Perfect is the Enemy of Good

 

My two-year-old daughter is a budding perfectionist. As my wife drinks coffee every morning, my daughter tries to copy the act by having a cup of milk in a coffee cup. We have a coffee cup that has a slight chip on one side. My daughter will inspect her cup every day to make sure that the chipped cup is not hers. If she finds that she has the cup with the chipped side, the screaming starts. Alas, to no avail, I tried to explain that Perfect is the Enemy of Good.

 

Perfection Is Not Your Friend When Sourcing Large-Scale Global Investors

 

Purpose of this Newsletter

This newsletter will discuss how perfection can be the enemy of good as asset managers in Brazil pursue large-scale overseas capital partners for the next real estate cycle. In particular, we will discuss why getting it out the door is so much more important than getting it perfect when looking for large-scale direct investors. This newsletter hopes to provide a roadmap for real estate asset managers to save time and make more money with a large-scale strategic investment partner.

 

Situation

An asset manager decides that they have “the deal of a lifetime” and seeks a large-scale partner. Great! In addition, they hire an advisory firm to help them sell the deal. They decide on the structure, the price, and the terms they desire. “Go Sell!” the asset manager tells the advisory firm. The asset manager and the advisory firm have put significant time into building the model, have a wonderful powerpoint presentation, and have “perfected” the ideal transaction, at least in their minds. In reality, they have put the cart before the horse and have wasted a lot of time.

 

Investor Thought Process

Global investors, similar to asset managers, all have investment committees and their biases. As one prepares to raise capital, THE LAST THING one should do is just shoot deals in the air. The investment opportunity for which the asset manager seeks capital is part of a larger investment thesis which, of course, includes Brazil. What does this mean?

 

Investment Thesis

Crucially, if a global investor takes a hard look at a deal based in an emerging market like Brazil, you can bet that they have done a detailed macro check. Serious investors have determined if they will or will not hedge, have an idea of the costs, and have factored this into the model. Importantly, they have a view on Brazil’s economy and the timing of the cycle. Finally, while they are open to various ideas, there is likely to be a thematic approach to their investments. For example, most investors at this stage in the cycle tend to be value investors. The closer the investment opportunity thesis matches their desire and viewpoint, the closer one is to cash.

 

Product Development Process

It is important to recognize that the best way to source large-scale investors is to build a relationship with the investor through an intelligent investment thesis that the investor believes in. Once the investor buys into the investment thesis, then – and only then – can you start to look at investment opportunities. However, we suggest that the transaction review process is  a collaborative effort with the investor even before a transaction goes to an MOU.

Transaction review and building an investment opportunity with an investor working side-by-side with an asset manager only takes place if you leverage a business process that creates this type of close relationship. It often involves developing initial investor interest, moving to a full investor-approved investment thesis, talking through the details of a sample transaction and then working hand-in-hand with an investor to look at such investment opportunities.     

 

So what about your deal? Let’s Get Started

If you have a transaction that you really believe in, wonderful!!! We would be particularly interested in hearing about it as interest in Brazil is increasing. We think there is a good chance to find capital currently, depending on the investment thesis, based on Brazil’s improved environment and greater interest in Brazil due to this change.

However, we will likely ignore your perfect deal, step back, work to understand your investment thesis, and then engage investors. Only after this investor engagement will we start discussions about sample transactions.

If you have an investment strategy that matches the upturn in Brazil’s economy and has high risk-adjusted return potential, we would love to hear from you.

Warm Regards,

Joseph W. Williams