Wednesday, December 21st, 2016
Chris Culbertson, Investment Director, gives you an inside look into his recent manager due diligence trip to South America.
I recently returned from a week long trip touring Argentina and Brazil along with one of Verger Capital Management’s key frontier managers. Each time I travel to a frontier or an emerging market, I am reminded of the importance of thorough due diligence and having a local partner. The risks are just too great otherwise. There is also an extremely high value placed on information. Effectively sourcing and properly executing investments requires the ability to be on the ground to meet with management teams and make decisions based on a truly informed analysis. This is exceedingly important in markets where the risk of fraud is so high.
During the trip, Verger Capital’s local manager told me a story about one of the real estate properties they previously were evaluating. The property was listed on an exchange and, at a high level, seemed to be an interesting opportunity trading at an attractive discount. When our manager went to visit the property, however, it was nowhere to be found. It was a fraud. Obviously, our manager did not invest in the opportunity. This does, however, support my thesis that an investor cannot make an informed decision from their office chair. He/she must physically visit the area, “kick the tires”, and establish as well as effectively leverage local relationships.
Comparing the three cities I visited, I received very mixed feedback from local investors and business executives. To summarize the feedback received: Buenos Aires is still economically depressed, Rio de Janeiro may still be nearing its trough, and Sao Paulo seems to be in its early stage of recovery. In most instances, these economies are still driven by a handful of industries, most notably oil and gas as well as tourism. For all of my fellow investors seeking frontier opportunities, I urge you to visit areas away from your Americanized hotel and nearby upscale restaurants. Otherwise, your perception of the economic situation in the country may be wildly skewed.
Since my last visit to Sao Paulo in 2014, there have been notable improvements in terms of urban planning and progress towards a pro-business regulatory framework. While Rio de Janeiro’s beaches are beautiful and housing in the Copacabana area may still be able to demand premiums, areas just a short distance away exemplify the challenges still faced by its businesses and citizens. In Argentina, citizens continue to protest on a daily basis. Over the weekend in Sao Paulo and Rio de Janeiro, citizens protested as they continue to put pressure on the government to reign in corruption where more than 50 sitting politicians remain under investigation.
The general consensus on the ground in Brazil is that international investors remain cautious about deploying money in the region. For investors who have the ability to be nimble and maintain a longer-term time horizon, Latin America is certainly an area with interesting opportunities. Relatively attractive valuations, less competition for capital, and a potentially stabilizing inflationary environment are just a handful of the reasons why I believe Latin America is an area worth pursuing further. Given the risks involved, including relatively low liquidity and currency risk in the local markets, choosing the right managers is a critical element to achieving success. Fortunately, I believe Verger Capital has some great existing and prospective managers that increase the odds of successfully navigating these markets.