Why Brazil?

Brazil offers unique advantages for investors that seek high risk-adjusted financial returns and / or investors that seek to secure long-term agricultural or energy resources at an attractive cost basis with aligned management. The scale of the country allows for large-scale profits, north of US$20M in individual transactions, and the securing of significant agricultural and / or energy resources at scale.

Brazil’s Advantages

Scale – The profits and agricultural sourcing opportunities are large.

Capital Markets – The capital markets are large enough to create exits but often not robust or agile enough to compete with large-scale capital on larger real asset transactions.

Speed and Scale – There is significant pricing advantage for those with scale, specialized knowledge, and the ability to move fast.

High Barriers to Entry – To be successful, there is a learning curve which prevents many investors from executing the highest-return transactions.

World-Class Agricultural Resources – Brazil boasts the world’s largest supply of freshwater, one of the world’s best biological growth rates, and a climate suitable for year-round farming.

Windows of Opportunity – There are windows of purchase and exit opportunity in Brazil. Often these moments are triggered by internal or external changes of perception. These moments tend to be the best time to be an investor or seller. Hence, there are unique opportunities for value creation for those who understand the economic cycles and liquidity windows.

Legal Framework – The law, while not perfect, has clarity on key transaction points.

Asymmetries of Information and Management Talent – In various sectors, there is limited information about what is market price. Additionally, a lack of management talent creates situational distress opportunities.

It almost looks easy…

Why Not Brazil?

Brazil requires homework. Many who have entered the market without careful thought and consideration have come to see the validity of the famous quote of the late, great Brazilian composer Tom Jobim, “Brazil is not for amateurs.”

Brazil is a nation of immense potential. However, this should not necessarily be included in an investor’s underwriting assumptions. The reality is that Brazil is a low productivity growth environment (with the huge exception of the agriculture industry), currently has a structural high relative cost of capital and an over-consolidated banking sector, suffers immense structural inequality, and, unless one considers private education, faces significant challenges in educating its people for the 21st century.

Brazil’s Disadvantages

Strong Cycles – Brazil experiences strong cycles, both positive and negative, which are often quite volatile and violent.

Red Tape and Speed to Get Things Done – Brazil’s bureaucracy is legendary. Besides agricultural products’ biological growth, very few things are fast in Brazil.

Small Capital Markets – While this can be an advantage for investors at purchase, at the time of exit the capital markets must be approached with an understanding of their size and capacity.

Exit Windows – Exit windows at attractive returns happen at specific times, often when Brazil’s political and economic situation is favorable to outside investors. It is important to exit, if an exit is desired, during these windows for maximum value.

Cultural Norms – Different cultural norms, such as indirect communication and avoidance of conflict, if not expertly navigated can lead to misunderstandings at best and lost money at worst.

Currency – The currency can move, in either direction, a significant amount during the term of investment.

Disparate Outcomes for Investors

The result of this complexity and Brazil’s advantages and disadvantages is that there are significantly disparate outcomes for investors and radically different experiences. Those who enter the market with unbridled enthusiasm during a market high and do not have a value investing orientation often experience very negative results.

For those that enter the market in tougher times or focus on special situations with motivated sellers, and those with capital needs, the outcomes are positive and often exemplary. In fact, value and distressed investors find Brazil to be one of the better markets to pursue due to the strong emotional swings in value and perspective.

What Causes Divergent Outcomes for Investors?

Complexity – From negotiation strategy to understanding one’s true cost basis and comparable transactions.

Opportunity Windows – An investor must be willing to exit during the liquidity window. Delaying an exit, if one is desired, until after a liquidity window can destroy significant value.

Government Involvement in the Economy / Specific Industries – Often, certain sectors or opportunities appear more attractive due to government involvement. This involvement can create complications as situations change.

Divergence in Quality and Alignment of Management – Business comes down to people. Often, on-the-ground execution is a problem for investors that have not carefully vetted their management teams.

Currency – Large purchases at a peak or not hedging can create significant risks.

Interest Rates – Interest rates can swing a significant amount in a small period of time. It is important to understand this and plan acquisitions and purchases appropriately.