November 9, 2015
Interviewed by: David Snow
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Latin American Countries That Remain Attractive

While Brazil continues to languish with high interest rates and a sinking economy, there are still very attractive plays elsewhere in Latin America, with Peru, Colombia, and Chile making headway, says Eduardo Alcalay of GP Investments.

While Brazil continues to languish with high interest rates and a sinking economy, there are still very attractive plays elsewhere in Latin America, with Peru, Colombia, and Chile making headway, says Eduardo Alcalay of GP Investments.

Latin American Countries that Remain Attractive
With Eduardo Alcalay of GP Investments

David Snow, Privcap: Today, we’re joined by Eduardo Alcalay of GP Investments. Eduardo, welcome to Privcap today. Thanks for being here.

Eduardo Alcalay, GP Investments: Thanks for having me; pleasure to be here.

Snow: Your firm is a Pan-Latin American investor. You’re based in São Paulo and you were one of the original private equity firms in Brazil. You’re also the head of the private equity program at GP Investments, so I’m very happy to have you here. I’d like to hear about what you’re seeing down in Latin America, specifically in Brazil. First of all, can you give us a sense of what percentage of your capital goes ex-Brazil versus Brazil?

Alcalay: Until now, it was more percentage goes out of Brazil. We’ve made an investment in a Pan-Latin American oil-field service company, but that was a while ago. More recently, we have been focusing on Brazil. Going forward, we may look especially at the Andes—Peru, Colombia and Chile—as well as other regions. But we are mostly centered in Brazil.

Snow: Let’s talk about Brazil a bit now—[it’s] obviously going through some economic turmoil. What is the mood among business leaders in Brazil? What do you think that spells as far as opportunities for private equity firms such as yours?

Alcalay: The mood is…quite challenging right now. People are concerned. Business confidence is in record lows because of all the problems and the challenges ahead of the country in terms of a macro as well as microenvironment. Interest rates are high. Economic activity is going backward. So, yes, it is a very challenging environment. Business owners are taking care and being cautious but, at the same time, Brazil is a very dynamic economy. New segments [are] being developed and so forth, so business owners need capital either to strengthen their businesses or to fund interest in a consolidation processes.

And more and more, they need capital together with managerial improvements, long-term, more robust execution capabilities, and so forth. And that’s where we get in. We get in pretty capable of contributing those two elements—capital and managerial support and great, long-term execution.

Snow: Where are you able to find companies that are growing quickly despite the fact that the macroeconomic conditions are not favorable?

Alcalay: Yes. This is sort of counterintuitive, but yes. As I said, Brazil is a relatively young economy compared to the U.S. or Europe. You have many [new] business segments—like consumer financial services, education, healthcare, technology and infrastructure—that, regardless of a overall macro negative environment, are growing because they have a big market to support. They have a big demand to supply.

And, yes, you find some great champion companies that have growth capabilities ahead of them. They need capital. There is no public capital out there. There is very scarce credit capital out there and they need strong managerial support. So, yes, we’re pretty busy.

Snow: In speaking earlier, you gave an example of auto insurance as an industry that is in its infancy in Brazil. Can you talk about how that might be an interesting play just by the fact that maybe all other factors surrounding that industry are negative?

Alcalay: Yes, that’s a typical example. A skeptical analyst would look and say, “Wow!” GDP is going backward, so car sales are going backward, so nothing related to that would be interesting to look at. But, again, this is historical economic development. Brazilians have bought a lot of cars over the last booming 10 years because of habits, behavior and so forth. Lots of those cars remained uninsured, but now the guys are getting to the point that we need insurance. And insurance businesses—especially consumer insurance—are growing significantly. So, there’s plenty of opportunity both for insurance underwriters and insurance brokers to do great business, especially by consolidating a big, nationwide platform of insurance brokerage to serve and occupy that gap that has grown significantly over the last years.

Snow: Having been in business in Brazil for a couple of decades in the private equity business, which doesn’t have a long history in Brazil, how have you seen the attitude of business owners and entrepreneurs change by way of their impression of private equity? Are you having more natural conversations with potential sellers now than you did maybe 15 years ago?

Alcalay: If you compare Brazil to other Latin American countries, again, up from Mexico down to Chile, I think Brazil has had a more open mentality from the business owners toward a good quality, potential partner. We’ve been getting more and more business owners open and willing to entertain conversations and to consider doing private equity deals and more and more, especially in times like this. When times [are] under a very big challenging environment, business owners more and more understand that either because of the fact that they are facing succession problems in their family-held companies or to take their companies to another level in terms of growth and development, and also thinking about better governance and about institutionalizing their companies with a long-term view. More and more, they are open to private equity investors. Again, this is my view. If you compare that to countries like Mexico, Chile and Peru, I think Brazil is ahead of the curve in terms of that openness mentality model for private equity.

Snow: Since you also invest outside Brazil, I’m interested in where you see pockets of strength and pockets of opportunity for your style of investment right now?

Alcalay: The end looks great. Colombia and Peru have been performing quite well. They’ve done great changes, great macro-adjustments in their policies, in the economy over the last 10 years. And the results are that both their industrials and consumer markets in those countries are doing well. Again, companies are growing. Markets are consolidating and so forth, and there are good pockets of opportunities there.

Even though it’s smaller—much smaller than Brazil—Chile is a fairly more developed country with very highly professional business conglomerates, pension funds and the like. It’s more of an expensive market, but still with good opportunities because the economy and the country function pretty well. The Andes, these three countries together—Chile, Colombia and Peru—account in aggregate for more or less one-third of the business activity private equity investment size of Brazil. So, they are relevant in aggregate. We are looking at that as well. But, again, in Brazil, we are locals, where the big critical mass market remains to be our most important focus.

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