October 12, 2015
Interviewed by: Mike Straka
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‘Interesting’ Time to Invest U.S. Dollars in Brazil

In Brazil, where low commodities prices and a weak real have put pressure on the economy, companies are looking for liquidity, providing robust opportunity for foreign investment in the Latin American region. Jacques Vaney of São Paolo-based Emerge Capital says now is a good time to get in at low prices.

In Brazil, where low commodities prices and a weak real have put pressure on the economy, companies are looking for liquidity, providing robust opportunity for foreign investment in the Latin American region. Jacques Vaney of São Paolo-based Emerge Capital says now is a good time to get in at low prices.

Brazil’s Turmoil Is Opportunity for Investors
With Jacques Vaney of Emerge Capital

Mike Straka, Privcap: Welcome to Privcap. We’re joined by Jacques Vaney from Emerge Capital.

Jacques Vaney, Emerge Capital: Good afternoon. Nice to see you.

Straka: You were at the ACG conference this morning and the subject was agriculture in Brazil and the opportunity for private equity. A lot of the talk was on soy, on (as you called it) the “ancillary services”—the chemicals, irrigation, all things like that [that are] ancillary to agriculture. Are you seeing those kinds of investments happening right now?

Vaney: You have right now a very interesting moment in that the sector is going through a difficult period after five years of very high prices, robust growth. All of a sudden, we have low commodity prices. We have a lot of companies that are overextended, and you have a change in the exchange rate that went—in a very short period of time—from 1.8, 1.9 reals to the dollar to nearly 4. So what you have now is an environment where it’s a very interesting time to come in if you have dollars, both in terms of the dollar purchasing capacity as well as asset valuations inside Brazil.

Expectations—there’s a lot of companies that are going through some difficult times that need to restructure. So, across the board, there are a lot of opportunities. Coupled with the fact that Brazilian agricultural is fundamentally long term, that is an absolutely solid bet. So, getting in in private equity—a lot of the time, the name of the game is the asset price, the purchase price at which you can get in. At this time, it’s very favorable for long-term, viable good business.

Straka: When we talk about the ancillary industries that you think where the opportunities lie, can you describe some of those? Where do you think the best bets are?

Vaney: Like everything, if you have a good fundamental business run by good people, that’s the place to bet. In terms of ancillary, what’s happening in the farm sector is Brazil’s really on the cusp of a shift in its mentality. It has moved from pioneer farming as Matogrosso—the northern areas were really frontier land being developed now toward professional farming. That professionalism has all kinds of implications in terms of precision farming, better inputs, new types of fertilizer, financial services, and equipment—

Straka: Storage?

Vaney: Storage, yeah, infrastructure. There’s a tremendous amount of investment right now going on to develop what’s call the Northern Arc, which is to take the northern Matogrosso production and these other northern areas—what’s called Mapitoba—and to move that production out through the Amazon and northern cities. So, instead of trucking everything 2,000 kilometers down to the ports of Santos and Para Negra, which are overcrowded, new logistics corridors are opening up and sprouting a lot of opportunities.

Straka: So, if soy is at 17, do you think it’s going to go down to like 7 and then come back up?

Vaney: Well, today, it at $8.75 a bushel; it was $17 a year ago.

Straka: Right.

Vaney: And it’ll stay at these lower levels. We’ve had bumper crops in the U.S., Brazil, Argentina—all sites look like it’ll be a very good crop this year again. Ending stocks, which had been depleted for the last five or six years, are at their highest levels in a long time. And that looks likely to continue. Now, it doesn’t take much of a weather shock to create a change in that, and to reduce stocks. I think demand itself would weed the stocks down over time, but anytime there’s a weather shock or a climate issue, and we tend to have those.

Straka: When you’re a private equity analyst and you’re thinking about agriculture, you have to be sort of a meteorologist, a scientist, a geologist, all in this one encompassing sort of sector, don’t you?

Vaney: I don’t think necessarily so. I think you need to be a meteorologist and a scientist if you’re protecting annual changes. I think good private equity investing is about picking the right teams, taking a medium, longer-term strategy, investing in the right people and the right businesses over time. There is absolutely no doubt that agriculture in Brazil and Latin America is the right people at the right time. There’s more available land. There’s more fresh water supplies, and water is a very important issue. When you look globally, the figures are something like more than 50% of global ag production is in what are called “hydraulically precarious” areas, where you don’t have ample water supply and where people are draining what’s called “blue water”—irrigating blue water rather than receiving green water. [In] Brazil, most of the production is green water, fresh water that comes naturally. So, you have a comparative advantage there.

Straka: What are Brazil’s largest exports, and to whom?

Vaney: The biggest growth is soy to China. If you look at where the growth is, you have more Brazilian soy. It’s basically going to China. That’s the delta. In terms of total Brazilian agricultural output, it’s the biggest. Soy, coffee, sugar, orange juice, cotton and (to a lesser extent), the numbers are massive. And the growth rate is really happening primarily from the growth in Asia. Asia’s growth is happening a lot, not just China. Growth of population, but also urbanization and as people shift from a more grain-based diet to a meat-based diet.

Straka: What’s deal sourcing like in Brazil these days?

Vaney: It’s driven a lot by liquidity needs. People need capital. In the last five years, the farmer has had the upper hand. He’s been very well capitalized. Now, [it’s] difficult—many of the farmers tend to recycle all their profits back into expansion. They tend to overleverage their short-term balance sheets to purchase fixed assets. Now that prices have come down and margins have come down, they can’t meet the installment payments on those fixed assets. And they’re suffering a liquidity squeeze.

At the same time, there are banks that have suffered losses. There are trading companies that have suffered losses. So, there’s a squeeze on the supply of capital. And that, in effect, creates an opportunity where you have lower asset prices and a higher need to bring in new forms of capital. Exactly the space where private equity can enter in as an alternative form of capital that can take a medium-term view and get in at a good value.

Straka: Now, you’re based in São Paulo. Are there many deals happening in São Paulo?

Vaney: São Paulo is the New York of Brazil, but the production is in the Midwest. So, there’s a lot of activity in São Paulo, but to really get into what’s going on, you have to go out into the field. My personal base—I’m a mix between São Paulo and New York—dividing my time these days roughly 50/50.

Straka: Despite the economic crisis going on over there, would it be fair to say that calling Brazil an emerging market might be a misnomer?

Vaney: There’s lots of different ways you call look at it. It’s being called an emerged market. It’s a middle-income country. The fact of the matter is, per capita, Brazil is still a middle-income country. Its potential is vastly higher than where it’s at right now, and that’s the light at the end of the tunnel. That being said, it’s in a moment where its political process is troubled. Its economy is not in the best of moments so it’s going through a challenging time, and it’s going to need to make political and economic and judicial reforms in order to get closer to its potential.

I would say really there’s opportunities everywhere there are companies that have liquidity problems—a lot of times, you have family-owned companies that have succession issues. You have a moment where you can get in and do interesting things. Again, you have to be very selective on working with the best guys and with people that you can align your interests [with] and maintain those aligned over time.

One of the biggest challenges, I think, for private equity is when you have really forced exits and then your interests can become unaligned when you have an exit strategy that might not be the same as the local partner, which then might have them perceive that they’re selling cheap. Again, it comes back to maintaining that your contract works well, your relationship works well and then you keep your interests aligned.

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