salt oilfields, where the conditions are very different. The beauty of this is that the new product will be developed exactly for a market that will have, let’s say, 85 billion barrels of oil to be developed.

The second company is a shipyard for maintenance and repair services in supply vessels. There are not enough shipyards to do maintenance services on the vessels’ fleet, forcing them to dock in distant locations.

In addition, the existing shipyards in Brazil usually provide low quality services, getting constant complaints, but still are able to charge very high rates.

DF: Our estimates are that today the docks located in areas closer to the oilfields in Brazil can attend to roughly 15 percent of total demand. This is why many vessels have to travel for example to the northeast, or even to Uruguay or Argentina. In this deal, we have a group of engineers that developed the project and a great area in Guanabara Bay. Because our team also brings value as managers, we made a very attractive negotiation that will bring great value for both for the entrepreneurs and our investors.

3. When I speak with energy investors, they point to regulations playing a crucial factor. What has been your experience with the regulations in Brazil?

RL: In terms of energy, Brazil has two national regulatory agencies. The National Petroleum Agency regulates O&G and the second regulates electricity. In the O&G space, regulations are very straightforward and stable. The government never changes what is established on a contract. What it can change are the future bidding processes. This recently happened with the discoveries of the pre-salt: 27 percent of this area had been granted to oil companies when it created a new regulatory system. However, the new rules were valid only for future bidding rounds, keeping the previously granted rights.

This recent pre-salt discussion happened because there was this huge amount of oil discovered with a high probability of success. Therefore, in the pre-salt fields, oil companies have to pay more in advance and give a share of their production, because they are taking a smaller risk. Even so, all previous contracts were respected. In addition, many licenses had been granted at a time when the oil barrel was around $40. Even when the oil barrel hit $140 in 2008, there was no increase in taxes. I believe it is actually a very stable regulatory framework.

DF: Another issue around the pre-salt regulation is that Petrobras has to be the operator of these oil fields while it must also own at least a 30 percent interest in the winning consortium of the oil field auction. This regulation originated from the concern that some very large oil companies, or even state-owned foreign oil companies, could be interested only in acquiring rights on these oil reserves without developing them. By having Petrobras as the leader of the group, the government can be sure that all the investments will be made and that the country will benefit from the development of oil activities. Overall, this has been successful because Shell and Total voluntarily wanted to partner with Petrobras and each one had a 20 percent interest in the latest bid round, already under the new rule for the pre-salt. Important to mention: with 10 billion barrels of oil, this oil field alone is a $1 trillion project.


1. Give us some background on General Atlantic and your role at the firm.

ES: General Atlantic (or “GA) is a global growth equity firm with $17 billion in capital under management and a portfolio of around 60 companies that have more than 300,000 employees worldwide. GA has 11 offices around the world and 90 investment professionals. We were founded in 1980 as a private investment firm to invest the funds of the Atlantic Philanthropies established by Charles Feeney, a global entrepreneur and one of the world’s most notable philanthropists. We seek 10 to 12 new investments each year with an investment range of $75 million to $400 million per investment, totaling $1.5 billion to $2 billion. Our goal is to provide capital but even more importantly, to provide expertise and resources to help these companies continue to grow.

I am a Principal at GA’s Brazil office in São Paulo where we cover all of Latin America, but with a focus in Brazil and Mexico. I am responsible for working on new investments and also help manage our portfolio companies in the region. We have eight portfolio companies in Latin America and have invested over $1 billion during the past few years.

2. What are the profiles of your investors and where are they located geographically?

ES: GA’s capital comes from a select group of wealthy families, well-established endowments, foundations and strategic institutions from different geographies. We do not have a fund but have an ‘evergreen’ structure with managed accounts which allows us a long-term investment horizon that appeals to entrepreneurs with whom we invest.

LatAm GROWTH EQUITY

LPEJ Interviews Eduardo Samara, Principal at General Atlantic

LatAm GROWTH EQUITY

ES: We are very optimistic and currently making investments in Latin America, particularly in Brazil and Mexico, given the size of both economies. While recent economic growth has been below our expectations, as long term investors, these fluctuations do not affect our long-term perspective of great growth companies.

The penetration of internet and technology is driving many of our investment theses. Whether Brazil grows two or four percent, our sectors will benefit anyway from enormous changes in the way people live, consume, make investments, travel, etc. Of course, if the economy grows at four or five percent instead of two percent, it’s better for everyone, but usually we try not to count on that.

7. What have you heard from your international investors when it comes to investing in Latin America?

ES: We hear that there is a lot of interest in Latin America and Brazil particularly. GA has been present in Brazil for more than 10 years, as we started by helping our portfolio companies do business here. We made our first direct investment in 2007 and decided to open an office in 2009. In this context, we have faced many good and bad cycles and we are here for the long term. Hopefully other investors will have the same long-term perspective as we do. Latin America is very attractive to us as there are so many outstanding companies and innovative entrepreneurs and competition is still low compared to other developed markets.

that our main investment thesis is to partner with great growth companies. At the same time, we often pursue asset light companies which tend to be in the technology, health care, financial service, consumer and business services sectors. We also tend to invest in companies that have technology as a key driver of growth and innovation.

5. Have there been instances where you utilized your knowledge of other countries within emerging markets to make investments in Latin America?

ES: Yes, our global focus allows us to learn and share with our colleagues in other parts of the world. We work closely with team members from other geographies where GA has offices, including people from the US, Europe, Asia and India. As a global firm with one single pool of capital, we are very aligned to work with and help other geographies within GA. Often, the sector heads, of which most are based in the US, come frequently to Latin America.

The regional teams usually lead prospecting and execution, but constantly work together with professionals from other regions, as they add a lot of value given their sector knowledge and past experiences with similar businesses. For example, when we invested in Decolar.com, we involved team members from the US as GA had been an investor in Priceline, or in the case of XP or Linx, where GA has great knowledge about the financial services and software sectors respectively.

6. What is your outlook for private equity opportunities in Brazil in the coming years?

3. What is your current timeline for making Latin American investments and where have you been focused on recently?

ES: We don’t have a specific fund or amount of capital dedicated to Latin America. In this context, there could be periods where GA makes lot of investments in one region, but there may be periods that we choose to pursue investments in other geographies, such as North America, Europe, Asia and India. However, we have been very active in the region for the past few years. We currently have a portfolio of eight excellent growth companies in Latin America.

We are a shareholder of companies such as BM&F Bovespa (Brazil’s equities, futures and commodities exchange), Linx (leading software company for retailers in Brazil which went public in 2013), Sura Asset Management (a pension and investment firm in Colombia with operations in many countries in Latin America, Aceco TI (premier provider of customized data center solutions in Brazil and Latin America) which we recently announced the sale of to KKR, Decolar.com (the largest online travel agency in Latin America), XP Investments (independent broker-dealer and financial supermarket in Brazil), and more recently Smiles (one of the largest loyalty programs in Brazil) which also went public last year.

4. Is there a common thread to how you go about evaluating these particular opportunities?

ES: As a growth equity firm, we pursue investments which we believe can grow 2x-3x times in a period of five years, so we can say

LPEJ JUNE 2014: General Atlantic


to strong inflections points. In general, we are exposed to industries that are non-discretionary and basic-need related, such as education and healthcare. This is important, because it gives us the ability to cope better with inflation and have control over prices. In addition, such sectors tend to perform better in erratic times, which allows us to cross volatile times with minimal side effects.

We are a total of 51 professionals dedicated to private equity with a hands-on approach. Most of us have an operational background and get directly involved with the management of our companies. We take an associative approach and like very much partnering with owner operators. We believe that combining existing company management with our team builds a powerful managerial equation. We normally take control of small and mid-cap companies and invest on a primary basis, which means issuing of new shares and cashing in companies to fund their business plans, and partnering with owner operators.

2. Give us your take on the current investment environment in LatAm.

MD: When you think about Latin American countries, you’ll find all sorts of economies, including the extremes like Argentina and Venezuela that today are facing substantial institutional and political challenges. There are approximately 400 million inhabitants in South America and Brazil, with 200 million inhabitants representing approximately 65 percent of GDP. Most of the economies in Latin America became a republic over the last 150 years and the development of these countries was accelerated only during the second half of last century when military

Marco Nicola D’Ippolito

PartnerPatria Investimentos

1. Give us a brief background on your role at the firm and your approach to PE.

MD: I’m one of the Partners responsible for Patria’s private equity division. I joined the firm approximately 10 years ago. Currently, I am involved with the management of five of our Fund III and Fund IV portfolio companies and a couple of functional activities within our organization, such as distribution. We started back in 1994 and are now managing our fourth private equity fund.

Patria has been investing in alternatives in Latin America for the last 26 years. We serve approximately 120 LPs and manage $6.4 billion in four business units: private equity, real estate, infrastructure and capital management. We are 18 partners, and have been associated with Blackstone since 2010. On the private equity side, we have two active funds. Fund three exceeds $600 million and four is $1.2 billion. We’ve been able to hold top quartile returns since our inception. The first vintage was ‘97 and the second vintage was 2002. In Fund III we’re yielding 35 percent gross, and on Fund IV we’re yielding 57 percent gross. We underwrite for a 3x multiple of invested capital and have a track record of 4.7x on realized investments. We’ve been able to produce substantial alpha in an environment where beta can be volatile. Our companies have been able to grow EBITDA historically by over 35 percent year over year for long periods.

We are exposed to Latin America and mainly Brazil, though we are now expanding into some other countries within Latin America. We have a top down approach and elaborate investment theses that are generally subject

LPEJ JUNE 2014: Patria Investimentos


THE OUTLOOK FOR BRAZIL IN 2014

The 6th Annual Private Equity Brazil Forum is South America's largest international private markets investment conference. The forum brings together 600+ investors, funds, and advisors for a two day meeting discussing sectors, due diligence, and private equity investment opportunities in Brazil and around the world.



approximately 350 companies and that’s it. In addition to that, the Brazilian and Latin American Exchanges do not represent GDP. About 70 percent of the Brazilian Stock Exchange is made up of commodity-related companies, banks and public utilities, while their share in GDP is not half that percentage.

So whenever you look at the screen at your trading terminal and say, ‘Oh, Brazil’s economy is suffering, look at the tumbling Stock Exchange,’ or the other way around, ‘Brazil is so overheated, look at the soaring price of that stock.’ That’s not really a proxy of the GDP behaviour. Stock prices have a lot to do with liquidity issues and, also, if they’re going up or down, this has a lot to do with swings in the price of commodities because you have a stock exchange which overstates the size of the commodity business.

On the other hand, there is a big portion of the GDP that is represented by illiquid markets or private equities. These markets are sizable and from the capital markets perspective materially underpenetrated, as a function of a legacy of historical high cost of capital that in turn delayed the development of these markets. To give you some examples in Brazil, mid-cap companies raise debt at a cost between 18 and 22 percent per annum. Another example is that 75 percent of corporations still own their real estate, and another one is that debt ratios at corporate and consumers level are respectively 35 and 40 percent of their annual turnover.

My sense is that illiquid markets within emerging economies present an excellent long term opportunity, as there has been a historical structural mismatch of capital flows between liquid and illiquid markets that will still last for many years. But that is clearly narrowing, catching up under different formats within infrastructure, real estate and private equity investments.

4. What is your opinion on investor trepidations and capital flowing more to developed markets in light of current account deficits and lower investor confidence?

MD: Noise in global capital markets has to do with complex geopolitical and institutional issues that affect several

poor, or even miserable, and now are less poor and are starting to have access to basic needs. This kind of non-discretionary consumption is steady and resilient. A big number of Brazilian families for the first time are having access to education, transportation, housing, security and health care. People will get it with or without inflation, with or without high cost of capital, and so on. Since the end of the military government in Brazil and many Latin American countries, not very much investment has been made in infrastructure. So on one side, there is demand from this

rising middle class that raised from 33 percent of the population to 55 percent of the population now in less than 15 years, and that’s sustainable demand.

On the other side, governments are not able to provide decent public services. So unlike other geographies in other parts of the world, like China and other emerging markets, governments in Latin America are not very capable of serving the population. This is why many of the opportunities in Latin America are related to investing in whatever the government is not doing properly. Infrastructure, health care, education and transportation are the sectors that we focus on and where you can have steady demand and also scalable businesses.

3. What is your view on the liquid versus the illiquid markets in Brazil?

MD: The liquid markets not only in Brazil, but also in other countries in Latin America are indeed illiquid. That’s very puzzling. How can a liquid market can be illiquid? It’s about concentration. Just to give you a reference, the Brazilian Stock Exchange which is one of the largest in the world, has only 450 names. And you can take out 100 names that are basically companies that were taken public during the ‘70s and actually never made any efforts to really create some liquidity for their shares. You take out that number and you get

governments across Latin America pumped in cash, under the format of debt, into infrastructure, building the basics for the country in order to become real economies.

By the end of the ‘80s, the military governments passed on to civil ones and countries with a relatively decent infrastructure, despite being still very much insolvent and with substantial income per capita inequality. The civilian governments struggled to cope with insolvency and slowly managed to reduce sovereign debt by combining a number of different actions,

including selling national government owned companies, and opening the economies. After 2000, especially in Brazil, the government managed to reduce income inequality via social government programs, and that’s when the real consumer markets started to rise. Just two decades ago, the consumer markets really started to grow.

In the 1950s, Brazil had 50 million inhabitants, and today we are 200 million inhabitants. Today, Brazil is the seventh largest economy and the fifth largest market for consumer goods in the world. It is also important to mention that over the last 20 years not much investment was made on basic needs and infrastructure, therefore, the government’s ability to serve the population has been undermined. This imbalance creates a number of social and economic asymmetries which can be observed today. Take a situation where, on one side, you have a big mass of consumers that have crossed the poverty line and become consumers. These individuals are willing to fulfil their consumer dreams, and on the other side the government with its significant limitations to serve – especially basic needs.

Although some countries in Latin America are growing at two to three percent GDP per annum, several consumer markets in the Latin American countries are growing much faster than that. In Latin America and Brazil, this is about people that were

“Brazil is poised to become the feeder of the world, therefore going long in

agribusiness is a good idea.”



agencies getting fast track approvals to get the projects going. They don’t want to be a burden in this process.

As far as politics are concerned, in Brazil, you have the leftist parties and the centre left – nobody is a right-wing conservative in this country. The Worker’s Party is in power now and Dilma Rousseff, who was expected to be a bad politician but a good executive, is our president. The great criticism of her is that she has the willingness to address the issues, but she can’t get things done properly. She is having a hard time creating the necessary political conditions and forging the agreements in order to get projects moving. It’s likely that she will be re-elected because social progress over the past 10 years has been impressive and the recall effect is very strong. In this scenario it will probably mean more of the same, which from a private market perspective is mildly positive. We will continue to see the government supporting private investment the way I described before. In the unlikely scenario that opposition parties win, then there’s a material upside because they have a far more liberal, market-friendly approach and much better execution capabilities. The electoral cycle does not pose a macroeconomic risk and Brazilians will decide who is better suited to address those key themes, and have a lot of fun at The World Cup in the meantime.

We have the ability to select assets, back up these firms and create a sizeable company around basic related services and consumer needs.

It may be an intuitive decision to channel short-term money back to liquid developed markets if you are worried with noise in emerging economies, but when we’re talking about private markets, then this is not the best option, certainly not as long as Brazil is concerned. Markets can be erratic in the short-term and this is very difficult to control, but they are cyclical as well, and this is an important element to be considered. We’ve made our best deals in adverse and unstable times. I think that means something.

5. What is your outlook for Brazil in the coming years keeping in mind The World Cup, elections and the current macroeconomic scenario?

MD: In the near future the key themes are related to basic needs such as education, health care, transportation, housing, security and infrastructure as well. Those are sectors in which pent-up demand in Brazil is huge. Although the government has limited ability to deliver, they have the good will to help these sectors. You will find the National Development Bank, and other government agencies, providing long-term financing to beef up these sectors, and government

emerging economies and their relations. Investors are generally conservative; therefore it is natural to conclude that when confidence is low, capitals flow back to developed markets.

Brazil is in a sweet spot in Latin America and the world, even though it is not growing 4 percent per annum now because there are some headwinds holding back the economy. Investing in Brazil on a directional basis might be tricky because you may not get the 4 percent plus GDP growth that you expect in an emerging market. But if you then slice the GDP and take out of it the less spectacular side of Brazil, what is left is indeed very interesting, sustainable and resilient.

For instance, agribusiness is a long position for sure because of Brazilian competitive advantages and middle classes worldwide are growing. Brazil is poised to become the feeder of the world, therefore going long in agribusiness in Brazil is a good idea.

In my opinion, the best way to explore this business and other appealing sectors is through private equity, because there is a very limited supply of assets from a public equity perspective. This puts the private markets on this part of the globe in a very advantageous position. That’s where we leverage ourselves, and are able to create very compelling alpha in our investments.

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