Unless you live in a cave, which is highly unlikely if you are a reader of this newsletter, it is obvious for most Asset Managers that the environment in Brazil has improved significantly. Retail stores are no longer closing en masse, closed stores are opening as new businesses, the REIT IPO market shows signs of life, and big banks such as BTG Pactual are listing IPOs in various industries and, of course, SELIC has hit an all-time low of 7% as of the writing of this document.

An important question is the following: as an asset manager based in the unique emerging market of Brazil, how do you truly take advantage of the next cycle? How does your platform go to the next level during this potential 2 to 5 year rally? How does your firm become a major winner in the next wave that potentially had its official kickoff on Thursday, December 7, 2017?

Purpose of This Newsletter

This newsletter’s objective is to consider how to maximize an asset manager’s ability to scale during the next economic cycle. In particular, how to balance the need for capital while at the same time building up assets under management, and how to achieve this rapidly.


The Last Cycle

Image: Cover The Economist Magazine November, 2009.


Remember This?

During its last economic cycle, Brazil was a poster child. The country had significant GDP growth, the commodity super cycle was in full swing, and US investors were allocating significant sums to Brazil. Importantly, both the US and Europe were in recession and had either negative or low GDP growth. I remember because I was here. Actually, English almost became the official language of Itaim Bibi. (This is a joke, by the way, but was not far from accurate in some locales.)


Momentum Investors

Due to the significant positive press Brazil enjoyed during the last cycle, to a large extent the large-scale winners of the asset management game were those that were skilled for sure, but also those that were first to market. There were and are still significant advantages to be had through an articulation of this Brazil real estate MACRO story.

The pitch book to investors at that time in the cycle was a clear thesis of: booming middle class / GDP growth / emerging market to rich shift ($10,000 to $30,000+ USD/per capita) / pent-up demand /etc. It all made sense and, importantly, not only did people buy the story, the early entrants and exits did quite, quite well.

However, those that did not exit in time, including investors in many of the larger funds, were crushed by the recession and, for USD investors, were impacted significantly by the 271% change in the exchange rate (peak of R$1.54/ US$1 to R$4.163 / US$1). Some of these investors lost so much money that you cannot say the word Brazil in their presence. I am not joking. I personally know one family office and one large prominent RE PE firm that were traumatized by incredibly negative experiences in Brazil via investments at the wrong time and one project that became a large zero.

Marketing Process/From MACRO to MICRO

During Brazil’s previous economic cycle, investors were focused on the MACRO play that Brazil made sense as a place to invest and then focused later on the micro of the specific investment opportunity and its underlying thesis. This orientation affected how asset managers and sponsors talked to investors (30,000 ft or 9144 meters) and obviously had an impact on investor behavior. This was so effective at the time because the backdrop of other economies was so, so dire. The PowerPoint presentation was easy and beautiful, everyone wanted to believe. Skepticism was quite low.

New Cycle

It is quite possible that the next cycle, which we will say had its official start on December 7, 2017 with the record low interest rate, has just as attractive investment opportunities as the 2007 to 2009 period in Brazil. However, the backdrop of how Brazil compares to other global economies is significantly different. The context in which an asset manager goes to market to sell Brazil could not be more different.



How to Respond?

Critically, Brazil still has incredibly strong fundamentals for global investors. The biggest positive factor is its scale. In fact, in a business focused on global investors, scale is  the first criteria to enter a market. In addition, with such a significant change in inflation 10.67% in 2015 to 2.88% in 2017, interest rates (14.25% in July 2015 to 7% in December 2017), and business and consumer confidence, opportunities for attractive investments abound.

However, the orientation of this next wave of investors is significantly different than that of the previous cycle. For readers interested in learning more about this type of investor, please sign up to receive our free guide to sourcing global large-scale investors.

Counter-Intuitive Leap

While the investors in today’s cycle are much more deal-oriented than the previous cycle, it is actually not to your benefit to immediately market a transaction. Why?

Not Only Brazil → Not only your trade

This investor may not have a specific allocation for Brazil and is considering Brazil along with many other markets. Crucially, in the last cycle with Brazil as an investment grade country, there were several large investors that had specific allocations to Brazil. There was no need for an asset manager to focus on the “why now?” as the investor had already said, “I want to be in Brazil.”

The current environment is different. Admittedly, Brazil has improved and thoughtful investors recognize that now may be an opportunity; however, they are cautious. The first step to get this investor’s attention is to create a thesis as to “why now?” Why is the investment strategy that you have chosen best to execute now? This needs to have data and a connect-the-dots orientation.

Ideally, there are several factors in your investment strategy that drive the “why now.” Causes such as the following are quite attractive: one, the downturn reduced the cost basis; two, a secular micro targeted demand story has emerged; three, improved macro conditions (bank credit / inflation) have provided momentum to the segment, etc.; four, capable execution partners are available and have positive track records; and five, the market has scale of entry and exit.

Key Questions to keep on the top of your mind are the following:

  • What created the investment opportunity?
  • How has it evolved in the past two to three years?
  • What changed?
  • What is the scale?
  • How was it affected by the downturn?
  • How will it react to an uptick?
  • Competition?
  • Why now?

Starting Point

The race has started. Brazil’s interest rates hit an all-time low and US assets are priced at a level that many smart investors are becoming quite cautious. Thoughtful global investors are open and desire to understand the opportunity set in Brazil. However, the keyword is thoughtful.

If you have a clear investment thesis for which you specifically feel now is the time to execute, please reach out to Ricardo Carvalho at ricardo.carvalho@indevcapital.com, one of the nicest guys you will ever meet, to set up a 15-minute call. Think of this call as a virtual cafezinho sem compromisso.


Happy Next Cycle!


Warm Regards,

Joseph Williams

CEO & Founder InDev Capital

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