Monday, May 10, 2010

[LAIST] May 7th Visits – Rio de Janeiro

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Upon arriving at Rio late at night, we made a quick reconnasance of the area before calling it a night. The next morning, we were up and ready to go to our next set of meetings.

TV Globo

TV Globo is the largest group of media and entertainment companies in Latin America. They are focused on TV and entertainment, print and media and radio; telecommunications and distribution.
Because of their influence on the Brazilian society, they have been playing a unique role as educator. Although Brazil has language unity, there is a great deal of cultural diversity which plays a unique challenge to media broadcasters. In a growing economy, Brazil’s newspaper readership has been growing rather than falling, primarily because of the growing C class (lower middle class).
Brazil is divided into a class system (not well explained if it is a formal or informal class system – need to look into this more) where there are A1, A2, B1, B2, C, D and E rankings.

TV Globo mentioned that infrastructure remains the biggest challenge for Brazil, not just in terms of roads and rail, but rather in education in the form of schools and labs for students to learn.
TV Globo uses their Tela Nouvella’s (sophisticated versions of soap opera’s) to address social change. They often hire sociologists to address social issues that are currently on the minds of Brazilians addressing topics such as racism and . They treat this service as a charitable non-cash forgone revenue expense.


The next presentation was at Vale (recent acquirer of Inco) the largest producer and has the most reserves of iron ore in the world (2nd largest resource producer in the world). Their business is 35% based in iron ore, demonstrates stable demand and has recently successfully moved from a yearly pricing model to a quarterly pricing model.

We had a talk from a political analyst two was describing the broad range of international investments of Vale in different parts of the world including Asia Pacific, South America and Africa.
In the crisis period, 38% of their revenue was from China, their number one client, who was previously only accounting for 17.4% of their revenue previously (number one position in the past also).

The cycle for mining is usually 3 to 8 years for exploration followed by licensing and 4 to 5 years to open and build the mine and infrastructure required to develop the mine. Their required IRR is 12+% and they have 12 golden shares held by the government (similar to Embraer).
One of their largest challenges is relocating indigenous people, developing infrastructure and developing communities at mine sites. Once a mine’s resources are deleted, there is a large outflow of business which can potentially decimate at geography, so Vale is careful to build a legacy plan and invest in the community remain stable after their exit including schools and diversified industry.

Brookfield Brazil

Next we had a talk from the CEO of Brookfield Brazil, an asset management company with $100B USD AuM and $22B invested capital. They talked about the macro factors affecting investment in Brazil including the allocation of 4% of Brazilian GDP towards social development, allocating resource surpluses towards financial deficits versus social deficits and the challenges of moving from an “artificially fixed exchange rate” to a floating rate.

He also mentioned the rebirth of the consumer class in Brazil, or the so called D and E class to the C class and how Brookfield was capitalizing on commercial real estate development. Their strategy is to invest in tangible assets where there are high barriers to entry, predictable long term cash flows and they prefer to be operators rather than passive investors.

Their IRR is 12% and they tend to focus on quality of investments rather than increased marginal returns. Their strategy allows their mall properties to command the same sales per square foot as comparable US malls. The mall model is different in Brazil than what we are used to in NA. Rather than have high city density where consumers drive to malls or super centers in sub-urban areas, Brazil malls tend to be in the city, with high density, vertical and paid parking (a surprisingly large 12-15% of mall revenue) and demonstrate less dependency on large anchor stores (such as Walmart or Sears). Consumption growth is currently well above the GDP which is having a large effect on the financial and economic strategy of the country.

With their high 16.7% Tier 1 capital ratio in Brazil allowed many Brazilian asset management firms like Brookfield take advantage of depressed prices in the market as a result of the recent financial crisis. They prefer to avoid higher leverage, look for quality of earnings and a high level of liquidity which allowed them to take advantage of special situations.

With the acquisition of many new properties, they have boosted their CAGR to a whooping +119% (keep in mind that this is a result of massive acquisitions and actually investing more of their AuM). When investing, the look for different partners including: Institutional, sovereign, pension, endowment and family funds. We were told they were partnering with 2 Canadian Pension funds, 1 Asian sovereign fund and 2 European family offices. You can probably guess who the Canadian and Asian sovereign funds are.

They prefer partners who have the same market views and investing profiles: long term, stable predictable growth and high cash positions and liquidity (all attractive makings of a proper pension fund investment).

They also have a unique array of investments, including agriculture. They raise cattle as one of their primary investments and follow their operator strategy. What does this mean? They may be one of the few companies where cowboys who work in a company which complies with Sarb-Ox and is audited by Deloitte. The work environment creates a unique culture.

No comments: