At InDev Capital, we strive to make the unobvious obvious for global opportunistic investors. InDev Capital’s core purpose is to provide well researched and thought out investment theses, contextual intelligence to understand the “why now” of investment opportunities, and top-tier experienced local co-investment partners. Our work creates an environment where unobvious investment opportunities in emerging markets become obvious and actionable investment opportunities for global investors. These unobvious emerging market investment opportunities upon which we focus usually involve mispricing events such as market changes (in macro, micro, equity, or debt capital markets), capital dislocations, financial or operational distress, or situations where large-scale capital has an advantage that drives opportunistic returns.
We often see our best investment opportunities during downturns and market corrections. Brazil’s most recent recession serves as an example of our work. This downturn created and continues to create numerous unique opportunities, including the one discussed in the next section. When market changes occur, we study where investors, including InDev Capital as a merchant bank and co-investor, can achieve high risk-adjusted returns.
In fact, Brazil’s recent downturn created significant opportunities for global opportunistic investors. Brazil’s core interest rate reached 14.25% and inflation reached 10%. This environment created significant pressure on real estate asset owners. Given this economic scenario, there were select large-scale opportunities to buy at significantly below replacement costs and sell at a significant premium to the acquisition price almost immediately. InDev Capital’s efforts resulted in one of the largest real estate transactions of 2018 and one of the largest exits of 2019 (transaction was well over US$100M in equity value), which achieved an IRR north of 40%+ in less than twelve months.
Recent US$130M Merchant Banking Transaction Executed by InDev Capital
A scion of a large business family decided to expand his family business into an adjacent business sector. Based on the family’s connections and unique relationships, the founder of the new company was able to source significant capital to start a large-scale logistics company in an important region of the country but not in the core metropolitan areas of Rio de Janeiro and São Paulo.
The capital structure was quite unique and offered significant upside if things worked out, and severe complexity if it did not. The Brazilian economy entered a recession and, although the business plan worked to perfection, the capital structure came back to haunt the entrepreneur. The seller ended up in a prepackaged bankruptcy situation.
The real estate asset was quite large (203,000 square meters) and the capital required (north of US$100M at distressed pricing) was a big bet even for the key markets of São Paulo or Rio de Janeiro, but extremely large for a different region of Brazil, as was the case. Based on the factors above, the investment opportunity was in limbo for 18 to 24 months.
InDev Capital, a local sponsor, and a global opportunistic investor stepped in as the “White Knight” and purchased the assets (fully leased logistics condominium) from the banks at a significant discount to replacement value with a going-in yield to cost of 12%+.
TRANSACTION CHARACTERISTICS
Global Investor – Opportunistic, desires to enter Brazil market at a time of distress and take advantage of high yields on existing assets. Immediate 250 bps to 300 bps acquisition spread is created through value-based purchase price. The exit occurred at an over 400 bps spread.
InDev Education Process – Significant education on Brazil family office buyer behavior, regional clusterization of distribution, cold storage market information, securitization markets, and discussion of which sector to focus on (residential, commercial, logistics) based on investor requirements.
Opportunistic Transaction – Going in 12% yield to costs, sold at an 8% yield to costs. IRR of 40%++.
Local Sponsor – CEO of project sponsor created an Opportunistic Hedge Fund that reached US$500M in AUM, created a Real Estate Platform that reached US$1.25B in assets. Firm co-invested 10% of equity requirement. InDev Capital invested half of our advisory fee at closing, guaranteeing total alignment.
Macro – Weight of time caused asset owners significant situational distress at purchase. Improved interest rate environment expanded universe of buyers at very attractive exit rates.
InDev Capital – Brings all the pieces together: sourcing the local sponsor and transaction, educating the market, sourcing the investor, co-leading the transaction to a close, and co-investing alongside global investor.
Summary
InDev connects the smart, experienced, knowledgeable local project sponsor with a large-scale global investor for unique high-return opportunities at special times in the emerging market’s real asset and economic cycle. Often, these opportunities are off radar and can be difficult for global investors to access in the time necessary to execute an opportunistic purchase price.
As compared to developed economies, emerging markets are much more volatile, their macro market cycles tend to be shorter, and their politics have a greater impact on valuation and exit. In addition, their capital markets are often less liquid and less fluid. Hence, InDev Capital serves as a co-investor and advisor to guide investors through the often difficult journey to unobvious large-scale high risk-adjusted return investment opportunities in emerging markets.
