Dan Berns, Sr. Partner, Astra Investimentos: Brazil is experiencing significant political and economic turmoil with the largest and most important company, Petrobras, under investigation and a slowing economy. What is really going on in Brazil today?
Brazil had an election last year that was far more competitive than most could have imagined. The pro-business conservative candidate received 49% of the votes and President Dilma, from the Workers Party, won with only 51%. There have been corruption accusations with the current administration that culminated in a federal investigation at state-controlled and publicly traded Petrobras, the national oil company. Tens of billions of dollars were awarded under the suspicion of illegal payments by Brazil’s largest construction companies to the Workers’ Party. Many of these executives are now under arrest and expected to be indicted. Despite the initial negative reaction, the overall perception is that the Brazilian society and its institutions are taking a new stand against corruption and political abuse.
With a global slowdown in commodity prices, in addition to the political turmoil and depreciated Real, Brazil has been hit with the perfect storm. Growth has decreased from an average of 4% during most of the past decade to a 0.2% GDP projected growth for 2015. The government realizes that it needs to focus on taking affirmative measures in order to restore its credibility, maintain its investment grade rating and maintain jobs.
Brazil is highly focused on commodity exports, how does that bode well for the near term with global commodities from oil to iron ore seeing significant price collapses?
Commodities represent 40% of Brazil’s exports. It is one of the leading countries in the world for agriculture and mining. It is also one of the largest producers and exporters of minerals including iron ore used for making steel. Brazil is also becoming a major producer of oil under the pre-salt program. Nonetheless Brazil is a net importer of oil. It is the 5th largest producer of cars in the world, both for the domestic and export markets. Embraer is the fourth largest commercial aircraft manufacturer in the world and its planes are used by airlines around the world. It also produces one of the most productive and cost-effective military aircraft in demand globally. InBev, a Brazilian beverage company, owns Anheiser Busch and is the second largest beer company in the world. Heinz, Kraft, and Burger King are now controlled by Brazil’s 3G, one of the best investment groups in the world. Brazil is a country of 200m people active in many global industries. The consumer market is strong and 30m people have been added to the middle class over the last decade. Future growth will depend on increasing productivity, growing exports and maintaining a healthy fiscal situation. The need for food globally will continue to grow and therefore agricultural exports are already recovering with a favorable exchange rate.
Considering the Brazilian backdrop what are the investment opportunities that you see and what are you working on at Astra?
We invest into multiple sectors at Astra, and I would like to highlight three in particular that we believe to be of interest to global institutional investors.
VENTURE CAPITAL
When one thinks venture capital, they think of Silicon Valley, Boston, New York, Israel, not Brazil. Why should international investors be interested in technology and venture investing in Brazil?
That is a great question. Brazil is not going to challenge Silicon Valley for innovation and venture investing. That is not the goal. But Brazil is an important player in the technology world. It has world-class companies across many industries and is the 7th largest economy in the world. There is great potential to provide capital to the best new innovators and technology developers in the country. And there is far less competition to do that in the regions you mentioned. Brazil needs to foster that technology and combine it with an innovation culture that we hope to help develop with both capital and the strategic value that our partners bring to helping entrepreneurs grow their companies
What offerings do you have to take advantage of this?
Astra has created, in partnership with CPqD, Brazil’s leading developer of technology companies, an innovation fund that will have access to this Technology Developer’s extensive pipeline of investment opportunities
Who is this Partner and what are the sectors you will focus investment on?
CPqD is the largest developer of research and development programs in Latin America generating solutions in information and communications technologies used in various sectors including communications and multimedia, finance, utilities, industrial, corporate and public administration and defense and security.
Brazil is the largest investor in innovation and R&D in Latin America, and it’s also a large domestic market for commercialization. CPqD is an important part of this innovation investment. CPqD’s is a private company without shareholders that re-invests its profits back into its business. It is comprised of top private and public sector leaders who have come together to help develop Brazil’s most promising industries. The Israeli govt. did this many years, which led to private capital eventually taking over for govt. Funding of Israel technologies and making the tiny country one of the world’s leaders in developing technology and world class companies. There are 455 post-graduate degree members of the CPqD team. Technologies developed by CPqD generated over R$20b in sales in 2013.
Your partner is non-profit. How will the Astra Fund appeal to LPs whose objective is making money?
The Fund will make investments solely based upon economic considerations. It’s important not to discount the synergy and connection that the for-profit fund as a provider of 3rd party capital to complement the efforts of its innovation partner, CPqD. Because CPqd has been such an important conduit for innovation and technology development, it is the first place that promising opportunities will go to seek capital as well as development expertise. CPqD’s mission is to foster innovation critical to growing the Brazilian economy. The Fund will be able to select among the most promising of the thousands of companies that CPqD reviews. This is a competitive advantage relative to almost all other VC investors. The Fund will be well-positioned both within the Brazilian technology world but also within the entrepreneur and corporate worlds to invest and help commercialize these cherry picked opportunities.
Additionally CPqD ‘s incredible penetration into the top private and public sector institutions will serve us well after we invest as we seek to commercialize the companies into which we invest. The members of the Board for CPqD is a whose who within Brazil and includes Board Members from the Ministry of Communications, Ministry of Science, Technology and Innovation, Brazilian National Development Bank (BNDES), Telefonica, Algar Group, FINEP, Galvao Renewable Energy, Embraer, Alcael, and many others.
CPqD has backed companies that have developed over 460 National patent applications, 254 int’l applications and 1,216 copyrighted software programs
Technologies and systems developed by CPqD have been used by hundreds of leadings entities including Telefonica, Algar, TIM, Embratel, the military, police, airport authority, municipal, state and federal agencies. Petrobras, Electrobas, Copel, Taesa Cemig, Light, Satander, Banco de Brasil, Bradesco, Santander, HSBC, Citibank, Itau, Nokia, Siemens Johnson Controls, Emerson, Motorola, Samsung, etc.
____________________________________________________________________________
CREDIT
With a slowing economy, why invest in Credit?
The world is highly liquid and searching for yield. Pension funds need to make 8% annually…which investing in U.S. and European credit will not likely to deliver without assuming greater risk. Family offices, insurance companies, and others want consistent yield and returns, which is why Brazil is where all these investors should be looking. Brazil has the highest real interest rates in the world. Inflation has increased up to 6.5%. However, Brazil has over $300 billion dollars in foreign currency reserves. The Interbank rate is 12.75% so any loans, either for consumer loans such as auto loans and credit card receivables, or corporate loans are based upon a spread to the interbank rate, delivering high yields for lenders. Nearly all contracts in Brazil are also inflation adjusted. Currency presents the biggest risk. Short-term hedges can also be implemented, lowering returns but still enabling returns far higher than in the U.S. or Europe for equivalent credit risk. And there are CDO like structures that further mitigate credit risk
What offerings do you have to take advantage of this?
We have created 2 credit funds as well as permanent capital vehicles to enable foreign investors the opportunity to invest into high yield, secure cash flows generated from consumer and corporate credit. These investment products are highly structured to mitigate risk and with Brazil offering the highest real interest rates in the world, will deliver high teen to low 20s yields. Our products include structured debt for auto car loans, credit card receivables, and corporate loans.
Why these areas of credit?
We have focused on sectors where there is a strong need for new capital, providing liquidity to companies that have high quality and high yielding loans to consumers, such as for auto loans and credit cards receivable loans. We can provide capital to borrowers, secured by these assets, which pay high yields, have inflation adjustments, and have low default risks. For corporate loans, funds can be more competitive and offer more flexibility on providing loans to top Brazilian companies than banks.
What are the risks?
As the Brazilian economy has slowed, there is certainly a risk that consumer and corporate borrowers will be hit and default rates will escalate. We have seen some increase recently but so far it’s been very limited. And structuring debt offerings that mitigate much of the risk can make these offerings far less risky but still provide compelling returns not achievable in the U.S. or Europe.
Currency is also an issue, but many credit offerings are short term by nature and the currency can often be hedged. Although some of the yield will disappear, returns will still be far higher than developed markets.
____________________________________________________________________________
REAL ASSETS
Why is now the best time to invest in real assets?
There is tremendous liquidity in the markets today and a desperate search for yield. Institutional investors, such as insurance companies and pension funds, want to find yield and long-term investments that will consistently produce dividends that are required. Pension funds need to make 8% annually. Investing in the U.S. and European markets are unlikely to deliver that, without assuming greater risk. Family offices and endowments also want these consistent yields and returns. This is why Brazil is where these investors should be looking. Brazil has the highest real interest rates in the world but not offer the respective risk. All investments are indexed and paid as a premium to this rate.
Real Assets offer more consistent returns when compared to other alternative assets, such as leveraged buyouts, hedge funds (that are highly leveraged), distressed funds, and others. When investing in a real asset, an investor is buying some type of asset that is tangible and has a cash flow backed by long-term contracts.
Real Assets include everything from real estate to farmland to infrastructure. It is a desirable asset class for investors because they are investing in something that physically exists and generates both yield and appreciation. Returns on real assets in Brazil are inflation indexed, and can offer equity and debt returns that are substantially higher than what they can earn in developed markets. We believe that the risk does not justify such a large spread in returns.
Inflation has increased to 6.5% up from 5%, but Brazil is not in any danger of default. Smart money knows this. Brazil has over $300 billion in foreign currency reserves. The Interbank rate is 12.75% so any leases, concessions, or contracts are based upon a spread starting at a minimum 12.75% rate. Basically all contracts in Brazil are also inflation adjusted. Currency is perceived as the biggest risk. At its current rate of R$ 3 Reals to the US dollar, this is the ideal time for investing. Short-term hedges can also be implemented, lowering returns but still enabling returns far higher than in the U.S. or Europe for equivalent credit risks.
What offerings do you have to take advantage of this?
We are launching three new funds, all with proven, dedicated management teams and some of the most respected strategic partners, both within Brazil and globally. We have Pan-Latin American hotel development fund in partnership with NH hotels, one of the leading global hotel operators. We have an Infrastructure Fund having partnered with Brazil's largest engineering firm and one of the country's most important owners of concessions, as well as with a global engineering and construction firm, who will be an advisor to the manager for investments. We also have a Farmland Fund in partnership with Brazil’s leading agro firm, Algar, who will be seeding the fund with a $100m and will be responsible for all agricultural operations.
Why did you select these real asset sectors?
We believe each sector offers an exceptional opportunity for international investors. Farmland is a recognized asset class globally and especially important in Brazil. It generates leases and historically appreciates, delivering consistent inflation-hedged returns to investors. The fund intends to acquire pasture land and turn it into productive farmland, creating exceptional value. For Infrastructure, I could spend hours discussing this sector, but it's a massive asset class in Brazil that requires foreign investment. The govt. has created favorable terms for investment and provides subsidized government financing, therefore increasing returns. As with farmland, it generates consistent yields and capital appreciation. And for hotels, there are not enough in Brazil, as anyone who tries to get a room at a business hotel will tell you. We will focus on repositioning prime properties into four and five star hotels, reducing the time to market.
Who should invest in real assets?
Real Assets including real estate are very different investments than other Alternatives such as buyout private equity or distressed assets and by nature of the asset class, are less risky and have a lower potential upside for returns. That being said, real asset returns in Brazil can reach mid to high teens or higher, which exceeds returns for this asset class in other markets. It is generally a fit for investors who require yield including pension funds, insurance companies, endowments, family offices, and sovereign funds.
What are the risks?
There is always market risk, but we believe that we have chosen the most compelling sectors that are not cyclical. There is operating risk, so the managers need to be good at what they do supported by world-class specialists. We have top strategic partners who help insure this for us and provide unparalleled confidence to our investors. Currency is the biggest risk. Long-term investments are not likely to be hedged because of the cost. As part of a long-term strategy, we believe that exposure to currencies such as the Real is a good thing. Inflation adjusted contracts can mitigate some of the currency issues but certainly will not be expected to hedge all the risk. With the Real at its current rate, we believe there is a far better chance that the Real will appreciate over the long term than continue to depreciate.
Thanks a lot to Dan Berns for his time with us.
Brazil had an election last year that was far more competitive than most could have imagined. The pro-business conservative candidate received 49% of the votes and President Dilma, from the Workers Party, won with only 51%. There have been corruption accusations with the current administration that culminated in a federal investigation at state-controlled and publicly traded Petrobras, the national oil company. Tens of billions of dollars were awarded under the suspicion of illegal payments by Brazil’s largest construction companies to the Workers’ Party. Many of these executives are now under arrest and expected to be indicted. Despite the initial negative reaction, the overall perception is that the Brazilian society and its institutions are taking a new stand against corruption and political abuse.
With a global slowdown in commodity prices, in addition to the political turmoil and depreciated Real, Brazil has been hit with the perfect storm. Growth has decreased from an average of 4% during most of the past decade to a 0.2% GDP projected growth for 2015. The government realizes that it needs to focus on taking affirmative measures in order to restore its credibility, maintain its investment grade rating and maintain jobs.
Brazil is highly focused on commodity exports, how does that bode well for the near term with global commodities from oil to iron ore seeing significant price collapses?
Commodities represent 40% of Brazil’s exports. It is one of the leading countries in the world for agriculture and mining. It is also one of the largest producers and exporters of minerals including iron ore used for making steel. Brazil is also becoming a major producer of oil under the pre-salt program. Nonetheless Brazil is a net importer of oil. It is the 5th largest producer of cars in the world, both for the domestic and export markets. Embraer is the fourth largest commercial aircraft manufacturer in the world and its planes are used by airlines around the world. It also produces one of the most productive and cost-effective military aircraft in demand globally. InBev, a Brazilian beverage company, owns Anheiser Busch and is the second largest beer company in the world. Heinz, Kraft, and Burger King are now controlled by Brazil’s 3G, one of the best investment groups in the world. Brazil is a country of 200m people active in many global industries. The consumer market is strong and 30m people have been added to the middle class over the last decade. Future growth will depend on increasing productivity, growing exports and maintaining a healthy fiscal situation. The need for food globally will continue to grow and therefore agricultural exports are already recovering with a favorable exchange rate.
Considering the Brazilian backdrop what are the investment opportunities that you see and what are you working on at Astra?
We invest into multiple sectors at Astra, and I would like to highlight three in particular that we believe to be of interest to global institutional investors.
- Venture Capital
- Credit
- Real Assets
VENTURE CAPITAL
When one thinks venture capital, they think of Silicon Valley, Boston, New York, Israel, not Brazil. Why should international investors be interested in technology and venture investing in Brazil?
That is a great question. Brazil is not going to challenge Silicon Valley for innovation and venture investing. That is not the goal. But Brazil is an important player in the technology world. It has world-class companies across many industries and is the 7th largest economy in the world. There is great potential to provide capital to the best new innovators and technology developers in the country. And there is far less competition to do that in the regions you mentioned. Brazil needs to foster that technology and combine it with an innovation culture that we hope to help develop with both capital and the strategic value that our partners bring to helping entrepreneurs grow their companies
What offerings do you have to take advantage of this?
Astra has created, in partnership with CPqD, Brazil’s leading developer of technology companies, an innovation fund that will have access to this Technology Developer’s extensive pipeline of investment opportunities
Who is this Partner and what are the sectors you will focus investment on?
CPqD is the largest developer of research and development programs in Latin America generating solutions in information and communications technologies used in various sectors including communications and multimedia, finance, utilities, industrial, corporate and public administration and defense and security.
Brazil is the largest investor in innovation and R&D in Latin America, and it’s also a large domestic market for commercialization. CPqD is an important part of this innovation investment. CPqD’s is a private company without shareholders that re-invests its profits back into its business. It is comprised of top private and public sector leaders who have come together to help develop Brazil’s most promising industries. The Israeli govt. did this many years, which led to private capital eventually taking over for govt. Funding of Israel technologies and making the tiny country one of the world’s leaders in developing technology and world class companies. There are 455 post-graduate degree members of the CPqD team. Technologies developed by CPqD generated over R$20b in sales in 2013.
Your partner is non-profit. How will the Astra Fund appeal to LPs whose objective is making money?
The Fund will make investments solely based upon economic considerations. It’s important not to discount the synergy and connection that the for-profit fund as a provider of 3rd party capital to complement the efforts of its innovation partner, CPqD. Because CPqd has been such an important conduit for innovation and technology development, it is the first place that promising opportunities will go to seek capital as well as development expertise. CPqD’s mission is to foster innovation critical to growing the Brazilian economy. The Fund will be able to select among the most promising of the thousands of companies that CPqD reviews. This is a competitive advantage relative to almost all other VC investors. The Fund will be well-positioned both within the Brazilian technology world but also within the entrepreneur and corporate worlds to invest and help commercialize these cherry picked opportunities.
Additionally CPqD ‘s incredible penetration into the top private and public sector institutions will serve us well after we invest as we seek to commercialize the companies into which we invest. The members of the Board for CPqD is a whose who within Brazil and includes Board Members from the Ministry of Communications, Ministry of Science, Technology and Innovation, Brazilian National Development Bank (BNDES), Telefonica, Algar Group, FINEP, Galvao Renewable Energy, Embraer, Alcael, and many others.
CPqD has backed companies that have developed over 460 National patent applications, 254 int’l applications and 1,216 copyrighted software programs
Technologies and systems developed by CPqD have been used by hundreds of leadings entities including Telefonica, Algar, TIM, Embratel, the military, police, airport authority, municipal, state and federal agencies. Petrobras, Electrobas, Copel, Taesa Cemig, Light, Satander, Banco de Brasil, Bradesco, Santander, HSBC, Citibank, Itau, Nokia, Siemens Johnson Controls, Emerson, Motorola, Samsung, etc.
____________________________________________________________________________
CREDIT
With a slowing economy, why invest in Credit?
The world is highly liquid and searching for yield. Pension funds need to make 8% annually…which investing in U.S. and European credit will not likely to deliver without assuming greater risk. Family offices, insurance companies, and others want consistent yield and returns, which is why Brazil is where all these investors should be looking. Brazil has the highest real interest rates in the world. Inflation has increased up to 6.5%. However, Brazil has over $300 billion dollars in foreign currency reserves. The Interbank rate is 12.75% so any loans, either for consumer loans such as auto loans and credit card receivables, or corporate loans are based upon a spread to the interbank rate, delivering high yields for lenders. Nearly all contracts in Brazil are also inflation adjusted. Currency presents the biggest risk. Short-term hedges can also be implemented, lowering returns but still enabling returns far higher than in the U.S. or Europe for equivalent credit risk. And there are CDO like structures that further mitigate credit risk
What offerings do you have to take advantage of this?
We have created 2 credit funds as well as permanent capital vehicles to enable foreign investors the opportunity to invest into high yield, secure cash flows generated from consumer and corporate credit. These investment products are highly structured to mitigate risk and with Brazil offering the highest real interest rates in the world, will deliver high teen to low 20s yields. Our products include structured debt for auto car loans, credit card receivables, and corporate loans.
Why these areas of credit?
We have focused on sectors where there is a strong need for new capital, providing liquidity to companies that have high quality and high yielding loans to consumers, such as for auto loans and credit cards receivable loans. We can provide capital to borrowers, secured by these assets, which pay high yields, have inflation adjustments, and have low default risks. For corporate loans, funds can be more competitive and offer more flexibility on providing loans to top Brazilian companies than banks.
What are the risks?
As the Brazilian economy has slowed, there is certainly a risk that consumer and corporate borrowers will be hit and default rates will escalate. We have seen some increase recently but so far it’s been very limited. And structuring debt offerings that mitigate much of the risk can make these offerings far less risky but still provide compelling returns not achievable in the U.S. or Europe.
Currency is also an issue, but many credit offerings are short term by nature and the currency can often be hedged. Although some of the yield will disappear, returns will still be far higher than developed markets.
____________________________________________________________________________
REAL ASSETS
Why is now the best time to invest in real assets?
There is tremendous liquidity in the markets today and a desperate search for yield. Institutional investors, such as insurance companies and pension funds, want to find yield and long-term investments that will consistently produce dividends that are required. Pension funds need to make 8% annually. Investing in the U.S. and European markets are unlikely to deliver that, without assuming greater risk. Family offices and endowments also want these consistent yields and returns. This is why Brazil is where these investors should be looking. Brazil has the highest real interest rates in the world but not offer the respective risk. All investments are indexed and paid as a premium to this rate.
Real Assets offer more consistent returns when compared to other alternative assets, such as leveraged buyouts, hedge funds (that are highly leveraged), distressed funds, and others. When investing in a real asset, an investor is buying some type of asset that is tangible and has a cash flow backed by long-term contracts.
Real Assets include everything from real estate to farmland to infrastructure. It is a desirable asset class for investors because they are investing in something that physically exists and generates both yield and appreciation. Returns on real assets in Brazil are inflation indexed, and can offer equity and debt returns that are substantially higher than what they can earn in developed markets. We believe that the risk does not justify such a large spread in returns.
Inflation has increased to 6.5% up from 5%, but Brazil is not in any danger of default. Smart money knows this. Brazil has over $300 billion in foreign currency reserves. The Interbank rate is 12.75% so any leases, concessions, or contracts are based upon a spread starting at a minimum 12.75% rate. Basically all contracts in Brazil are also inflation adjusted. Currency is perceived as the biggest risk. At its current rate of R$ 3 Reals to the US dollar, this is the ideal time for investing. Short-term hedges can also be implemented, lowering returns but still enabling returns far higher than in the U.S. or Europe for equivalent credit risks.
What offerings do you have to take advantage of this?
We are launching three new funds, all with proven, dedicated management teams and some of the most respected strategic partners, both within Brazil and globally. We have Pan-Latin American hotel development fund in partnership with NH hotels, one of the leading global hotel operators. We have an Infrastructure Fund having partnered with Brazil's largest engineering firm and one of the country's most important owners of concessions, as well as with a global engineering and construction firm, who will be an advisor to the manager for investments. We also have a Farmland Fund in partnership with Brazil’s leading agro firm, Algar, who will be seeding the fund with a $100m and will be responsible for all agricultural operations.
Why did you select these real asset sectors?
We believe each sector offers an exceptional opportunity for international investors. Farmland is a recognized asset class globally and especially important in Brazil. It generates leases and historically appreciates, delivering consistent inflation-hedged returns to investors. The fund intends to acquire pasture land and turn it into productive farmland, creating exceptional value. For Infrastructure, I could spend hours discussing this sector, but it's a massive asset class in Brazil that requires foreign investment. The govt. has created favorable terms for investment and provides subsidized government financing, therefore increasing returns. As with farmland, it generates consistent yields and capital appreciation. And for hotels, there are not enough in Brazil, as anyone who tries to get a room at a business hotel will tell you. We will focus on repositioning prime properties into four and five star hotels, reducing the time to market.
Who should invest in real assets?
Real Assets including real estate are very different investments than other Alternatives such as buyout private equity or distressed assets and by nature of the asset class, are less risky and have a lower potential upside for returns. That being said, real asset returns in Brazil can reach mid to high teens or higher, which exceeds returns for this asset class in other markets. It is generally a fit for investors who require yield including pension funds, insurance companies, endowments, family offices, and sovereign funds.
What are the risks?
There is always market risk, but we believe that we have chosen the most compelling sectors that are not cyclical. There is operating risk, so the managers need to be good at what they do supported by world-class specialists. We have top strategic partners who help insure this for us and provide unparalleled confidence to our investors. Currency is the biggest risk. Long-term investments are not likely to be hedged because of the cost. As part of a long-term strategy, we believe that exposure to currencies such as the Real is a good thing. Inflation adjusted contracts can mitigate some of the currency issues but certainly will not be expected to hedge all the risk. With the Real at its current rate, we believe there is a far better chance that the Real will appreciate over the long term than continue to depreciate.
Thanks a lot to Dan Berns for his time with us.