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Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
Alternative Latin Investor - Issue 11
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Alternative Latin Investor - Issue 11

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The launch issue of Alternative Latin Investor - Premium :http://www.alternativelatininvestor.com/signup.php

The launch issue of Alternative Latin Investor - Premium :http://www.alternativelatininvestor.com/signup.php

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  • 1. Agribusiness Issue 11Saving  Latin  AmericanRain ForestsForex Private Equit yReaching LatAm InvestorsMILA Special IssueIntegrationA L I P R E M I U M L A U N C H I S S U E 1
  • 2. Agribusiness 2
  • 3. ContributorsB ig things are happening, both on a global platform and here at Alterna- tive Latin Investor. Before I tell you about the exciting new develop- ments in our magazine, please allow me to address the small ma er Managing Director Nate Suppaiah of the US Standards and Poors downgrade. While this was perhaps Content Editor Amanda Carterno real surprise given the current debt debacle within the United States, the dif-ference between an assumed risk and public downgrade is an enormous one. Public Relations Director Ti any Joy SwensonHowever, this does fall in line with the position we take, and will continue to Sales Director John McNamarapursue. In a zero-sum view of the world, as the ‘developed’ world is forced to re-evaluate economic policy, and is perceived as more risky, emerging markets will Sta Writers Michael Romano ll the void created by the decline of the so-called ‘super powers’. Perhaps one day Marc Rogersa ‘ ight to quality’ will refer to mass demand for real, peso or kuai, though suchan eventuality is still on a distant horizon. Contributers Particio Abal Javier CanosaWhile we maintain coverage of all of Latin America, working to provide expo- Vander Giordanosure to less ‘googleable’ topics, for this issue we have focused on private equity Eduardo Gomideinvestment within LatAm’s powerhouse, Brazil. I am continually impressed by Joseph Hoguethe country’s inward focus, which has bene ted the region’s largest economy by Stephen Kaczorbalancing a heavy dependence on commodities exports with huge growth in in- Bernard Lapointeternal demand. Leonardo Navarro Design Arman SrsaIn our coverage of this sector and region, it is with great pride that I would liketo announce the launch of Alternative Latin Investor Premium. We will continue Sales Director John McNamarato provide you with the same coverage of alternative assets within the region forfree, but will now o er a new subscription option, with twice the content, pre- Social Media Coordinator Vidhya Narayananmium articles are more speci c, in-depth and actionable. Consultants Adam Berkowitz Tyler UlrichI would very much appreciate your thoughts regarding this, our rst premium Jennifer Peckissue, as well as what stories, sectors, or regions you would like us to cover in the Lydia Holdenfuture. Contact: info@alternativelatininvestor.com; (202) 905-0378 2011 Alternative Latin Investor. No statement in this magazine is to be construed as a recommendation for or against any par- ticular investments. Neither this publication nor any part of it may be reproduced in any form or by any means without prior consent of Alternative Latin Investor. 3
  • 4. 4
  • 5. ContentsSectors Issue Focus: Cover StoriesNewsPolitical Moves: brought to you by Latinnews.com.............................................................6 Private Equity Philanthropy Cuipo: Saving the Rainforest One Meter e Brazilian Bubble Argument: Full of at a Time......................................................17Emerging Markets Hot Air? (Premium)..............................14Growing M&A Activity between Asia and Latin America?................................................8 In the midst of the Brazilian economy’s con-Latin American Venture Capital: Lessons Learned from China....................................10 tinuing surge, some skeptics have emerged, ForexBe careful What You Wish For- A Brazilian Cautionary Tale...........................................12 warning of an overheating system and a Spo ing Opportunities in LatAm Forex swelling bubble poised to burst. Trading.........................................................40PhilanthropyCuipo: Saving the Rainforest One Meter at a Time..........................................................17 e Secondary Market for LatAm Pri- vate Equity (Premium).........................22 Hedge FundsAgribusiness In the coming years, a strong secondary MILA Integration......................................42Nuts: Crops that Grow Well in LatAm...............................................................................19 market will emerge in LatAm – and par-Entering e Brazilian Agribusiness Sector (Premium)..................................................22 ticularly Brazil.Infrastructure Investing in the Brazilian Consumer Mar-Mezzanine Financing for LatAm’s Infrastructure..............................................................25 ket (Premium).........................................39 One of the major stories of the BrazilianEnergy boom is the growth of its domestic consumerInvesting in Brazilian Oil (Premium)...................................................................................29 market fueled.Art Going Small – Smaller rm investmentFine Art Funds: Taking the Soul Out of Art Investing?...................................................30 (Premium)...............................................46 Pursuing small and mid-cap companies forHedge Funds the best prices and returns.MILA Integration.....................................................................................................................35LatAm Fund Due Diligence: What Managers Need to Know (Premium)..................42Institutional Investing in LatAm: A Contrarian’s View (Premium)...............................45A racting US Institutional Investors to LatAm Funds (Premium)...............................53Quant Funds in LatAm (Premium)......................................................................................54How HNWI in LatAm View Alternative Assets (Premium)............................................56ForexSpo ing Opportunities in LatAm Forex Trading...............................................................40RegulationTax Incentives: So ware Development in Argentina........................................................46VenturesMercatrade: Inter-emerging Market Trade..........................................................................48QuickStart Global: Have an O ce Anywhere...................................................................50Real EstateAirli Encourages Latin America to reach for the skies.....................................................55 5
  • 6. NewsPolitical Moves:Brought to you by B ZIL – Rousse replaces Palocci with novice President Dilma Rousse took a major decision in mid-June to axe her scandal-hit number two, the minister of the presidency, Antonio Palocci, a veteran baron of the ruling le -wing Partido dos Trabalhadores (PT). In a sign of her single mindedness, she went against the advice of senior party members including her predecessor and mentor Lula da Silva (2002-2010) and replaced Palocci with a rst time PT senator, Gleisi Ho mann, and later also replaced the strug- gling PT minister for institutional relations, Luiz Sérgio, with another woman, Ideli Salva i, whom she switched across from the sheries ministry. e Palocci scandal, Rousse ’s rst serious political crisis, underlined the fact that nothing canbe taken for granted in the executive’s relationship with the coalition and congress. For all the talk back of Rousse ’s unprecedented parlia-mentary majority, at the end of the day there is no strength in numbers in Brazil, where parties act rst and foremost on a self-interested basis.Rousse is commi ed to an e cient, technocratic administration and has an obvious distaste for traditional backslapping politics. She willexpect of Ho mann and Salva i the same type of managerial diligence. Yet unless the president herself intends to step into a more active rolein managing the complex relationships with her political partners, she may be taking a gamble with these novice appointments, who will haveto be tough skinned to operate in Brazil’s chauvinistic environment. ough Rousse has shown resolve in cu ing away the dead wood fromthe Lula administration and surrounding herself with her own team, she needs to demonstrate stronger political leadership, at least in order toprove to skeptical observers that she is more than a temporary proxy for Lula until 2014. CHILE – Poll drop to cause polarisation President Sebastián Piñera’s opinion poll rating continues to fall. On 2 June an opinion poll by Adimark put his approval rating at 36%, a new low. As Chilean presidents cannot serve consecu- tive terms, this slide means that Piñera’s in uence on the choice of the rightwing candidate he would like to succeed him in 2013 is ebbing. His low opinion poll ratings and rising disapproval ratings do not mean, however, that the country is sliding towards either unrest or political con- frontation. What it does mean is that party politics may become more ideological. us the second half of Piñera’s administration is likely to be more right wing and, correspondingly, the opposition to his government is likely to become more le wing. It’s worth noting that it has been the most radical opposition politicians who have drawn, metaphorically, most blood fromthe government, in forcing ministerial and other resignations. is polarization is already having an e ect on moderates. e former president Ricardo Lagos (2002-2006) seems to have sensed the changein the political mood. In May he ipped from being a supporter of the Piñera government’s policy over the controversial hydroelectric projectin southern Chile – HidroAysén - but a critic of the government’s methods, to become a fully- edged opponent of the HidroAysén project. Inhis new position Lagos aligned himself with radical environmentalists, some of whom appear to believe that violent street demonstrations willstop the project more e ectively than reasoned argument. 6
  • 7. News COLOMBIA – Colombia gets investment grade from second ratings agency e May 31st move by the US-based credit ratings agency Moody’s to upgrade Colombia’s for- eign debt from speculative grade (Ba1) to the lowest level of investment grade (Baa3), which followed a similar move by Standard and Poor’s in mid March, means that the Andean nation can now become a destination for institutional investors, who require that a country has been given investment grade by at least two of the world’s leading credit ratings agencies. Further- more, Colombian companies requesting loans overseas will bene t from lower interest rates. e expected in ow of foreign currency into the country has already triggered a slight apprecia-tion of the peso, the value of which against the US dollar could be further bolstered as investors trickle in. Minister of Economy Juan CarlosEcheverry has warned that he will continue to take the necessary measures to maintain the peso at a competitive exchange rate, which Moody’sitself recognizes as a long-term challenge for emerging markets since they are expected to grow at a much faster pace than developed econo-mies. Colombia’s “political and economic maturity to face internal and external shocks” was the reason cited by Moody’s to grant it investmentgrade. e agency also upgraded the ratings of foreign currency denominated bonds to Baa2 from Baa3 and bank deposits to Ba2 from Baa3. PERU – Second time lucky for Ollanta Humala e narrow victory of the le -winger Ollanta Humala over his right-wing rival, Keiko Fujimori, in the June 5th Peruvian presidential round o sent the markets spiralling out of control. ey bounced back the next day, however. To reassure the markets, Humala will choose centrist, and possibly independent, candidates for the key positions of Economy and Finance Minister and Prime Minister; the current head of the central bank, Julio Velarde, may see his mandate ex- tended. Fears that a Humala administration would lead to an abrupt le ward shi in economic policy are exaggerated. A Humala-led government will seek to place greater emphasis on social policy but Humala will be torn between the constituency that voted for change and those who voted for the maintenance of the status quo. Managing expectations will be crucial. With regardto foreign policy, relations with Brazil will be the point of reference.Humala may not be able to hold together his winning coalition, Gana Perú, which won 47 seats in congress against Fuerza Social’s (Fujimori’sparty) 37. Humala doesn’t have a majority in congress but could cobble one together with Perú Posible, of former president Alejandro Toledo,which has 21 seats; this could help him pass legislation, but it is still short of the 87 votes required to change the constitution. e most visiblethreat will come from social con ict, which tends to are into violence, particularly around mining. About LatinNews.com LatinNews (historically known as Latin American Newsle ers) has been at the forefront of respected political, economic, security and strategic analysis since 1967. We provide a comprehensive intelligence resource on 33 countries in Latin America and the Caribbean; covering political, security, economic and strategic issues. LatinNews is the de facto intelligence source for serious Latinamericanists, executives, governments and academics worldwide. 7
  • 8. Emerging MarketsM&A activity betweenAsia and Latin America? Bernard Lapointe TradeWill rising bilateral trade between Asia – especially China – and Latin America lead to more merger and acquisition activity between the tworegions?Asian exports to Latin America rose 65% in 2010 from the prior year. Two-way trade amounted to US$ 172 billion in 2010, a jump of 50% from2009, and in favor of LatAm. Trade has risen at a 25% annual compounded aggregate growth rate (CAGR) since 2000. Brazil and Chile run tradesurpluses with Asia while most other LatAm countries have a de cit with the Asian continent. Mexico has a US$13 billion trade de cit with Asia.Notably, China is Brazil’s largest trading partner.Bilateral trade between Asia and LatAm, US$ billionLatin America trade balance Latin America ex-Mexico All Latin AmericaUS$ billionWith China +8.9 -31.5With US +20.0 +127.0With EU +16.0 -2.3Source: JP MorganChina is the top destination for exports from Brazil and Chile with trade links growing fast. Brazil sells the following products to China: soy,iron and steel, petroleum, meat, and wood products. China sells to Brazil: cars, motorcycles, appliances, textiles, footwear, and electronics.Argentina now exports more to China than to the U.S. In the region, Mexico is the exception among large economies with its dependency onthe U.S. market quite obvious since it sends nearly 84% of its exports to its northern neighbor. In Latin America total exports account for 21%of GDP, while exports to China represent nearly 10% of total exports, making it the region’s second-largest trading partner a er the U.S. 8
  • 9. Emerging Markets Exports to China as a share of total exports 2010 2005 Chile 24% 11% Brazil 17 6 Peru 12 11 Venezuela 10 2 Argentina 9 8 Colombia 5 1 Ecuador 2 <1 Mexico 1 <1Source: BloombergGrowing links between China and Latin America date back to the 1970’s when Chile became the rst South American nation to establish diplomaticties with Asia’s most populous country and to recognize it as a ‘market economy’. However it was really in 2008 that the bilateral relationship betweenChina and Latin America took o , a er the proactive policy towards Latin America was clearly laid out by the Chinese government in a publicationtitled “Chinese Policy Document for Latin America and the Caribbean.” In fact, China and Latin America are quickly diversifying and elevating theirtrade and investment, as witnessed by the host of agreements signed by China and Cuba, Uruguay, and Chile in the past few weeks. Latin America’strade links with Asia have outpaced trade with Spain, historically the region’s largest commercial partner. LatAm exports to Spain only ac-count for 1.6% of the region’s total exports. M&AIf bilateral trade growth is an indication of potential mergers and acquisition (M&A) trend, then investors could expect a urry of activitybetween the two regions in the next few years. In the rst six months of 2011, M&A activity is up 30% globally versus the same period last year.However, in Latin America, transactions are down 26% year over year in volume.Mergers and Acquisitions breakdown by target region 1 Jan- 30 June 2011 2010 Volume change (US$ bn) (US$ bn) Latin America 86 116 -26% North America 551 452 +22 Europe 390 221 +76 Asia 240 190 +26Source: Bloomberg M&A activity in Latin America, quarterly. e year-over-year comparison for Latin America comes from a high base following the US$25 billion acquisition of Brasilcel by Telefonicain the summer of 2010. Asian M&A activity in the region has also dropped but comparisons are again skewed due in part to the US$7 billionacquisition of 40% of Repsol’s Brazilian division by China Petroleum & Chemical Corp. (more commonly known as Sinopec) in 2010. So farin 2011 few Asian companies have made large acquisitions in Latin America. Most recent data show that Asia-Paci c companies have madeless than US$7 billion in acquisitions in the region. Indeed in Latin America the largest deals have all been between Brazilian companies. BrazilTelecom’s US$7 billion purchase of Tele Norte at a price-to-book value of 0.8 times is the largest so far. However, Asian companies continue tobe active in LatAm. Perhaps as a consequence of the strong yen, Japanese trading companies like Itochu, Mitsui and Marubeni have made smallacquisitions in Mexico, Colombia and Brazil. Current valuations make Latin American small and mid cap companies a ractive. Small and midcap companies trade at 2.1 times EV/sales versus 3.2 times for their Asian counterparts. Rising trade ows and cash-rich Asian corporationsprovide a solid background for further expansion of M&A activity in Latin America. Author Biography Bernard Lapointe is a Portfolio Manager in the Overlay Strategies division at Caisse de dépôt et placement du Québec, a Canadian-based global fund manager. Mr. Lapointe has been a portfolio manager and trader of equities, currencies and commodities since 1994. He holds a Master degree in Economics and speaks French and Mandarin. 9
  • 10. Emerging MarketsLessons Latin American Venture Capital: from China Leonardo Navarro T he Venture Capital (VC) story in e consumer market model. Latin America is anything but a shared experience. Where some China’s large population and its expanding countries such as Chile have actively middle class demand new products and ser- stimulated their VC industry since the 1990s, vices. Companies in sectors such as education, other countries such as Peru have only now be- health, and nancial services are especially at- gun to promote theirs; and where some such tractive investments. NeWorld, for example, as Brazil have actively established the necessary a recent Carlyle Group investment, provides legal frameworks for early-stage investments, in- instruction in Japanese as a second language vestments in Mexico are made more in spite of – throughout China. and less because of – local regulations. It should not be surprising, then, that LatAm´s fragment- e global integration model. ed mishmash of regulations makes the object of investment in the region anything but de nite. Foreign funds also invest in Chinese compa- nies whose value increases via integration with Emerging markets with VC industries with operations elsewhere. In nity I-China, a Sino- a longer track record o er a glimpse into Israeli VC fund, increases the value of its Isra- probable models of VC investment in Latin el-based innovations by integrating them with America. China, for example, underwent a competitive manufacturing base in China. the growth of its VC industry more than a decade ago. ree main types of early-stage ese investments contrast with the tradi- investments in China can provide VC profes- tional VC model. Statistics from the US Na- sionals with a useful framework to evaluate a tional Venture Capital Association reveal that speci c investment’s potential: the largest US-based investments in 2010 were in so ware, industrial/energy, biotech- e C2C model. nology, medical devices, and IT services. In the US, these sectors of the economy are the e C2C, or “Copy-to-China” model, is im- ones able to deliver the high growth rates re- plementing a successful business model from quired by the VC model. elsewhere in China, especially in web and IT. Baidu.com, for example, is the “Chinese Investments in emerging markets t a dif- Google”; Alibaba.com is the “Chinese eBay.” ferent pro le. e sectors of the economy 10
  • 11. Emerging Marketscapable of delivering similar growth rates are sector in the region. Wal-Mart is trying tomore o en riding the back of an expansion tap into mass nancial services in Mexico byin the economy. Because of this fundamental developing products tailored to a previouslydi erence, it is therefore likely that LatAm´s underserved sector of the population.VC business model will have more similari-ties with China´s than with the US´s. Integration with global business models var- ies by country, especially taking into account e C2C model in Latin America, for exam- speci c local competitive advantages. Latinple, can be implemented regionally to bene t American competitiveness is not constrainedfrom economies of scale. Mercadolibre.com, to low labor costs – it can also mean speci cthe agship success story of Latin America, innovations. Mexican-based sports auto maker ts this model. e company, “Latin Ameri- Mastre a, for example, highlights a sector ofca’s eBay,” went public in 1999 commanding the Mexican economy that is able to develop ana price at the top of its valuation. Similarly, innovative product that can bene t from part-Deremate.com and Despegar.com, are local nering with an investor with global capabilities.implementations of successful US businessmodels. ere is no shortage of other local e Chinese experience in VC is a relevant caseimplementations. ere is no Latin Ameri- study for Latin American governments, limitedcan Amazon, Groupon, nor Gilt. partners, and fund managers. As di erent coun- tries in the region experiment with their own e consumer market model, for its part, is solution to local conditions and constraints,especially a ractive in countries with expand- minimizing wasteful investments is crucial.ing middle classes, such as Brazil or Mexico. “Nadie piensa en cabeza ajena,” an o -saidChanging needs fuelled by an evolution in proverb, means “no one learns from others’ ex-values create markets with high growth rates. perience.” Leaders in the region would do wellPrivate education, for example, is a growing to learn from China. Author Biography Leonardo Navarro has worked in Taipei and Beijing, via Mexico City, in the public, private, and non-pro t sectors. He is Co-editor of China Latin Diaries, a bilingual magazine on China and Latin America. He holds a Wharton MBA/MA with a concentration in Finance and Mandarin Chinese. He is currently based in New York. Follow him at: h p://twi er.com/leonavarroavila 11
  • 12. Be F oreign rms bidding on infra- structure projects or buying up local companies in Brazil are understandably keen to get in on the country’s economic boom. But Careful two projects gone awry provide a cautionary tale of the considerable risks that accompany potential rewards in Brazil. In November 2009, e Economist noted that “Brazil has been democratic before, it has What had economic growth before, and it has had low in ation before. But it has never before sustained all three at the same time. If current trends hold (which is a big if), Brazil, with a population of 192 million and growing fast, could be one of the world’s ve biggest econ- You omies by the middle of this century, along with China, America, India and Japan.” Predictably, Brazilians have embraced the optimistic scenario. ey have concluded that it is Brazil’s time to shine. e media has Wish reported extensively on how Brazil is nally tapping into opportunities in a changing world economy and ful lling all the potential of its large population, fertile lands, vast min- eral resources, and now huge deepwater oil reserves discovered in the last decade. For However, economic growth and prosperity – Brazil’s GDP grew 7.5% in 2010 – also bring the risks associated with excessive optimism and a gold-rush mentality. On top of the “big if ” listed above, investors and companies need to pay careful a ention to details when it comes to where they put their money. A consideration of just two areas – the potential pitfalls of Brazil’s rapidly growing infrastruc- ture sector and compliance issues arising from new environmental legislation – show Vander Giordano & Eduardo Gomide that a lack of such care can be costly.12
  • 13. Emerging MarketsPlaying the game cleanly, Brazil is about to made to local public o cials in order to win a businesses to include compliance with the newhost two major international sporting events. US$45 million subway project in Brazil. waste management regulations. Otherwise,In 2014, the World Cup will be played in Rio buyers risk inheriting liabilities that might even-de Janeiro and 12 other major cities. Two years Further investigation revealed that this same tually jeopardize their entire investments.later, Rio will welcome the Olympic Games. company made close to US$200 million inAnalysts are predicting an enormous impact on suspicious payments in connection with a Recently, a foreign group acquired a Brazilianthe economy, with infrastructure investment hydroelectric project in Brazil. e scheme al- petrochemical company. Eight months later,as the driving force. A study by Brazil’s Sports legedly involved a consultancy contract with the rm’s legal department received a sub-Ministry estimates the potential economic im- a Panamanian company. e consultant was poena from the State District A orney. epact from the World Cup to be nearly US$100 hired to provide information to help in the company, along with others which outsourcedbillion between 2010 and 2014 and cites an bidding process for the hydroelectric power waste management to a particular garbageexpected $5.1 billion in incremental tourism, plant. But both Brazilian and European inves- treatment and disposal business, was beingUS$9.2 billion in tax collection and the cre- tigators are convinced that the Panamanian included in a civil action. e waste treatmentation of 330,000 permanent jobs. company never provided any consulting ser- company was not compliant with the new law: vices and that its sole purpose was to act as waste was being discarded without treatment. e vast opportunities related to the rebuilding a go-between to deliver bribes to secure the is le the petrochemical company also inand expansion of Brazilian infrastructure are at- contract. Meanwhile, the European engineer- violation of the law and subject to heavy nes.tracting foreign investors. Some estimates put ing rm is prohibited from participating inthe likely cost of the planning and construction contract bids in Brazil until the investigation Kroll was hired to investigate the ma er andof Olympic sports venues at US$15 billion. e concludes, e ectively barring it from the infra- found that the risk could have been managedbuilding of new stadiums and the refurbishing structure boom. during the due diligence process had theof existing ones for the World Cup, along with auditors at the time done a more thoroughimprovements to ports, upgrading of public Another cautionary tale involves a foreign review and spent more time looking at thetransport and roads, and the expansion of air- company ge ing embroiled in legal action waste disposal company’s record. Evidenceports necessary for both events will involve at related to government regulation of waste already existed about its failings as did com-least another US$18 billion. ese gures may treatment. plaints about operational activities. Kroll’seven be underestimated. evaluation of waste disposal documentation Brazil produces 150,000 tons of garbage also found large discrepancies in weight andTaking part in the infrastructure boom in Brazil annually. Its comprehensive National Policy outright falsi cations. In some cases, thewill almost always involve a public bid. e ma- on Solid Waste, passed into law last July, is waste management truck did not even enterjor infrastructure projects, such as hydroelectric the culmination of a long line of policies company premises, although the contractorplants and enhanced power grids, as well as new strongly emphasizing the use of recycled had a record of trash removal. Similarly, eldports, highways, and airports are largely backed materials. Nevertheless, despite the e orts interviews indicated that some of the wasteby agencies with full or partial government of the national government, states, munici- was simply thrown in the city’s public dump.ownership, including BNDES, Brazil’s National palities, agencies, and industry organiza- Kroll’s reports supported e orts by the for-Development Bank. e second phase of the tions, up to 43% of waste collected in Brazil eign acquirer’s lawyers to prove that the newnational Growth Acceleration Program (PAC), may not be adequately treated. shareholders of the petrochemical companythe largest public sector investment program of had acted in good faith. e responsibility forthe past 20 years, will open up US$220 billion Compliance with the new law’s regulations the violations of the waste law was thereforein opportunities for foreign investment in Brazil will require many companies to invest in new assigned to the former owners.from 2011 to 2014. e federal government has technology and procedures, as well as spendalso established the Olympic Public Authority considerable amounts on monitoring and Brazil’s economy provides substantial oppor-to coordinate the construction projects for the auditing activity. For international investors tunities for foreign investors. To fully pro tOlympic and Paralympic Games. Companies looking to purchase Brazilian companies, due from them, however, companies need tomust be aware of the risk of ge ing caught up diligence should now go beyond assessing the study and gauge the underlying risks.in bribery or corruption schemes in violation of background, reputation and integrity of theseBrazil’s own laws, as well as the US Foreign Cor-rupt Practices Act and the UK Bribery Act. Author BiographyOne cautionary tale involves a European Vander Giordano ( vgiordano@kroll.com), a managing director in Kroll’s São Paulo o ce,company that came under scrutiny by both has extensive experience in investigative and business intelligence ma ers, including fraud in-European and Brazilian authorities in 2009. vestigations, asset searches and competitive intelligence. He is a member of the Brazilian and e company had subcontracted a Euro- International Bar Associations. Eduardo Gomide (egomide@kroll.com), a managing directorpean engineering rm for its infrastructure in São Paulo, has more than 10 years of nancial and risk consulting experience. Eduardo hasprojects. Authorities began to suspect that managed a wide variety of complex assignments with special emphasis on nancial investiga-a US$6.8 million expense the subcontrac- tions and forensic auditing.tor had on its books was, in fact, a payment 13
  • 14. Private Equity : Premium ilian Bubble A z rgu B ra Ho of tA m u ll i e enTh t F r? : 14
  • 15. Private Equity : PremiumIn the midst of the Brazilian economy´s activity. “Brazilian households are now ad- e Economist warns that the tight laborcontinuing surge – it grew 7.5% in 2010, its dicted to credit,” he writes, “in the same way market will keep pushing in ation up, to thehighest rate of growth in twenty- ve years, that their North American brethren were just economy´s detriment.and is forecast to grow another 4% this year a decade ago.”– some skeptics have emerged warning of an In the face of this skepticism, however, ALIoverheating system and a swelling bubble In addition to these concerns over credit, has found a decidedly more con dent view ofpoised to burst. ey are particularly con- some analysts are wary of what they per- the Brazilian economy in the alternative assetcerned with the soaring real estate prices in ceive as an over-dependence on Chinese community. In interviews with a broad rangeSão Paulo and Rio de Janeiro and a boom- consumption and unusually high commod- of experts, including Brazilian fund manag-ing middle-income housing market fueled ity prices that are bound to fall; they argue ers and industry heads as well as foreignby unprecedented levels of consumer credit that, healthy as Brazil´s current trade de cit fund managers and investors inti-being dispensed to the enormous and grow- is, it would be dangerously high were com- mately involved with various sec-ing middle class. Paul Marshall, the CEO modity prices to fall back to where they were tors of the Brazilian economy,of Marshall Wace, has been perhaps the ve years ago. ey are closely scrutinizing there is a broad consensusmost prominent and vociferous skeptic; in President Dilma Rousse and the Brazilian that the skeptical pro-columns published in the Financial Times, Central Bank to see how they manage the nouncements of ahe has sounded the alarm on the increasing three-headed problem of rising in ation, Brazilian bubblerisk of a full-blown credit crisis, arguing that chronically high interest rates, and the surg- are inaccuratethe middle class´s debt burden is becoming ing value of the Brazilian currency, the real, or funda-unbearable. Walter Molano, writing in the which threatens the domestic industrial sec- men-Latin Business Chronicle, agreed, declar- tor. ere is also concern with the extremely tal-ing that consumer credit is the main driver low unemployment rates at a time when de-behind a frenzy of unsustainable economic mand is growing so fast; a recent column in 15
  • 16. 16
  • 17. CUIPO Saving the rainforest, one meter at a time Ti any Joy Swenson 17
  • 18. PhilanthropyA few years back, a beautiful coastal community in California was devastated to learn that their neighborhood had been zoned for hotel development and the developer was en route to begin construction. It was then that omas Murray, President and co-founder of e Two Oceans Fund L.P., came up with an ingenious idea: “Let’s laya grid on the land and let’s pay this developer real world money – what he would have made onthe project – and allow individuals to buy sections of it and then we can turn it over to the city andmake it into a park. e developer doesn’t get shorted and everybody gets what they wanted.” is particular story doesn’t have a fairly tale ending as the city found the loss of the potentialproperty tax revenue from the hotel less than appealing and the idea was never put in to play.Nonetheless, omas took the idea with him and it was in 2007 that he and partner Gus Hurstbegan Cuipo (www.cuipo.org), a unique idea for how to make rain forest preservation acces-sible to the masses. e name Cuipo is derived from an endangered tree located in CentralAmerican tropical rain forests, which also serves as the home for the Panamanian nationalbird - the also endangered Harpy eagle. omas and Gus operate two private equity real estate funds in Panama and since 2006 havebought a variety of properties throughout the country. roughout that process they havedone numerous helicopter yovers and have been remarkably impressed by the apparent “golfcourses” in the middle of lush jungle land. ey quickly came to realize that these were areasthat had been deforested, mostly by local farmers and ranchers who simply wanted to createmore space for crops or ca le.Inspired to preserve such a precious natural resource, in 2007 Gus and omas began to buyprimary rainforest land in Panama, and they have currently commi ed to purchasing 5.2square miles or 13.46 square kilometers for permanent preservation and conservation. eCuipo model for preserving this land is based on the idea of saving “one meter at a time”.An easier approach compared to inspiring millionaires to buy the land for mere preservationpurposes or convincing governments to radically change their policies to protect the land. As omas Murray explains, “Why don’t we take the impetus on the individual and buy the landwith our own money and then allow people to adopt in very small increments.”As you can imagine, it is not practical to sell people one meter of the rainforest due to thepaper work and logistics involved; furthermore, due to various landowners, and complicatedsurveying and titling requirements, merely obtaining the land is a tedious and time consumingprocess. erefore, the land is purchased in large parcels using private capital, and then, as itbecomes “adopted,” Cuipo donates 100% of that land to A Meter at a Time, its 501(c) 3 nonpro t foundation, whose responsibility is to protect, preserve and educate. Next Stop: BrazilCuipo currently has their sights set on Brazil. Land in the state of Pará, located in the northernregion and considered one of the most threatened areas in the Amazon basin will be availablefor adoption in 2012. Whatever Cuipo purchases will be 100% protected, and the goal is tohave upwards of 10 million hectares in the next 20 years. is issue is quite current, as an amendment has recently been proposed to the Brazilian “For-est Code”, a legislation which requires large landowners to maintain 80% of their land as for-est. e proposed changes (approved in the lower house and awaiting nal decision by theBrazilian Senate) would reduce this percentage to 10%.Looking at Brazil, this is the process Cuipo undertakes in order to obtain land: Contract an environmental agency in Brazil to research the land, a esting to the fact that the land is not already protected. Approach the property owners of the land that is in the most danger. In most cases, land- owners are in a position to sell their land to either a private buyer or a logging company because the land has no protection basis. 18
  • 19. Philanthropy Assure that the purchase includes outright ownership of the land and the rights to the trees. Since the majority of the land has no commercial value unless it is stripped, and owners are typically eager to sell if it means the land is going to be preserved, and the already titled land can be quickly turned over to the new buyer if the price is right. omas adds, “We’re concentrating on countries in the tropics that have primary rainforest.Once primary rainforest is gone, there’s no ge ing it back. I don’t believe in telling peoplewhat to do with their property, but if it’s my property, I bought it, I’m going to protect it.”Cuipo operates on a social enterprise model. A social enterprise is an organization thatapplies capitalistic strategies to achieving philanthropic goals.“ e Red Cross is pleased to announce Cuipo’s participation in aiding our e ortsto help those a ected by the Japan earthquake/tsunami. We think this partnershipis a great way of allowing participants to bene t two world causes at once: aiding inthe Japan relief e orts and preserving deforestation in our planet´s most biodiverse region,says Greg Cherry, A sociate Director of Major Gi s, Red Cross.As omas explains, “If people are directed to Cuipo through an a liate and they adopt me-ters of the rainforest, nearly ½ of that money is given back to the a liate. e a liate canchoose to: reinvest it in the rainforest, use it for some other social cause, or pocket it. But wewould have never go en to that base of people had it not been for the outreach of the a li-ate. What we want to do is make our revenue share compelling enough that people will do itwithout the incentive of ‘it’s a nonpro t.’ We believe this business model will allow us to reachexponentially more people and therefore create an unparalleled sense of awareness, therebypromoting our ultimate cause, which is saving one of the world’s most precious resources.Our concept is to be non-political it’s not to be promoting one agenda or the other - we havethis mo o it’s called ‘Stop the Chop’ – we would like Sean Penn and Rush Limbaugh to bothlike Cuipo because our model has nothing to do with one agenda or another. All we’re doingis buying land, not chopping down the trees and implementing a preservation/conservationplan, it’s that simple and I don’t think you can argue with that”.Cuipo is creating a purpose oriented; environmental social enterprise whose goal is to havemillions of members who can create social change, something that has not been achievedby any other environmental organization. Part of their strategy will involve talking to well-known actors, musicians and spokespeople to get them on board, and working alongside John All   we’re   doing   is   buying   land,   not   chopping   down   the   trees   and   implementing   a   preserva-­‐‑ tion/conservation   plan,   it’s   that   simple   and   I   don’t  think  you  can  argue  with  that”Oswald – former CEO of Paul Frank apparel to explore licensing opportunities for merchan-dise. For example, to create hangtags for popular retail items – “With this purchase you havejust adopted a meter of the rainforest.”In the age of Facebook and Twi er, Cuipo is a great way for companies and individuals to do agreen, sustainability project without having to build it out themselves; they just have to tweet aboutit and promote it with their social media. 19
  • 20. Philanthropy“Rather than giving your friend a bo le of wine, Cuipo Founders Gus Hurst (in white shirt) andwhy not give him 20 meters of the rainforest Tom Murray (green shirt)instead, there’s no carbon footprint because it’san electronic transfer. Our demographic is kids,teenagers - youth – making it social media friend-ly – the new way to do something good. “ omas Murray speaks passionately aboutthis project that has taken up an inordinateamount of time over the past few years,“We’d love to take this to the Philippines, theCongo, Indonesia and create a grassroots ef-fort to do this because it allows people who ty and environment, while using market footprint and ght global warming. is alignsdon’t have a lot of money to be involved – forces to monetize an otherwise intangible with Cuipo’s goals since rain forest preservationkids can do this. What I love is that anyone value. is key to reducing global warming.”can feel empowered – it’s not like were trying -Chris Jonesto sell people a product that they can’t use Sustainability cannot reach its objectives with- Lead developer of the calculator at UC Berke-or don’t need, through Cuipo everyone can out a pro t margin, and reforestation projects ley’s Renewable and Appropriate Energy Lab.get involved, everyone can make a di erence, will be the carbon sequestration mechanism af-you don’t have to have a lot of money ... we fording clean air for all of us, while providing awould like to turn Cuipo into a verb, ‘what solid margin for investors. It’s a win-win. Find-land should we Cuipo next’ “. ing parity between our ethics and income desires has always been a con ict. It seems humanity isAdopt the rainforest today: nally embracing the necessity of a solid nancialh ps://cuipo.org/ali model for a sustainable planet.” -Samuel C. Larson Outsider Opinions VP of LatAm Operations - Eco Ventures Group, Inc“Rainforest preservation and carbon seques-tration programs are nally being properly “UC Berkeley’s carbon calculator helps in-accounted for in contemporary dividuals understand the most e ectivemarket economics, from which social prerog- ways to reduce their carbonatives are providing healthy pro tmargins for investors. egreatest business suc-cess is that whichprovides val-ue to thecom-mu-ni- “We’d  love  to  take  this  to  the  Philip-­‐‑ pines,  the  Congo,  Indonesia  and  create  a   -­‐‑lows  people  who  don’t  have  a  lot  of  money  to  be   involved  –  kids  can  do  this.” 20
  • 21. AgribusinessNuts:Cultivating crops thatGrow Wellin the Americas Stephen KaczorW hile the USA is the world popular of nuts, as they make an excellent e most endangered nut may be the Brazil leader in tree nut produc- snack and are used in baking and cooking. nut, which grows primarily in the Amazon tion, growing nuts in Latin Native to Brazil, the cashew, Anacardium Basin. Vast forests of Brazil nut trees grow America represents a sig- occidentale L., belongs to the Anacardia- in the shrinking rainforest, o en reachingni cant investment opportunity. e USA cea family. e Portuguese name refers to 150 feet tall. e mature tree has a hugeproduces one-third of world nut volume, half the shape of the fruit, which looks like an trunk and the nuts are contained in largeof it exported to Europe. Nut consumption inverted heart (ana means “upwards”, –car- woody pods resembling coconuts. Insideis high in many countries where domestic dium, “heart”). Other important plants of are approximately 18 nuts arranged in sec-growers may enjoy a logistical advantage this family are the mango and the pistachio. tions like a grapefruit. ey generally con-but su er from high labor costs, high taxes, Cashew trees, which live for 35 years, start tain high levels of the antioxidant selenium.regulation, less ability to borrow money, and bearing fruit in the third year. ey grow in Brazil nuts from Peru and Bolivia are not asincreased fertilizer and orchard costs. With warm regions with annual rainfall of 1,000 high in selenium because the nut can onlymany nut types being cultivated in Latin to 3,000 mm, such as Central and South grow wild in tropical jungles. As the rainfor-America, is there any reason the region could America, Asia and Africa. Easily cultivated, ests continue to be decimated, this nut willnot displace the number two producer, Tur- they require li le care and produce an an- continue to become scarcer and the pricekey, with one-fourth of world volume? nual average of 3 kg of cashews per tree. e will rise accordingly. “fruit” of the cashew tree is a false fruit; whatWhile the ubiquitous peanut is native to appears to be the fruit is an oval or pear- Almonds are commonly named as the favoriteSouth America, it is not properly a nut but a shaped cashew apple that develops from the among many North Americans; the Nut Fac-legume, as it grows in the ground. Cashews ower. It is known in Central America as tory in Spokane, Washington, grows 1.5 billionare perhaps the most widely cultivated and marañón. pounds of almonds annually. ey are found, 21
  • 22. Agribusiness The  most  endangered  nut  may  be   the  Brazil  nut,  which  grows   primarily  in  the  Amazon  Basin.   22
  • 23. Agribusinesshowever, all over the Americas and grow on a Walnuts increase fat oxidation and reduce eir annual sales total US$15 million withsmall yet hardy tree native to the Mediterra- carbohydrate oxidation, improving the use 3,000 tons of processed nuts; they sourcenean. Global production is approaching 2 mil- of body fat. Compared to certain other nuts, nuts from all over the world.lion tons annually. e almond, Prunus dulcis, walnuts (especially in their raw form) containis classi ed with the peach in the subgenus the highest level of antioxidants. One important investment consideration isAmygdalus. e almond is not a true nut, that nuts are a storage item. Nuts can be keptbut a drupe (a fruit in which an outer, eshy Overall, Nuts are an excellent source of pro- for up to one year, provided they are properlypart surrounds a shell). e favorite variety is tein, ber, vitamin E, magnesium, zinc, sele- dried a er harvesting (maximum moisturethe Spanish Marcona, which is even shorter, nium, copper, potassium, phosphorus, zinc, 9%) and properly stored to prevent mold.rounder, sweeter and more delicate in texture biotin, ribo avin, niacin and iron. Nuts may Nuts are typically sun dried and turned regu-than other varieties. In California, the polli- also be a source of helpful biologically active larly for several days until the kernels becomenation of almonds is the largest annual man- components found in plant foods, such as loose within in the shell. A er drying theyaged pollination event in the world, with close phytochemicals. Phytochemicals are com- can be roasted, processed, or shipped green.to one million bees trucked in to the almond pounds that are potentially bene cial to peo- Turkey, as mentioned, is the number two pro-groves (half of all hives in the country). ple, but not currently classi ed as vitamins or ducer, mostly of hazelnuts, and China is cur- minerals. Recent studies show the inclusion rently the third most important nut grower, e sweetest nut is certainly the macadamia. of nuts in diets can work to decrease cardio- with 12% of the market, according to the e macadamia tree is an evergreen native to vascular diseases, including coronary heart USDA. U.S. tree nut imports, mostly cashewsAustralia and are now grown in Hawaii, Central disease, hypertensive heart disease, conges- from the tropics, amount to more than US$5America, Colombia, and Bolivia. e fat content tive heart failure, and stroke. billion annually. With many Pecans beingof Macadamia nuts is high, amounting to about imported from Mexico, as well as substantial72%, primarily made up of monounsaturated A case study showing potential scale of the amounts of macadamia nuts from Centralfats. ey are an excellent source of copper, mag- nut business, is the English company H.B.S. America, and Brazil nuts from South America,nesium and thiamin and a good source of iron Foods Ltd. ey are fully owned by the Hop- Latin America could easily gain a greater mar-and niacin. Aside from their nutritional value, cra family – a husband and wife team, along ket share of the world nut market.they are a popular snack, eaten raw or roasted with one of their sons and just 40 employees.and are also used in salads, cooking and baking. Author BioIn Mexico, pecans are an important crop. e pecan - Carya illinoinensis - is a species Stephen is Chairman of the Big Riverof hickory, native in Mexico from Veracruz Foundation, a non-pro t focused on riv-and Jalisco (northern region) into much of er and watershed ecology conservationthe USA, which is the major producer due to initiatives throughout the Americas. Hefavorites such as pecan pie in southern states is an organic farmer, eco-entrepreneur,and praline candy from New Orleans. A pecan consultant, and a writer with a documen-is also technically a drupe, like the fruit of all tary lm in production in Central Amer-other members of the hickory genus. In addi- ica. As a Panama-based consultant, Ste-tion to the pecan nut, the wood is also used in phen’s focus is sustainable organizationalmaking furniture, in wood ooring, as well as development, research & management. avoring when smoking meats. Pecans are one In addition to consulting and writing, heof the most recently domesticated crops and is passionate about sustainable agricul-show strong investment potential. ture, Latin American culture, travel, and the ecology.Walnuts are grown in Chile, and are the ed-ible seed of any tree of the genus Juglans. www.BigRiverFoundation.org 23
  • 24. Private Equity : Premium TheSecondary Market for forLatAm Private Equity I n the coming years, a strong second- Mr. Li lejohn says that a lot of secondary pri- ary market will emerge in LatAm – and vate equity will enter the market for adminis- particularly Brazil – for funds launched trative housekeeping reasons, as institutional toward the middle or end of last de- LPs accumulate a multitude of funds. cade, o ering foreign and local LPs new in- vestment and exit opportunities. “Over the life of a fund,” he explains, “a er it has made Substantial distributions, Net Asset According to Duncan Li lejohn, the Latin Value shrinks, and there comes a time when American representative at Paul Capital, a the LP has accumulated a lot of these tail-end global alternative investment rm that in- funds that are no longer as signi cant to his cludes a US$1.6 billion fund for secondary portfolio, and which still require the same assets in emerging markets, the LatAm sec- amount of work as a big fund.” O en, he says, ondary market is only in its infancy. “If you the LP will put these funds on the market in think of the inventory of existing LatAm their eighth or ninth year, “because at that funds,” he says, “the bulk of them were raised point the IRR is basically baked in, most of 2007 onwards, so most of the funds aren´t the distributions have happened, and if they yet ve years old, are just ge ing to the end sell that for a li le more or li le less, it won´t of their investment period, and LPs aren´t make much of a di erence to their fund-level really pressured to sell them.” He says that IRR. at´s a recurrent source of secondary the pa erns of growth of secondary markets private equity deal ow.” tend to re ect those of the primary market, only with a time lag, and that the LatAm sec- In LatAm, however, few funds have reached ondary market will be healthy, re ecting the that stage. “Most of the funds are young and massive in ux of PE investment to the region haven´t reached their peak distribution,” he in recent years. says. “ e LPs are still ramping up to their 24
  • 25. 25
  • 26. Agribusiness Art 26
  • 27. Agribusiness Mezzanine Finance for LatAm’s Infrastructure Patricio AbalM ezzanine nance is an innovative and complex way to nance corporate expansion projects, acquisitions, recapitalizations and leveraged buyouts and to structure re- nancings. e infrastructure sector is no exception and private sector companies use it to develop public infrastructure. A mezzanine nancing can be structured ina number of ways. is facilitates its capacity to evolve with market conditions and adapt to meetthe particular nancial needs of companies and projects. A “well structured mezzanine transactionaligns all interests around the success of the project and provides all sides with a be er deal, as itmitigates risks from the investor side while avoiding unnecessary dilution from the sponsors.” 27
  • 28. Infrastructure e infrastructure sector in our region has gal and nancial advice – both before apply- the recipient. e plus side is that thehad limited experience with mezzanine ing for the nance (to anticipate the expecta- debt won’t a ect the operating compa-funds. Darby Overseas Investments (Darby), tions and requests of mezzanine providers) ny’s ratios involving interest coverage oran experienced player in mezzanine nance and, subsequently, during the negotiations of leverage.worldwide, launched the Darby Latin Amer- term sheets – and legal documentation, to be Transparency requirements. Companiesica Mezzanine Fund back in 1999 and the able to tackle more e ciently the issues that are expected to report certain nancialBrasil Mezanino Infra-estrutura – FIP (BMI) are listed below. and operational information in a timelyin 2007. Darby is also apparently in the pro- and complete fashion to allow appropri-cess of closing its Darby Latin America Mez- Due to the equity and debt elements that ate monitoring.zanine Fund II a er a number of years of characterize this type of long term risk capital,fundraising. Infrastructure professionals are investors and companies have to understand Last but certainly of no less importance, therealso watching EMP Latin America invest in and negotiate a number of complex issues: is the subject of the bene cial e ects for aits Central American Mezzanine Infrastruc- partner company of a mezzanine provider. Asture Fund (CAMIF). Security. Mezzanine is subordinated to when partnering with a private equity rm, the senior loans, therefore security can con- company’s image improves, which at the same is article will provide an overview of mez- sist of second liens on assets. Security times increases the chances of partnering withzanine nance and the most common issues packages will need the consent of senior sponsors and the access to relevant deal ow.surrounding it. It will then address the char- lenders (see “Intercreditor issues,” be-acteristics and activity of the funds men- low). Our region’s experience with in-tioned above. Exit structure/s. e most common fra-focused mezzanine funds ways for mezzanine nance providers to Characteristics of mezzanine exit an investment are through a recapi- In 1999, Darby launched the pioneer Latin nance talization of the company (using gener- America Mezzanine Fund. By 2005, it had ated cash or senior debt contracted on made 12 investments for a total of US$200As previously noted, this type of nancing more convenient pricing) or through an million. Today, it is fully divested. is fundmechanism can be structured in a number of acquisition of the company by a strate- had a strong focus on infrastructure. e in-ways to provide a tailor-made solution, based gic investor. vestments showed great diversi cation amongon the transaction and the capital structure Covenant protection. While the debt countries and infrastructure sub-sectors (tollof the company receiving the nancing. In component of a mezzanine transaction roads, ports, pipelines, energy, telecom, etc).fact, mezzanine nance is a collective term shares a similar set of covenants to bankfor hybrid forms of nance, as it has features loans, ratios are not as stringent. ese last few years have been quite active,of both debt and equity. Intercreditor issues. Senior creditors and compared to previous years, in the launching providers of mezzanine nance will have of infra-focused mezzanine funds.It is important that companies considering to negotiate an intercreditor agreementmezzanine nance understand that the re- to address, among others things, the col- In 2007, Darby certainly led the way, yet again,turn of the mezzanine providers, up to 20% lateral to guarantee the mezzanine loan, with the launching of the BMI. As the namein most cases, will be the aggregate of any the remedies to be exercised upon a de- suggests, this is a mezzanine fund focused onor all of the following: (i) interest cash pay- fault on their respective loans, and the just one country and a speci c sector. Further-ment; (ii) the so-called “payable in kind” in- conditions under which the mezzanine more, the currency of investment is the Brazil-terest, which basically means that the interest provider can accept a payment (di er- ian real (R$387.5 million) and the externalamount is added to the principal outstand- ent from the interest payment) from the capital was raised from Brazilian institutionaling; (iii) the return from the equity stake; company. investors (we use the word “external” now toand (iv) whatever participation the provider Interest rates. Can be xed or variable. note that the fund’s sponsors, Franklin Tem-gets over the results of the company’s perfor- “Equity kicker.” Can be in the form pleton Investments and Brazilian Grupo Stra-mance. of warrants and/or pro t sharing ar- tus, have also invested in the fund). rangements tied to the company’s per- Issues to be considered by compa- formance (measured using net pro ts, e BMI has a 4 year investment period andnies applying for mezzanine nance EBITDA, or operational metrics). part of its capital has been invested in the gen- Holding or operating company. Provid- eration of electricity and in a cargo terminal. ing the mezzanine nance to the former We have been told that “investing in Brazil-With the previous section in mind it shouldn’t means additional risk for the provider ian infrastructure is a complex activity thatbe a surprise that negotiations over mezza- (the reason being that the holding com- requires a number of pieces to be put in thenine nance can involve many issues, extend pany has no operational cash ows, so a right place simultaneously: senior nancing,over time and demand plenty of documenta- legal structure to secure the dividends all required licenses, a certain amount of eq-tion. at is why companies considering this from the operating company has to be uity from a sponsor with a remarkable tracktype of nance are advised to seek proper le- put in place); hence costs increase for record and indisputable reputation, among 28
  • 29. Infrastructureother characteristics. e main challenge for development banks appeared as investors facturing, services and infrastructure sectorsa professional infrastructure investor is to in the US$150 million fund that focuses on of primarily Mexico, Brazil, and Colombia. nd robust and economically a ractive in- traditional infrastructure sectors but can alsovestment opportunities that match all these invest in related sectors such as alternative fu- Special thanks to SoRon Hung and Eduardorequirements and can go through an in-depth els and health & education. Part of CAMIF’s Farhat from the São Paulo o ce of Darbydue diligence process without any major is- capital has already been invested in a palm oil Overseas Investments.sues identi ed.” e fund can invest in (i) en- producer in Mexico and in a hydroelectricergy and biofuels; (ii) water, sewage and waste power company in Guatemala.management; (iii) logistics and transporta-tion; (iv) oil and gas and; and (v) suppliers to Darby seems to be closing the follow-up fundthe Brazilian infrastructure sector. to the Latin America Mezzanine Fund. e rm intends to raise US$200 million andIn late 2009, EMP Latin America closed its will focus on investment opportunities in theCAMIF. Major multilateral and bilateral range of US$10 to $30 million in the manu- Author Biography Patricio Abal is an infrastructure law and nance professional and the Infrastructure Editor of Alternative Latin Investor. Holds a J.D. from the Universidad Católica Argentina and is a Master in Project Evaluation Candidate at UCEMA & ITBA in Buenos Aires, Argen- tina. He is an A orney at DFG Abogados. He can be reached at patricio@alternativelatininvestor.com. 29
  • 30. Agribusiness 30
  • 31. Energy : PremiumInvestingin Brazilian Oil: ALI Talks with Will Honeybourne of First Reserve I n the last half-decade, a er a series of discoveries of enormous elds in the so-called pre-salt layer beneath the ocean o its south-east coast, Brazil has jumped to elite status among oil-rich nations. It is still unknown exactly how much oil and gas are contained in the discovered elds, and how many more undiscovered elds there might be, but the general consensus is that the quantities will make Brazil a leading oil producer and exporter in years to come. Petrobras, the partly state-owned oil and gas giant, has already commit- ted to investing US$224 billion in development through 2014, with the intention of doubling its output. “Brazilians joke about these discover- ies as a gi from god,” says Will Honeybourne, Managing Director of First Reserve, an investment rm specializing in the energy industry, “and it really is. ese discoveries are absolutely massive.” Foreign investors, including First Reserve, have responded by investing in Brazil´s oil industry, particularly in smaller companies charged with supplying equipment to Petrobras and other producers. “$224 bil- lion translates into an amazingly large amount of equipment,” says Mr. Honeybourne. “ e pressure is on to source those needs locally, but the local market can´t provide without an infusion of growth capital. So there is a huge interest on the part of foreign companies who want to participate in se ing down a footprint and ful lling the requirements of the local content, and that´s a very in- teresting dynamic.” Aside from generous geology, says Mr. Honeybourne, other factors that have at- 31
  • 32. ArtTakingFine Art Funds:the Soul out of Art Investing? T hroughout history, retailers and individual collectors have been trading valuable works of art, whether for plea- sure or investment potential. As far back as the 1800’s art trading clubs were formed and investors would gather to discuss their collections and potentially trade works. It wasn’t until a er the year 2000 that commercial art funds began to gain traction as investment vehicles. At that time a number of entrepreneurs from the nancial and arts industries who had a strong personal or vocational interest in art set up these funds, a number of which have zzled out over the years. An art fund, much like a hedge or private equity fund, provides com- mercial rewards to both the capital providers and the fund managers. Considered by those involved to be a sophisticated type of alternative investment, art funds provide a long-term hedge during periods of nancial crisis and in ation. For this feature, ALI spoke to two promi- nent ne art funds as well as to top art advisors to understand and analyze strategies of art investment funds as well as the recent growth in the Latin American sector. e Fine Art Fund Group A leading global ne art investment company, founded in 2001 by Philip Ho man, TFAFG was the rst group of private-equity type funds focused solely on investing in art as an asset class. eir inves- tors are chie y HNWIs and family o ces representing 16 di erent countries. e Group currently manages over US$100 million in assets, spread across ve separate funds: three Western art funds, a 32
  • 33. ArtChinese art fund and a Middle Eastern art fund. TFAFG values theirassets both internally and externally, with valuations performed by “Brazilian  art  has  out-­‐‑performed  auction houses on an annual basis and by the fund’s Directors on aquarterly basis. other  asset  classes,  thus  proving  ALI spoke with Paola Matallana Gonzalez, Vice President, LatinAmerican and Spanish Markets, for TFAFG. A er spending ve to  be  an  excellent  investment.  It  years working within the private wealth management department ata major European bank, she joined e Fine Art Fund Group in 2008to focus on increasing the client base in Latin America and Spain. e impressive increase in interest in Latin America inspired the FineArt Fund Group’s decision to bring on a specialist in this arena. “Art funds  dedicated  to  this  segment  are  from Latin America has experienced a solid and steady growth overthe past years. ere have been world record prices paid for key art- established  locally  and  abroad.  “ists. As a group, we are interested in high quality works of established[Latin American] artists, whether modern or contemporary pieces. An increasing number of museums and galleries are now making aFor example, we invested in a female contemporary Brazilian painter, point to include departments dedicated to Latin American art or hir-who is well known in the international scene [Beatriz Milhaes].” ing curators with expertise in the region. Brazil Golden Art Private Equity Investment Fund Within the Latin American context, Brazilian art has had the steadiest appreciation over the last 10 years. Even during the 2008 crisis, whichBGA is a part of the Rio de Janeiro and Sao Paulo-based rm Plural hit every sector of the international market, Brazilian art continuedCapital, a private equity 5-year fund. e BGA fund is worth R$ 40 to appreciate. Such stability is directly associated with a solid GDPmillion under management, or approximately US$ 26 million. e growth rate, which is unique in the history of Brazil. Mr. Reis adds,fund consists of 70 investors, all Brazilian, mainly from São Paulo and “Brazilian art has out-performed other asset classes, thus proving toRio de Janeiro. eir funds are allocated between xed-income as- be an excellent investment. It is a ma er of time before other art fundssets with daily liquidity and moderate risk, and works of art that are dedicated to this segment are established locally and abroad. “now starting to make up the fund’s investment portfolio (primarilyBrazilian contemporary art). As currently there is no art index in Bra- When it comes to comparing LatAm works to other emerging econo-zil, BGA uses expert appraisals and auction results to benchmark the mies, one can see similar training based on key vanguard gures suchcurrent value of the fund. as Picasso or Matisse, which in uence strongly their work. e role, however, that art plays in each culture is in uenced by various fac-According to Heitor Reis, BGA Founding Partner and Fund Man- tors and di cult to de ne on a global basis, as the complexity of eachager, “Given the success of BGA, which had its fundraising complete country and culture is profound.a er 30 days, we are likely to open new ne art funds and possiblyo er them to foreign investors. Moreover, we will expand to create As Ms. Gonzalez adds, “Modern Latin American art is freely inspiredfunds based on other alternative asset classes, for instance, Brazilian both from political and cultural forces. An example is work by the lm.” Mr. Reis worked in the Brazilian art market for over 20 years. Brazilian artist di Cavalcanti depicting strong cultural and social per-He served as director of the Museum of Modern Art in Bahia and spectives such as images of the Carnaval, whereas work from ChinaRio de Janeiro, organized several exhibitions and biennales in Brazil might contain more overt political references, yet still have pop in-and overseas, and currently sits on the board of important Brazilian uences by artists such as Warhol and Lichtenstein, who moved thatinstitutions such as the AICA - Associação Internacional de Críticos market internationally.”de Arte (International Association of Art Critics). Skepticism: Taking the “soul” out of art investing: Brazil and Latin America ere are many individuals within the ne art investment commu-Emerging markets economies of some Latin American countries have nity who remain skeptical when it comes to art funds, as there arehad one of the best economic runs ever in the past years, in uencing some signi cant di erences when compared to other investmentpositively the local art market development and permi ing local col- funds (i.e. hedge or private equity). Much like the real estate andlectors to invest in local hard assets. According to Ms. Gonzalez, “ e entertainment markets, the art market doesn’t have concrete quan-Latin American art market will continue growing and we will con- titative values that you see in other industries, making it di cult totinue to see new world price records in the international market.” track ROI and forecast. Another obvious di erence is that that art, unlike other, conceptual assets, is a physical asset, thus the fund’sIn 2010 the LatAm sales for auctions at Christie’s Sotheby’s and Phil- strategy must include a series of buying and selling costs associ-lips de Pury exceeded 1 million dollars (Insert Graph from Page 9 ated with ne art which are not applicable to non-physical property– source Alternative Latin Investor Art Investment Outlook 2011). funds. As art advisor Clayton Press from LINN|PRESS art advisory 33
  • 34. ArtValentino Fialdini on the family or the art side ever come to To quote Ms. Gonzalez, “We look at art pure-Untitled, 2010 me and say: I’m considering investing in an ly as an investment. We never buy a work ofC-print art fund, do you think it’s a good idea?… . art because we like it aesthetically; we onlyEdition of 5 It is still a highly speculative venture with buy in order to seek longer-term capital125 x 180cm questionable return on investment, mostly growth for our investors.” due to the management fees and holdingservices points out, art investment involves costs associated with the investment.” Sergey Skaterschikov, CEO of Skate’s Art“shipping and handling, storage and trans- Market Research, takes the same approach:portation, so you can’t dispose of the assets Generally speaking, the people who invest in “ ere is no universal set of principals whenquickly due to illiquidity of the physical an art fund are an entirely di erent class than it comes to the way that each fund choosesproperty.” those independent investors, speculators or its assets. e only eligibility requirements ne art collectors who have a genuine interest are nancial. “Furthermore, while the majority of Art and love of art. While the la er group does de-Funds boasts a slew of “in-house” coun- ne some of their works as pure asset invest- is strategy, however “passionless” it maysel, such as advisors and art historians, it is ments, and follows market trends, their pur- sound, is successful from an investment per-di cult to invest with certainty, as what is chases are largely inspired by “gut” instinct. spective, as the risk to nding new talent“hot” is entirely dependent on uncontrol- based solely on one´s objective opinion islable factors such as political and social Many passionate art collectors would ar- that the particular work or artist may or maytrends. As the holding period for an art fund gue that art acquisition with only financial not yield positive nancial gains. Mr. Skater-is generally much longer than the term for gain in mind takes the soul out of art in- schikov believes that art investment outsideother funds – inspiring the hope of a high vestment. Art fund management compa- the list* of artists with proven artistic legacyrate return – the ability to cash in on that is nies have one primary objective: work to market value and public sales records repre-highly susceptible to aforementioned mar- deliver returns to their investors. Hence sent a high-risk, venture-capital-like invest-ket trends. Mr. Press goes on to say, “I’ve art buying and selling is based on rational ment that is most successfully managed bynever had a single one of my clients either reasons only. industry insiders. Essentially, dealers and gal- * Skate’s Top5000 is an available database of the world’s 5,000 most valuable artworks based on publicly reported 34 auction prices. h p://www.skatepress.com/_index.php?cat=102
  • 35. Art leries are investors at the bo om of the value Marcelo Moscheta “We  look  at  art   chain, and to be successful in “new talent” art HIC SVNT D CONES v.01, 2010 Charcoal on paper investment one has to dedicate signi cant re- 140 x 200 cm purely  as  an  in-­‐‑ sources to the process. e price of an artwork is connected to basic cess of investment funds. is being said,vestment.  We  nev-­‐‑ economic principles – the law of supply and those funds that understand the working of demand – as well as to the art market, with its the market will be able to capitalize on its er  buy  a  work  of   auctions, galleries, institutions and fairs. As Mr. potential and bene t from the money to be Reis adds, “At the end of the day, despite their made in the sector. According to Ms. Gon-art  because  we  like   di erent sources of motivation, both investment and passion-driven buyers bet on the success of zalez, “ e keys to success in investing in art include: the need for agility and cash in hand the art and artists whose work they collect.” In to seize opportunities; reliance on experts; asit  aesthetically;  we   regards to question of taking the soul out of the well as a critical awareness of the impact of investment, Mr. Press said it best: “I don’t think changing tastes. If you have an excellent team only  buy  in  order   there’s any passion whatsoever in an investment fund – it is more that there is a desire to entrust of experts, are si ing on a lot of cash and are prepared to hold art over a ve-year period, someone else to generate a pro t for you.” you can make substantial pro ts.”to  seek  longer-­‐‑term   e future of art funds: capital  growth  for   Succeeding in the art world as an Art Fund is indeed a very di cult task. e degree of our  investors.” speculation and the overheated nature of the market can be great threats to the suc- 35
  • 36. Agribusiness : PremiumEntering PhilanthropyThe Brazilian Agribusiness Sector Foreign entrepreneurs are entering the Brazilian agribusiness sector, reaping the bene ts of an agricultural powerhouse that is among the world´s leading producers and exporters of soybean, corn, co ee, and sugar, among other cash crops. In the last year, however, many have been forced to alter their business models in light of new regulations restricting foreign ownership of land.Philip Corzine is one such investor. An es- South American Soy began by purchasing three where they leased two di erent farms, onetablished soy farmer in Illinois, in 2003 he farms in Tocansin, where land prices remain in Tocinsin and one in the bordering state offounded South American Soy, a U.S.-based cheap even as major export-oriented infrastruc- Goias, totaling another 1,500 hectares. eycompany with large, crop-yielding land ture projects in the works promise to push values nanced it with a European, agri-focusedholdings in the Brazilian state of Tocantins, up in the coming years. e purchased farmland hedge fund that was interested in agricultural in central Brazil. e company has been comprises 1,500 hectares, of which about 80% is production, not buying land. ey then part- capitalized through small private of- devoted to soybean, 20% to corn; the eighth and nered with local farmers, covering half the fers, and currently has about a most recent crops were the best to date, says Mr. production costs (usually fertilizer and seed) hundred members/investors Corzine, with 3.2 metric tons of soybean and 7.2 and handling merchandising, marketing and focused on long-term real metric tons of corn per hectare. distribution, while the farmers covered the estate appreciation in rest of the production costs and worked the the Brazilian agri- e company recently expanded its acre- farms. Pro ts were split 50/50. Mr. Corzine business sector. age and production using a di erent model, says that the arrangement has been good for 36
  • 37. Hedge FundsMILAIntegration AJoseph Hogue s Brazil frightens investors with threats of escalating its “currency wars” with more capital controls and China’s growth looks its weakest in two years, investors continue to search for alternatives within the emerging market space. Enter MILA, the Mercado Integrado Latinoamericano, or Lat- in American Integrated Market, which combines and integrates the stock exchanges of Chile, Colombia, and Peru. MILA is the culmina- tion of a four-year process, the goal of which was to create economies of scale and scope for equities trading on the exchanges and rms operating within the region. Trading o cially began in May of this year and has already a racted interest from some of the larger regional exchanges. Following is an excerpt from a report released this month from the investment consulting rm E cient Alpha. e integration will create the largest exchange in Latin America by number of issuers (see next page) and the second largest by market capitalization a er Brazil’s Bovespa (see next page). Hasan and Malka- maki (2001) studied 38 exchanges in 32 countries and found consider- able economies of scale and scope with greater exchange size. Demand for recent issuances has been strong in all three countries. Nutresa, a Colombian food manufacturer, saw its IPO of US$522 million over- subscribed by 17 times in its July o ering. In December 2010, the MILA of- ferings for Concreto and Davivienda were oversubscribed by 12.6 and Mexico 13 times, respectively. e success of these placements and hopes for increased liquidity has helped to bring more issuers to market. Brazil 37 Peru Chile
  • 38. Hedge Funds e mix of equities from the three countries will also greatly improvediversi cation across sectors. Currently, sector weights within theindividual indices range from .3% to 50.2%, with each index holding Although  2011  has  most of its composition in one or two sectors. e IGBC, Colombia’sindex, has 42% of its composition in energy, and 28% weighted inFinance. e IGBVL, Peru’s index has over 50% of its composition not  been  as  strong,  in mining and mining service companies. e IPSA, Chile’s index, ismore diversi ed than the other two indices, but still holds approxi- Brazil the  three  indices  have  mately 24% in nance. e sector weights in the integrated exchange MILAwill range from 2.4% to 23.7% with the largest holdings in basic ma-terials and banking. Mexico fallen  an  average  of   ChileTrading on Chilean equity market was almost three times that of oth- Colombiaer two markets combined, at approximately US$39 billion in 2009.Trading on the Peruvian and Colombian equity markets in 2009 was Peruapproximately US$4 and $12 billion, respectively. Despite low trad-ing volume, the three markets have experienced an average annual months  of  the  yeargrowth in trading of approximately 22% since 2002. e composi-tion of the markets is di erent across the three exchanges. Equity Correlations IGBC between the three IGBVL since 2004 show a high IPSA markets S&Ptrading makes up less than one-tenth (8.3%) of the total exchange positiveIGBC relationship, ranging from .74 to .88, but still providing di- 1 0.88 0.74 0.20volume in Colombia, while equity trading in Peru and Chile amounts versi IPSAcation e ects and high 1 0.82 An equal-weighted portfolio returns. 0.06to approximately 68% and 6%, respectively, of total exchange activity. of the three indices over the last seven1years would have returned IGBVL 0.42Fixed income trading on the Peruvian exchange is only 32% of total 21.9% S&P versus the return for the S&P500 of 2.2%, and would have had 1activity while making up 85% and 78% of trading on the Colombian a standard deviation of only 16.8%. Including the S&P500, with anand Chilean exchanges. equal-weighting across all four indices, lowers the portfolio return to 38
  • 39. Hedge Funds tody in the local markets and local currency. MILA will run on a FIX- based message routing network allowing information exchange between the exchanges, managers, and participating brokers. Foreign investors will have access to the exchange through brokerage. Since investments in MILA securities will be held in custody in local currency, investors will need to decide on the amount of desired currency expo- sure. Colombia is the only market of the three with a standardized de- rivatives market in addition to over- the-counter instruments. As curren- cy derivatives will not be traded in the integrated market, investors will need to take necessary precautions to hedge currency risk. Some of the risk will be naturally hedged by vir- tue of less than perfect correlations between the currencies, but correla- tions are relatively high between the three currencies and may increase17.2%, but also reduces the standard devia- a er adjusting for seasonality and economic as a function of the integration.tion to 13.1%. trends. Bastianen (2009) showed in a study of the Euronext formation that removal of Last month, the chief operations managerFinal bene ts of the integration are yet to be informational and regulatory barriers in in- of the Lima exchange, Francisco Palacio,realized, but many are using the Euronext tegration lead to higher valuations and stock reported that Mexico’s stock exchange hadcreation as a model for forecasting. Research prices through increased investor pool and expressed interest in joining MILA, andby Marco Pagano (2005) on e ciency gains liquidity. It remains to be seen if risk will this month the Colombian newspaper Elfrom the Euronext formation shows that a be reduced as signi cantly for the MILA Colombiano reports talks between thereduction in volatility and increased liquid- exchanges as for the Euronext exchanges. Brazilian Bovespa and Colombia’s BVCity helped Euronext reduce costs of trading Latin American exchanges and economies exploring a possible integration of theby an average of between 15% and 31% for carry considerably more emerging market bourses. Although 2011 has not been asthe participating exchanges, and a reduc- risk than those domiciled in Europe, so strong, “the three indices have fallen an av-tion in bid-ask spreads of between 23% and risk reduction e ects may not be as pro- erage of 5.7 % in the first three months of48%. Pagano also found a statistically sig- nounced. the year”; returns were among the top fiveni cant increase in volume on the order of best performing in 2010 with the IGBVL,35-50% a ributable to the creation of Eu- Trading will be managed through brokers list- IPSA, and IGBC appreciating 65%, 38%,ronext. is increase in volume was found ed on each exchange with shares held in cus- and 34%, respectively. Author Biography Joseph Hogue is a research economist for the State of Iowa and a candidate for the level III Chartered Financial Analyst exam. He is a regular contributor to the website Seeking Alpha and the Director of Virtual Relations on the board of the CFA Society of Iowa. E cient Alpha, provides investment research & analysis solutions for small and medium-sized businesses. Core products include: nancial newsle ers, blogging, investment analysis & due diligence, and real estate analysis. www.e cientalpha.com 39
  • 40. Agribusiness 40
  • 41. Private Equity : Premium O ne of the major stories of the Brazilian boom is the growth of its domestic consumer market fueled by a swelling middle class with rising purchasing power. is middle class, or Class C (according the o cial class strati cation scheme), with family incomes be- tween US$750 and US$3,229 a month, has grown by almost 40 million since 2003, and now includes about 105 million people, or half the Brazilian population, accounting for nearly half of the country´s total purchasing power. Class AB (the upper-middle and upper classes) has also grown in the last decade. All classes of the population are spending more, with Class C expected to increase its total spending 19% this year. Brazilian fund manag- ers and foreign investors are looking to the consumer market as one of the best means to gaining exposure of Brazilian growth. Investing in the Brazilian Consumer Market 41
  • 42. Forex Opportunities in Lat Am Forex Trading T he foreign exchange (forex) market al- sent a small segment of the global market. Latest data ready the world’s largest and most liquid from the Bank of International Se lements (BIS) puts investment vehicle set a new record for the Lat Am market at $42 billion in April 2010. Within average daily trading of US$5.12 trillion the region, Mexico was the most active in forex trading, in June. While major institutional investors dominate with an average daily turnover of $17billion. Brazil was the sector, private investors are increasingly active, second at $14 billion, although this marked a spectacu- drawn by 24-hour markets and the proliferation of lar increase from just $6 billion in 2007. simple online trading programs. Despite the small numbers, interest in forex trading Geographically, forex trading remains highly concen- in the region is growing, spurred by strong economic trated, and trades conducted in Latin America repre- growth, increasingly sophisticated nancial markets, 100 Forex Money Manager Returns 80 70 Low Risk 60 50 Medium Risk % 40 30 High Risk 20 10 0 05 06 07 08 09 10 20 20 20 20 20 20 42
  • 43. and the impact the global commodities boom is having onArt cur-rencies around the region. In the last twelve months, for exam-ple, the Brazilian real appreciated 11.6% against the dollarthe pesos of Chile (12.7%), Uruguay (11.3%) and Mexico(8.95%) also made strong gains against the greenback.It is in this emerging market that brokers such as SPOT-tradeare looking to establish a foothold, focusing on a personalizedservice for the growing community of private investors, whilsto ering institutional investors a chance to diversify their port-folios.“We are trying to incorporate face-to-face, local services of in-vestment vehicles typically o ered online in locations wherethe market is still undeveloped,” explains SPOT-trade Directorof Corporate and Institutional Trading, Jonathan Rivas, add-ing that it is the personalized service that gives the company acompetitive edge in a crowded market. e possibility of quick and high returns is one of the big at-tractions of forex trading for individual and small investors. Butwild and rapid currency swings can be devastating for the port-folio of an investor without an understanding of the marketthat is dominated by a small group of major institutions.Rivas says SPOT-trade’s goal is to form long-term relationshipswith its clients, beginning with an assessment of each investors’targets, nances, and risk appetite. en the company’s teamof experienced money managers adopt a hands-on approachto guide an investor whether experienced or a rst-timerthrough the confusing mass of online trading platforms andadverts.Market expertise also has to be matched with a close under-standing of a historically turbulent region, where knowledgeof local politics and culture is vital for outside investors. In aperiod of rapid development, it is particularly important to an-ticipate legislative changes. For example, recent regulatory ad-justments to Brazil’s forex market are set to make trading moretransparent and fairer, particularly for small investors who haveli le or no in uence over aggregated trading volumes. Localanalysts welcomed the change, but warned that it could reducethe size of Brazil’s forex market. Several governments in the re-gion are also considering new policies to stem the appreciationof their currencies, over fears that it will harm local competi-tiveness.SPOT-trade’s LatAm HQ is based in Buenos Aires. Although Ar-gentina is not one of the major markets for forex trading in theregion and one of the few LatAm countries whose currencyweakened against the dollar in the last year (4.82%) Mr. Rivassays a signi cant investment community and strategic location inthe thriving Southern Cone sub-region makes it a prime spot tostay ahead of the ever-changing investment landscape.For more information regarding SPOT-trade please see spot-trade.com or email info@spot-trade.com 43
  • 44. Hedge Funds : PremiumLatAm  FundDue  Diligence:What Managers V idak Radonjic, the founder and CEO of Beryl Consulting Group, which provides independent hedge fund research and advisory to family o ces and institutions, recently gave ALI aNeed to Know window into how he evaluates LatAm managers. As an analyst, he says, he always draws comparisons between manag- ers working in a similar space; in approaching Latin American manag- A Conversation with Vidak Radonjic ers, he compares them to those he nds in other emerging markets, particularly Asia. Currently he is unimpressed overall by the limited range of investment strategies in Brazil and throughout LATAM com- pared to their Asian counterparts, seeing the region as lagging about ten years behind. “In Asia today, when you compare it with ten years ago, you can nd ‘local’ global macros, long-short credit funds, volatility arbitrage funds; you can even nd funds that are very speci c, for example, sec- tor funds within long-short equities space – and you don´t have that in Brazil right now. In order to a ract funds of funds type of investing into Brazil, it would be very useful to have more strategies to choose from, because if you want to allocate your money into Brazilian space, you also don’t want to put all your eggs in one basket, in one strategy, but to be able to have a variety of strategies with a Brazilian focus.” Mr. Radonjic adds that that the overall lack of manager competition within the region is detrimental. “In Asia you have 1200 or 1300 hedge fund managers,” he explains. “Most of these managers are small, so the number is vastly in ated. But on the other hand, the number of manag- ers in Brazil and Latin America is miniscule, so the competition isn´t as large and therefore managers are less inclined to give you a presentation that is as stunning as those you would nd in Asia, New York, or Lon- don. If you compare the quality of interest you receive from an Asia- based fund that´s doing a strategy that a certain Brazilian fund is doing too, I´m much more inclined to do business with the Asian manager. You get much more for a buck in terms of people and resources.” He also says that, in LatAm, the fund´s overall size and infrastructure is a key factor. “I would be more inclined to invest in a hedge fund that 44
  • 45. RegulationTax IncentivesSoftware Developmentin Argentina the Argentine Government provides for Total exemption from Gross Income Federal Incentives for the industrial activities. Tax for income originated in IT activi-So ware Industry. In addition, the incentive regime pro- ties;At the federal level, in 2004 two pieces of vides that those individuals or com- Exemption of Stamp Tax applicable tolegislation aimed at promoting the So ware panies subject to this regime will be public deeds or any other document forIndustry were enacted in Argentina. excluded from any present or future the transfer of property in the Techno- restriction for the repatriation of funds logical District, provided that the pur- ese laws were aimed at promoting the relating to the payment of importation chaser is registered as an IT company.activities of creation, design, development, of hardware and other components of Such exemption shall beproduction and implementation of so ware computer use necessary for the so ware Total if the relevant instrument is exe-systems and their technical documentation, production activity. cuted within the rst three years as fromincluding the developed so ware to be in- the date the law is enacted,corporated into various processors. So ware Municipal Incentives for the Seventy- ve percent (75%) of the ap-development for personal use is excluded So ware Industry. plicable Stamp tax if the relevant instru-from this system. ment is executed between the third and On the local level, in 2008 the City of Buenos seventh year as from the date the law is ese laws cover individuals and legal enti- Aires enacted Law No. 2,972 for the Promo- enacted, andties incorporated in Argentina whose prin- tion of Information Technology and Com- Fi y percent (50%) of the applicablecipal activity is to develop so ware. e munications Companies (ITC). Stamp tax if the relevant instrument isincentives granted at the federal level are the executed between the seventh and tenthfollowing: This local law creates the “Technological year as from the date the law is enacted; District” of Buenos Aires, a designated Exemption from payment of contribu- Fiscal stability – for all federal taxes – area in the south of the city of Buenos Ai- tions to Street Lighting, Sweeping and for a period of ten (10) years as from the res that provides certain incentives for IT Cleaning for properties in the Techno- date of enactment of these laws (2004); companies. logical District which receive improve- Fiscal credit for federal taxes (except ments mainly for development of the Income Tax) of up to seventy percent e main purpose is to achieve the best pos- technology industry. is pro t will also (70%) of social security contributions sible combination of resources and capacities bene t the properties owned or rented due by the relevant individual or com- to develop the production and business pro- by the employees of companies regis- pany; cesses, research and development to generate tered in this scheme. Tax exemption of sixty percent (60%) of innovative products and services, and collab- Finally, it is noteworthy that this local Income Tax applicable to each relevant oration to certify world-class quality. law is also under the scope of the federal scal year; so ware development law No. 25,922. e so ware production activity will be Individuals and companies doing business in considered as a productive activity of the Technological District are entitled – for transformation, like any industrial activ- a ten-year period – to the following tax ben- ity, in order to receive any bene ts that e ts: 45
  • 46. Agribusiness Javier Canosa is the managing partner of Canosa Abogados (www.canosa.com.ar) who help foreign entities and funds se ing up and developing their business in Latin America. He has vast experience in mergers and acquisi- tion and the negotiation of commercial agree- ments. Javier has represented and advised several companies, including nancial institu- tions, in corporate M&A, business develop- ment and real estate undertakings. Javier can be reached at jc@canosa.com.ar 46
  • 47. I Hedge Funds : Premiumnstitutionalnvestingn LatAm: A Contrarian´s View ALI  speaks  with  Mark  Yusko  of  Morgan  Creek For most institutional investors, there is an uncertainty about LatAm´s quality and future and a certainty about its checkered past that gives them pause as they investi- gate young managers in the region. Most of these investors want to see a strong and suf- ciently long track record from a manager, demonstrating sustained high performance, before they commit, but many of the manag- ers cannot provide one. is unproven inex- perience is a deterrent for risk-averse insti- tutional investors, and many choose to wait and see how a young manager grows, relying on established reputations in the meantime. Mark W. Yusko, however, disagrees with this prevailing mentality. e CEO & Chief Investment O cer of Morgan Creek Capital Management, a Chapel Hill-based Invest- ment Advisory Firm, he was formerly the head of the UNC Chapel Hill endowment, 47
  • 48. GoingPrivate Equity : PremiumPremium SmallA s foreign investors have ooded the Brazilian market in recent years, much of their capital has gone toward select blue-chip companies with in-ternational reputations, leading to increases incompetition, prices, and multiples. “ ere issome overcrowding at the high end of the market,where there are fewer companies, said DuncanLi lejohn, the Latin American representative atPaul Capital, a global alternative investment rm.Traditionally you´ve had a handful of players andmanagers that have been active in that space, andnow they are being joined by a number of U.S.and European private equity managers that havecome in for big deals.”Meanwhile, both Brazilian fund managers andforeign investors with more knowledge of theBrazilian market are pursing small and mid-cap companies for the best prices and returns.As Mauricio Levi, Chief Investment Officerof FAMA Investimentos, an asset manage-ment company based in Brazil, explained,“Not many foreign investors are willing to gointo these less liquid names; they are lookingfor liquid stories in Brazil, where it is easy tocome in and easy to get out. But when youlook at mid-caps, and especially small-caps,and micro-caps, you do not find foreign in-vestors. It is an overlooked sector of the mar-ket.” 48
  • 49. Private Equity : PremiumFAMA invests seed capital mostly in small asset management rm based in Sao Paulo, audit and are o en listed; indeed, even localand mid-cap listed companies that are al- sees investment in smaller companies as the lending banks, such as the government-runready established, eventually buying be- best way to get exposure to Brazilian growth. development bank, BNDE, are more com-tween 5% and 25% of the company, enough “A good portion of Brazil´s GDP growth is fortable with these companies. “Banks andto give them one or two seats on the man- driven by the small and midsize companies”, investors would rather go to them instead ofagement board. We´re very collaborative he said, “and these are companies that his- doing the heavy li ing, due diligence andinvestors in the sense that we help the com- torically have had limited or no access to - intensive credit analysis with smallerpany develop, Mr. Levi says, in most cases nancing and equity. at is where we see a companies that might not have anuntil the company is liquid enough to sell good niche for us to add value and nd good audited balance sheet or num-on the open market. “In the small and mi- opportunities.” Ninety per cent of Olimpia´s bers in English, but are stillcro cap capital segment there is very li le mandates are focused on small and midsize very good from an op-competition right now, because people see companies, which Mr. Menge de ned as erational and credita lot of risk in Brazil and tend to go higher those that do between 100 million and 1 bil- perspective.” Heup in the food chain; they´re interested in lion in sales. added, howev-later stage buyouts, which is good for us at er, that thethis moment.” e lack of foreign capital at the smaller end tide is of the market, Mr. Menge said, results from turn-Eduardo Menge, Portfolio Manager at Olim- foreign investors wanting to make sure- repia Partners, an independent strategy and bets on blue-chip companies that are easier to 49
  • 50. VenturesMercatrade Inter-emerging Market TradeW ith its shallow banking sector catrade, an online b2b marketplace con- largely down to soaring trade among individual and limited debt the legacy necting importers and exporters in Latin states. According to a recent report by the Latin of decades of economic tur- America, says the crisis caused a deceleration American Integration Association (ALADI), moil the direct impact of in growth among the region’s traders rather inter-regional trade rose by 24.6% in 2011, hit-the 2008 credit crunch was minimal in most than an outright recession: “First companies ting US$133 billion. ough this still falls shortLatin American countries. e second-round eliminated their stock, then very quickly, by of the 2008, pre-crisis high of $146 billion,e ects of the crisis, however, were clearly evi- 2010, they were all buying again.” ALADI estimates that similar growth this yeardent, with investment in ows drying up and will take trade volumes in the region to historicexports to major markets slumping as the de- Latest macroeconomic data support the idea highs at around $160 billion.veloped world slid into recession. of a robust recovery, with regional GDP set to rise by 4.2% in 2011. But another feature of According to Besserve, whose business isYet the region remained relatively resilient. Latin America’s newfound economic steel is based in the Colon Free Zone (CFZ) inEmmanuel Besserve, co-founder of Mer- its increased ability to sustain itself as a region, Panama, companies throughout the region 50
  • 51. Venturesare discovering the potential of expandinginto neighbouring markets. “Whereas beforenational [domestic] consumption was veryimportant, now they need to nd a new mar-ket to accelerate growth, and we see LatAmcompanies are doing business between them-selves much more intensely.” is trend is aided by a growing number ofbilateral and multilateral trade agreementsmade between di erent Latin Americanstates. Sub-regional associations such as Mer-cosur and ALBA have helped promote inter-regional trade, while countries such as Chile,Colombia and Panama have implementedwidespread reforms to liberalise trade andencourage foreign investment.A growing middle class in populous countrieslike Brazil is also creating a strong consumermarket that exporters in other Latin Americancountries are targeting. For example, morethan 80% of Argentine automobile exportsone of the country’s most dynamic industriesin recent years are destined for Brazil. ere are still limitations. Protectionism isrife in the region, and barriers to trade stilllead to disputes that disrupt the exchange ofgoods and services around the region. Earlierthis year, Brazil imposed retaliatory restric-tions on vehicle imports a er Argentina hadadded new trade restrictions on several prod-ucts sold by its larger neighbour. Still, tradebetween the two South American giants stillincreased by over 30% in the rst half of 2011(compared to the same period in 2010). business opportunities in the region. And in Europe, and, Asia (especially China), as lu- a very recent reversal of the historic trend, crative markets for their products. “Organic at some 400-500 companies are register- Besserve says an increasing number of U.S. products are very strong in all Latin Ameri-ing with Mercatrade.com every month dem- companies are looking to sell to, rather than can countries, and everything that is eco-onstrates the appetite for increase trade in buy from, Latin American markets. friendly and fair trade “ says Besserve, “this isLatin America, with businesses outside the a very aggressive market.”continent also drawn to the dynamic market. Meanwhile, even as new opportunitiesAccording to Besserve, Chinese companies emerge closer to home, exporters based inin particular are aggressively pursuing new Latin America continue to view the U.S., 51
  • 52. VenturesQuickstartW ith more and more aspects of business conducted on- line, companies of all sizes are now able to makes con-nections with partners, suppliers and cus-tomers all over the world. Yet, in many indus-tries, establishing a successful multinationalcompany still requires a physical presence inseveral countries. Global with the added uncertainty of operating in an unfamiliar country, can be too much risk for managers with limited nancial and person- pete in the globalised market by smoothing their transition from local to international. QSG was launched in Vadodara, India, inWhether it is to manage the supply chain, nel resources. 2006 by entrepreneurs Kaushal Chokshi andhandle administrative operations, or make Neal Gandhi. Recognising the importancesales to new customers, se ing up abroad in- is is where new ventures like Quickstart of speed in today’s fast-moving, globalisedvolves signi cant capital outlays and a great Global (QSG) operate, giving more entre- marketplace, QSG o ered businesses a safedeal of time-intensive e ort. at, combined preneurs and rms the opportunity to com- shortcut to international operations by tak- 52
  • 53. Venturesing on the duties involved in se ing up anoverseas o ce. ese include nding an ap- “We  revolutionised  the  way  smallpropriate property, recruiting a skilled ande ective workforce, and navigating unfamil- and  medium-­‐‑sized  companies  can  go  globaliar political and legal environments. By out-sourcing these tasks to a specialist, compa- by  establishing  and  maintaining  an  overseasnies can focus on their core business without subsidiary”  worrying about the logistical and legislativepitfalls that can derail plans for international e QSG’s one-stop model is designed to thing is really global so you just need to makeexpansion. keeps costs and risks low, enabling rms to sure you know where each part of the company enter markets that would normally be beyond needs to be in the planet for your advantage.”QSG soon expanded into the US and UK, their reach. “We revolutionised the way smalland, as demand for its services grew largely and medium-sized companies can go global As it continues to grow, QSG gains additionalvia networking and word of mouth in the by establishing and maintaining an overseas experience and expertise in the countries thatbusiness and investment community be- subsidiary” says Chokshi. In particular, edg- their clients both existing and potentialgan se ing up o ces all around the world. ling start-ups stand to bene t from being able are looking to reach. One region a racting e company has created over 1500 jobs to immediately frame their growth strategy in considerable a ention today is fast-growingglobally and employs 600-1000 employees global terms, picking locations with the most Latin America, where QSG is preparing toat any given time since some of their clients appropriate resources, talent and market for deepen its presence. On top of the estab-exit once they become large enough to sus- their speci c business model. lished o ce in Managua, Nicaragua, thetain their own legal entity. e services QSG company has a new o ce about to open inprovide can bene t companies in any indus- Marta Caballo, Business Development Direc- Buenos Aires, with others expected in Rio detry, though most clients operate in the IT tor at QSG, says all companies stand to bene t Janeiro and Santiago de Chile within a year.(particularly so ware and game developers), from the ability to set up operations quicklylegal or nancial sectors. and securely in any part of the world: “every- h p://www.quickstartglobal.com 53
  • 54. Agribusiness 54
  • 55. Hedge Funds : Premium Attracting U.S. Institutional Investors to LatAm FundsU .S. Institutional investors looking to increase their ex- Hedging is on the rise, as well, particularly in Brazil. Bloomberg News posure to emerging markets have been turning increas- recently reported on the success of Brazilian hedge funds investing ingly to a handful of LATAM countries, where they see mostly in stocks and bonds, with Credit Suisse Hedging-Gri n, the a swelling pool of experienced fund managers working country’s leading hedge fund in recent years, having to turn downwithin a context of political stability and economic growth. Brazil has eager foreign institutional investors lest its fund grow too large Asgarnered the most a ention, but Chile, Colombia, Perú, and México Alper Ince, Managing Director of Paci c Alternative Asset Manage-are also increasingly a ractive. ment Company, a group of hedge funds whose clients include large public and private pension plans, endowments, and foundations, ob-“I’ve been in the private equity market for the last een years,” says serves, “ e hedging is much be er in Brazil than in places such asEduardo Farhat, a Principal at Darby Overseas Investments, the pri- Eastern Europe or the Middle East or any other frontier market. It´svate equity arm of Franklin Templeton Investments specializing in quite liquid and you can nd quality managers who are willing toemerging markets, “and the last ve have been the brightest I’ve seen hedge and can run a hedged book to emphasize alpha over beta,so far for PE investments in Latin America.” and we like those characteristics.”As the Web site Institutional Investor recently reported, private equity Institutional investors are a racted to the GDP growthinvestment across the entire region surged 149 percent last year, and of these LATAM nations, as compared to their“nine of the ten biggest deals in Latin America – and the ve largest Eastern European and Middle Eastern counter-investments in Brazil – were made by global funds rather than vehicles parts, and to the allocation opportunitiesdedicated to investing in the region.” they provide, as compared to Asia, says 55
  • 56. Hedge Funds : PremiumQuant Fundsin Latin AmericaA er taking a ba ering during the 2008 credit crunch and struggling in the early stages of recovery, quantitative (or ‘quant’) funds are trying to reassert themselves in the industry. And a small, but growing, number are looking to start afresh in the world’s most promising emerging markets.In Latin America, quant funds, which use complex computer models and algorithms to iden-tify investment opportunities, are a relatively new phenomenon. Although the rst appearedin the region in 2004, it wasn’t until 2007-2008 that the sector began to grow. Even today it re-mains on the fringes of a nascent industry Latin America holds only a tiny fraction of globalhedge fund assets with fewer than 20 active quant funds based in the region.According to local experts, aside from one or two quant funds in countries like Chile andMexico, most quant funds operating in Latin America are based in Brazil; if they venture else-where in the region they typically trade from their headquarters in the US or Europe. is concentration in Brazil is no surprise: it is by far the largest economy in the region, witha nancial market deep and sophisticated enough to a ract institutional investors. It is alsoactively encouraging the high-frequency trading that quant funds require, with the nationalexchange BM&FBovespa o ering steep discounts to encourage more intra-day trades and in-crease liquidity in the market. at high-frequency still only represents around 6% of total trades demonstrates how undeveloped the quant fund market still is. A New Frontier for Modelling Bruno Freitas Miranda, managing partner at the São Paolo-based MI capi- tal, is one of the asset managers looking to entice institutional investors in- terested in diversifying into Brazil. A er actively trading in 2008-2009, his company temporary stopped trading in 2010 so as to rede ne their investment strategies and redevelop their computer models 56
  • 57. Real Estate - PremiumAirliftEncourages Latin Americato reachfor the skiesW ith air passenger tra c tra c in the entire region will grow at almost and tourism on the rise 7% a year over the next two decades. throughout much of Latin America, ALI examines the e expansion of the aviation industry requiredimpact an airport can have on the local real to satisfy this demand will have important conse-estate market. quences for real estate development in the region, particularly the tourism and leisure sector. A newLast year, Brazilian airports welcomed over airport, especially if it receives international ights,150 million passengers a new record for can connect a holiday destination to the mass mar-Latin America’s biggest country. Almost ket, opening up a slew of potentially lucrative in-90% of air travel was domestic, fuelled by vestment possibilities for resort developers.increased wealth and the emergence of low-cost carriers such as Azul. In 2010, for the is is known as airli , and is one of the key rst time ever, more Brazilians chose to trav- factors when hoteliers conduct due diligenceel around their country by plane rather than on a new or emerging destination; what is theuse the traditional long-haul buses. location’s proximity to airports, and how well it is serviced by airlines. is is a trend echoed around much of LatinAmerica (though not always reaching the “In the hotel industry you live and die by ac-same highs). And it is set to last: not only cess and the airli ,” says Christian Charre,will the World Cup and Olympics in Brazil President of BridgeRock Capital, “certainly ifcause a spike in demand in 2014 and 2016, you want to reach a critical mass at the desti-but aircra maker Boeing forecasts that air nation.” Hotels in the Caribbean, for example, 57
  • 58. Hedge Funds - Premium How  High  Net  Worth   Individuals  in  LatAmAlternative  AssetsT he wealth and quantity of high to and knowledge of di erent kinds of invest- Once you get their trust and get them to lis- net worth individuals (HNWI) ment, as well as to a misguided prevailing ten to you, you can start educating them. He in LatAm has grown in recent wisdom among their advisors. “I feel that the says that the best eye-opener for these inves- years. According to the Capgem- private bankers and wealth managers tend to tors is the success of hedge fund investing andini/Merrill Lynch World Wealth Report give more traditional investment alternatives record-high fund subscriptions in the U.S. I2011, the number of LatAm HNWI grew by to these investors,” he says, “but honestly I tell them that we see all the big institutional6.2% in 2010, and its total HNWI wealth by don´t think they´re doing the right thing. I and smart money doing it, checking di erent9.2%. ere are about a half-million HNWI think the right thing would be to give the in- alternatives for the portfolio, while they arein LatAm, a relatively low gure compared to vestors exposure and education about what´s stuck in the traditional portfolio model thatdeveloped regions, though its concentration going on in the world. hasn´t worked.of ultra-high net worth individuals amongthe HNWI population is the highest in the In 2009, Mr. Alamo founded Candor Asset e Capgemini/Merrill Lynch report alsoworld. Management, a multi-family o ce focusing notes that HNWI allocations within LatAm on alternative asset investments for an ex- are expected to drop signi cantly in 2012,By and large, however, they have refrained clusively LatAm clientele, in large part in re- with an increase in North American alloca-from investing their wealth in alternative as- sponse to that more traditional, conservative tions. Mr. Alamo says that his clients, whosets. e report observes that LatAm HNWI approach. One of Candor´s goals, Mr. Ala- have minimal exposure in the LatAm region,invest conservatively, “holding 47% of their mo says, is to expose its clients to the bene ts are averse to investing there because of whataggregate portfolios in either cash/deposits of alternative assets, which he sees as part of they perceive as the high risk. He expectsor xed-income, despite surging equity pric- a global trend toward a more comprehensive the tide will change, however, bene inges,” with hedge funds accounting for most of approach to investing, and away from bread the region. I think it´s important to get Latintheir alternative investment holdings. and bu er portfolios. American investors themselves to invest in the region. ey´re taking everything outCarlos Alamo, a Miami-based nancial ad- ere is a lot of resistance to change, he says, of the countries, [Financial advisors] have visor, has seen this resistance to alterna- especially among the older generation of to convince them to take it back, and that´s tive asset investment rst hand, both HNWI, but he believes that Candor´s more when you´ll see that the Americans and ev- among HNWI and their wealth personal approach can meet that resistance. eryone else will follow.” managers. He a ributes it to As a family o ce, I have a di erent strategy, a general lack of sophisti- a di erent way of introducing myself, and He suspects the new Latin American Inte- cation in the regional sometimes they open themselves up more grated Market (MILA), which combines market, with HNWI because they feel like we´re working with the stock markets of Chile, Perú, and Co- lacking exposure them instead of selling them something. lombia, will make the region more attrac- 58

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