February 14, 2013
Interviewed by: David Snow
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Drew Guff: Bullish on Brazil

Investment firm Siguler Guff is bullish on the long-term Brazilian private equity opportunity, as co-founder Drew Guff details in this in-depth interview. A veteran of the emerging markets private equity scene, Guff compares his pioneering experience in the Russian market with trends he sees in Brazil today. He also tells why there is not too much money chasing too few deals in Brazil, he argues for the attractiveness of markets outside of Brazil’s biggest cities and he discusses the importance of peer references in emerging markets investing. This is the first of a two-part interview with Guff.

 

Investment firm Siguler Guff is bullish on the long-term Brazilian private equity opportunity, as co-founder Drew Guff details in this in-depth interview. A veteran of the emerging markets private equity scene, Guff compares his pioneering experience in the Russian market with trends he sees in Brazil today. He also tells why there is not too much money chasing too few deals in Brazil, he argues for the attractiveness of markets outside of Brazil’s biggest cities and he discusses the importance of peer references in emerging markets investing. This is the first of a two-part interview with Guff.

 

David Snow, Privcap: We are joined today by Drew Guff of Siguler Guff. Drew, welcome to Privcap today.

Drew Guff, Siguler Guff: Thanks.

Snow: Your firm is active all over the world. I’d like to talk to about Brazil and Siguler Guff has been in Brazil since 2005, correct?

Guff:   That’s right.

Privcap: You personally have a background in the emerging markets, but also deep background in Russia, so I’m very interested in some thoughts from you about knowing as much as you do about Russia, how does that inform the way that you understand the Brazilian private equity opportunity?

Guff: Okay. We’ve been active in Brazil since, as you said, 2005. We go back in terms of investing in Russia back to the fall of Communism, back to 1992-93. Structurally, Brazil and Russia have a lot in common: they’re both on the same rankings, around nine or ten in terms of largest economies in the world; both moving up to the five or six spot over the next five to seven years; both incredibly well endowed in natural resources; both growing at about the same rates. Large exporters of natural resources and commodities and demographics and capital markets are two areas where Brazil really has something different than what Russia has.

Brazil has a capital markets formation capability. They have large pension funds, large domestic pools of capital that can support a large domestic stock market and that’s very important for private equity investors like ourselves because we’re investing in companies that are smaller and medium sized opportunities and as they grow to the size where they can go public on the stock market, it gives us the chance to refresh and exit those businesses and then reinvest again.

So while the two have a lot in common in a larger sense, Brazil has two things that are going for it that we find particularly attractive. One is capital markets formation and the other is just structural dynamics of more rapid growth of the middle class. So 30 million people joined the middle class in the last seven years and another 30 will join the middle class in the next five years and so that kind of growth is attractive to us.

Snow: Since Siguler Guff first went to Brazil in 2005, it was not, let’s say, you know, the most popular place in the world for private equity dollars to flow. Since then the Brazilian story has become a lot better known; in fact, it could be among the top destinations or at least intended destinations for private equity dollars, and so people are beginning to say about Brazil what has been said about the U.S. market for a long time is there too much money chasing too few deals? Are you hearing that about Brazil and do you believe that it’s true up to a certain point?

Guff:   So we’ve heard that about the U.S.; we’ve heard it about China. We hear it all the time. The old saw was that Brazil was the country of the future and always will be. I think it’s now at the point where people feel comfortable that Brazil has arrived. It has changed it’s-, it’s reformed its political system. Its large financial institutions have also been liberalized, and so there are many more opportunities for private investing than ever before. There are 18,000 companies in Brazil with revenues of $50 million REI or greater. So it gives you a large selection of private companies for investment and that’s a great differentiating factor for Brazil.

The other statistic is that their private equity as a percentage of GDP, still very low, and it’s low for a country that has the characteristics where you can enter, grow a company, and exit a company and refresh and do that again and again. So when you have those structural pieces in place to have a large selection of private companies to invest in, that really means that the country’s probably underinvested.

There’s also different pockets of growth within a country as large as Brazil. The Northeast of Brazil is growing at China rates. It’s growing at nine to ten percent, even though Brazil overall last year grew, you know, barely one and is on a stable track of three to four percent, but when you go to the Northeast, you’ve got much higher growth rates. Tier 2 and Tier 3 cities, very much the same as China. The Shanghai and Beijing and the coastal areas in China, that’s an old story, and in fact, some of those areas are contracting, but as you move farther west in China, you’ve got lower prices and better opportunities and higher growth, same thing in Brazil. As you move to different areas, Tier 2 and Tier 3 cities, you’ve got higher growth and lower prices.

Snow:  Back to Russia, and you know, to the extent that it’s possible to put money into a private equity market with the wrong people, are there any cautionary tales or cautionary lessons from your years investing in Russia that you are applying to Brazil to get it right?

Guff: Well, arguably Russia’s the most adverse of the emerging markets. It’s also the least crowded of all the private equity markets; so they’re arguably only two or three major private equity firms, local, operating there, one of whom is us, but the lessons learned from a place like Russia, it does boil down to who are your partners, what are their motivations, what’s their background, where do they want to take the company and peer reviews. We’ve found the most important thing in understanding how successful a business will be, what are the entrepreneur’s peer groups? So what is that peer group saying about that business, that person, that company, the background, more so than kroll investigations which of course, you have to do in any kind of deal, using background checks, but more importantly, what are the competitors saying? What are the peer groups saying and doing regarding the company that you’re looking at, and what’s the general feeling, and I’d say, you know, nine times out ten or ten times out of ten, the company who is held in really high regard by competitors and also peers, tends to be an outperformer and tends to be a really great company.

Snow: I know you’ve been in Brazil since 2005, but what would you say were Siguler Guff’s ambitions over, let’s say, the next ten years for participating in the Brazilian growth story.

Guff So the Brazilian growth story’s not just about the consumer, it’s also about these large increasing pools of capital. So we’re invested now over what we believe to be the twelve best managers in the country. We will continue to add to that matrix. It’s well diversified, so it gives our investors a mix of managers that is differentiated in style and differentiated in different categories within consumer or sideways play on infrastructure. Over time, I think just as every market has gotten larger, you remember the days when the private equity market in the U.S., you know, when KKR’s first fund was 30 million or Carlyle, their fund was 100 million, well, the private market has gotten so much bigger and much more diversified. Same thing will happen in Brazil and I also thing you’ll see a domestic private equity market where we’ll have, and others will have the opportunity to advise and manage money for those Brazilian pension funds in Brazil domestically and we’ll do that with local teams, hybrid teams, and that’s been our specialization in the emerging markets.

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