Posted: March 7th, 2010 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Macro Environment, posts | No Comments »
Thank you to Rodrigo Ribeiro of Harpia Ventures for forwarding me this article from Business Week.
Brazil Buyout Firms Have $9 Billion in ‘Dry Powder’
By Alexander Ragir and Tal Barak Harif
March 1 (Bloomberg) — Buyout firms are poised to spend $9 billion in Brazil on everything from infrastructure to oil exploration as the economy recovers from a recession, the nation’s private equity and venture capital association said.
Grupo Santander Brasil and San Francisco-based Paul Capital Partners said they may purchase stakes in companies that will benefit from the country hosting the World Cup in 2014 and Olympics in 2016. Axxon Group in Rio de Janeiro said it is considering firms that supply the oil, health care and media industries. Carlyle Group, the world’s second-largest private equity firm, plans to invest $1.2 billion in Brazil in five years, said a senior associate, Daniel Sterenberg.
“The investment environment is probably the best in 20 years,” Geoffrey David Cleaver, who runs a $500 million private equity infrastructure fund at the Sao Paulo unit of Santander, Spain-based Banco Santander SA, said at an event last week in New York hosted by Abvcap, as the Brazilian association is known. The fund has committed 90 percent of its capital while disbursing about 65 percent, he said.
Latin America’s largest economy is luring investment after policy makers provided 100 billion reais ($55.3 billion) in stimulus and cut the benchmark interest rate five times to a record low of 8.75 percent to pull the country out of a recession.
Investment Rises
Foreign direct investment will jump 74 percent this year to $45 billion, matching the record in 2008, as the country builds houses, subways, railroads, roads, hotels and stadiums for the soccer and Olympic games, the central bank said. Economic growth may accelerate to 7 percent in 2010, Goldman Sachs Group Inc. Chief Economist Jim O’Neill said at a conference in Rio de Janeiro on Feb. 22. That would be the fastest pace since 1986, according to the International Monetary Fund.
“Companies are looking for capital because they see growth coming and don’t want to miss out,” Nick Wollak, who oversees $150 million in private equity for Axxon, said in a telephone interview. “We are now seeing some of the strongest and broadest deal flow pipeline since our fund began in 2001.”
While buyout funds in Brazil raised at least $10 billion by the end of 2008, only 10 percent of that was spent last year, Luiz Eugenio Figueiredo, the president of Abvcap, said in a telephone interview from New York. Investors were reluctant to commit as the global financial crisis choked off growth in the country, he said.
‘Dry Powder’
“We have plenty of dry powder in venture capital and private equity,” Figueiredo, who is also chief operating officer for Sao Paulo-based Rio Bravo Investimentos, run by former central bank President Gustavo Franco.
Target companies are demanding higher prices because they are aware private equity firms are loaded with cash throughout Latin America, said Mark Mobius, who manages $34 billion in emerging market assets at Singapore-based Templeton Asset Management Ltd.
“The word is out that there are considerable amounts of money looking for a home so the sellers tend to ask for high valuations,” Mobius said in an e-mail response to questions after returning from a trip to the region last month.
Valuations of publicly listed companies have also risen, sending the price-to-earnings ratio of stocks in the Bovespa index to 19.3 times reported earnings from 12.06 times a year ago, according to data compiled by Bloomberg.
Capital Group
The pickup in purchases already has begun. Los Angeles- based Capital Group Cos.’ private equity unit bought an undisclosed stake in Grupo Ibmec, which owns colleges in four Brazilian states, for 130 million reais, the university said last month. Cia. Energetica de Sao Paulo, the state-controlled utility known as Cesp, is considering selling a stake to a private equity firm, Relatorio Reservado newsletter reported Feb. 24. A telephone call to Cesp’s press department for comment wasn’t returned.
New York-based JPMorgan Chase & Co., the second-largest U.S. bank by assets, has been in talks with Arminio Fraga about buying a minority stake in the former Brazilian central banker’s fund company Gavea Investimentos Ltda., according to a person with knowledge of the matter. Darin Oduyoy, a spokesman for JPMorgan, declined to comment. Fraga didn’t return calls seeking comment.
Pension Funds
Duncan Littlejohn, who manages $1.6 billion in global private equity funds at Paul Capital in Sao Paulo, said he expects pension funds to step up investment after Rio de Janeiro-based Petroleo Brasileiro SA made the largest oil discovery in the Americas in the last three decades.
Brazil eased restrictions on pension funds last year, increasing the limit on non-fixed income investments to 70 percent from 50 percent of their more than 450 billion reais in assets.
Carlyle, based in Washington, is in preliminary talks to buy two more companies after purchasing a majority stake in tour operator CVC Brasil Operadora e Agencia de Viagens SA, Sterenberg said in a Jan. 7 interview.
Axxon may test the initial public offering market this year with Mills Estruturas e Servicos de Engenharia SA, a Rio de Janeiro-based maker of scaffolding and concrete forms for construction in which it owns a 14 percent stake, Wollak said.
“For both multinational strategic investors and private equity firms, Brazil has become a place where you have to have exposure going forward,” Wollak said.
Of the about 400 companies with private equity investment in Brazil, about 30 percent are likely to have an IPO in the next five to 10 years, said Thomas Tosta de Sa, chairman of the advisory board for Abvcap and Brazil’s chief regulator from the end of 1993 to 1995.
“These companies are going to come to market and they have a tendency to perform better than other stocks,” said Tosta in a telephone interview from Rio de Janeiro.
Markets Last Week
The yield on the government’s zero-coupon bonds due January 2011 rose 20 basis points, or 0.2 percentage point, to 10.49 percent, according to Bloomberg data. Brazil’s real weakened 0.3 percent to 1.8076 per U.S. dollar.
The following is a list of events in Brazil this week:
–With assistance from Camila Fontana, Francisco Marcelino and Paulo Winterstein in Sao Paulo. Editors: Alan Mirabella, David Papadopoulos
To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net; Tal Barak Harif in New York at tbarak@bloomberg.net
To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net
Posted: February 19th, 2010 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Entrepreneurship, Macro Environment, posts | 9 Comments »
Last week,
I suggested that the startup ecosystem in Brazil has reached an inflection point similar to the one reached in the United States in 1994, with the next five years promising huge wins for aggressive startups and disciplined investors.
One can certainly make a strong case against such an outlook and, below, I provide the pessimist’s viewpoint (taken from the last post), followed by its optimistic counterpoint.
A. Pessimist: Entrepreneurialism has shallow roots in Brazil and entrepreneurs are few in number and inexperienced. The startup ecosystem is nascent and scattered.
B. Response: Yes, historically, the most talented Brazilian business people have gone into large corporations or into government but this is changing rapidly: there is a large number of talented entrepreneurs, mostly below the age of 35, involved in startups or interested in making the leap. Some have already had successful exits from companies they founded. Over the next five to ten years, a larger percentage of society will become entrepreneurs, especially as they witness earlier entrepreneurs succeed.
A. Pessimist: Brazilian startups must cope with much more burdensome tax and labor regulations than their compatriots in the US.
B. Response: Absolutely true and it is one of the reasons I so respect entrepreneurs that have made it in Brazil – they have overcome immense obstacles.
I have also learned, however, that the tax and labor laws can be dealt with effectively, it just takes more time and effort than in the US. In other words, these issues are speed bumps, not walls.
A. Pessimist: Angel investor networks have yet to fully coalesce and institutional venture capital is extremely scarce.
B. Response: Yes and that is why there is still a huge opportunity for venture capital investors, especially those willing to get their hands dirty in helping early-stage entrepreneurs.
Moreover, a greater amount of angel capital exists than most people think. I have met many, many Brazilian entrepreneurs backed by high net worth angels. Many of these businesspeople also act as willing and able mentors.
A. Pessimist: Interest rates, while falling, remain high enough to compete for investor dollars – why invest in a high-risk startup when you can earn 11% a year buying a low-risk bond?
B. Response: Certainly interest rates must continue to fall or, at least, not rise, in order for the venture capital ecosystem to flourish.
Indeed, why has most of the venture capital in Brazil come from government sources (FINEP, BNDES, etc.) up to this point? Because private investors have had no incentive to take the huge risks involved in venture capital investing. They could get great returns from bonds or, if they wanted to dabble in alternative investments, private equity. The mediocre track record of VC funds in Brazil (and the US) in the last ten years has not helped the situation: for the moment, non-governmental institutions (e.g., pension funds) have no interest in putting money toward venture capital. They will only do so if 1) interest rates fall to the point where they have to take more risk in order to get high returns and/or 2) they see proof that the VC asset class can actually succeed in Brazil.
A. Pessimist: The specter of inflation never seems to go away and political risk in Brazil remains: the surprise 2% tax on FDI jarringly reminded investors of the potential for sudden moves by the government.
B. Response: Inflation risk and political risk are real but decreasing. In fact, Brazil is a nation of inflation hawks. I was shocked that, even at the height of the financial crisis, while the US was dropping interest rates to zero, Brazilian policy-makers were worried about inflation. This vigilance reflects Brazil’s painful history with inflation and will serve as a guard against inflation in the future.
Regarding political risk, only a small minority believes that the government could ever revert back to far-left or far-right policies. A large percentage of the population has seen their lives improve as Brazil has moved toward a free market economy, few will want to return to a heavy-handed, government-centric system.
A. Pessimist: There is too much optimism about venture capital in Brazil.
B. Response: This worries me but we are a still a long way from an imbalance in which too much venture capital chases too few good businesses (as exists in the US). In fact, the opposite situation exists and will continue to do so for the foreseeable future.
Of course, good investment opportunities, whether they be tulip bulbs, railroads, Internet companies or consumer real estate, inevitably become overvalued, sometimes so overvalued that a massive bubble forms and pops, leading to years of woe. Something like that may happen in venture capital in Brazil, maybe five to ten years out, but the point is to get take the ride on the way up and protect yourself on the way down.
I believe that the “ride up” is starting.
Posted: February 11th, 2010 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Macro Environment, posts, US Venture Capital | 4 Comments »
I just spent two weeks in Brazil and, as has happened on almost every trip to Brazil since 2006 (I have been traveling there since 1999), I came back shaking my head at all the opportunities in that country. Unless I have misread the last four years of experience or am completely delusional, the venture capital market in Brazil has reached an extraordinary moment. I compare it to the US in 1994 – an inflection point where a critical mass of startups in certain markets will grow exponentially.
Like the US in 1994, a healthy balance exists between the number of startups and the market for their products and services. With proper execution and sufficient capital, Brazilian entrepreneurs have the potential to build the next generation of great companies.
Before my optimistic investment thesis leads you to you conclude that sun and samba have damaged my brain, however, let’s review and respect the anti-thesis (I'll continue the bullish case for Brazil VC in the next post).
Obviously, Brazil in 2010 is not totally analogous to the US in 1994: entrepreneurialism has shallower roots there and entrepreneurs are fewer in number and generally less experienced. The startup ecosystem is more nascent and scattered – Sao Paulo is not Silicon Valley, Rio is not New York and Belo is not Boston. Brazilian startups must cope with more burdensome tax and labor regulations than their compatriots in the US.
Angel investor networks have yet to fully coalesce and institutional venture capital is extremely scarce. Interest rates, while falling, remain high enough to compete for investor dollars – why invest in a high-risk startup when I can earn 11% a year buying a low-risk bond?
The specter of inflation never seems to go away and political risk in Brazil remains: the surprise 2% tax on FDI jarringly reminded investors of the potential for sudden moves by the government.
Perhaps most negatively, for the first time I feel a twinge of concern that there is too much optimism about venture capital in Brazil. I know that sounds crazy coming from a guy who hypes the market for VC in Brazil but I live by Warren Buffet’s dictum: “Be fearful when others are greedy and greedy when others are fearful.” I now know of at least four parties thinking of or actively trying to raise early/growth stage VC funds in Brazil. Those are the only the ones I know of, so there are surely more.
The people interested in raising funds have a high level of talent and sophistication — that's not the issue. The issue is whether too much early/growth stage capital would exist if all the new funds get raised: when combined with Ideiasnet, Monashees, Criatec, FIR, Confrapar and other, smaller funds, I begin to get worried about an imbalance.
Think of it as an equation, with good potential VC investments on the left side, investment funds on the right. There are only a limited number of good entrepreneurs and businesses on the left side; when too much capital pours into the right side of the equation, valuations get driven too high, more startups get funded than can succeed in the market and the venture capital asset class then fails to deliver sufficient returns on investment.
Unfortunately, a problem like this cannot correct itself quickly. Venture funds have a ten-year life and their investments are in private companies (and therefore very illiquid). So, unlike the public markets, which can adjust relatively quickly to imbalances, once the venture market is oversaturated, it takes a very long time to correct itself.
For a real world example, just look at the US. Since 2000, US venture capital asset class has had a negative return. Negative! VC is the riskiest asset class—LPs need a 25% IRR to justify investing in VC funds – and ten-year returns have been negative! So, of course, the US venture market is a disaster. Most LPs don't want to touch it and it will take another 3-5 years for enough tier two and tier three VC firms to disappear before a balanced equation re-forms: a sufficient number of good entrepreneurs and businesses on the left side, an appropriate amount of venture capital on the right.
Next post will make the bullish case for venture capital in Brazil and specifically address the concerns above.
Posted: January 6th, 2010 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Entrepreneurship, Macro Environment, posts, US Venture Capital | 8 Comments »
…well, not completely dead but the upside is very limited, according to my old friend Brian Taptich, who has witnessed firsthand the rise and maturation of the Internet ecosystem in Silicon Valley.
Brian worked at Red Herring from 1994-1998, co-founded a new media startup, Alarm Clock Worldwide, and held senior executive positions at Electronic Arts and Bit Torrent. Somewhere in there, he also managed to get his MBA from Kellogg. He now consults for the new media industry.
A couple of months ago, Brian was back in DC, where he and I attended high school together (we also went to college together) and I asked him for a download on the state of affairs in Silicon Valley.
The key takeaway from our chat was this: in the ’90s, the Internet ecosystem had deep instabilities and inefficiencies, which created a massive opportunity for startups to create value and capture market share. Now, however, the ecosystem has matured, which means that opportunities for value creation are fewer in number and smaller in size. Thus, investors and employees in startups have much less upside than they used to have. This holds important (negative) implications for Internet investors and entrepreneurs in the US.
I requested a follow up from Brian and, rather than paraphrase his response, I cut and paste the email below. If you have any interest in investing in or working at web-based businesses, read on…
When the Web was born as a truly consumer platform (thanks to the Netscape browser), THE enormous problem that needed solving was the lack of structure and stability to all the component stuff – from the network level to the UI (on one dimension), and from the enterprise to the consumer (on a second dimension). Through the late ’90s, all this unstructured stuff was both stabilized and organized, and many billions (trillions?) of dollars in market capitalization was created – by companies like Cisco/Akamai at the network level to Yahoo/AOL on the front end (on the first dimension), and Oracle/Symantec in the enterprise and Amazon/Ebay with the consumer (on the second dimension). Of course these dimensions are fairly fluid, and there is much overlap.
Today, the Internet is an entirely stable platform – all of this component stuff is now every bit as dependable as most every other utility in your life (eg electricity, gas, etc). And the vast preponderance of innovation happening right now is dependent on this stability, which has led to an entire generation of startups focused on incremental opportunities (ie most every consumer internet company not called Google) – we should expect that the aggregate market capitalization that is/will be created by this generation will be at least an order of magnitude smaller than the companies born just 15 years ago. Not only will the “huge wins” be smaller compared to the ’90s, there will be far fewer of them. Case and point: The consumer internet companies widely expected to be this year’s “huge wins” – eg Facebook, Twitter, LinkedIn, Zynga, etc – are not only a relatively short list, but also are tracking to public equity valuations (should they even get there) absolutely lower than the previous generation.
This is precisely why the early stage venture capital that led tech funding in the ’90s has been desperately expanding into areas like clean/greentech or medical technologies (in which they have little-to-no domain expertise), and/or seeking out international expansion opportunities in places like China and India and Brazil (ie self-sustaining markets that are about 10 years behind Silicon Valley in terms of localized innovation) – VCs need to find the next thing that will provide their LPs a 20% annualized return…and tech investing in the US ain’t it.
This is not an entirely novel hypothesis – everybody from Mark Cuban to hedge fund investors have made similar and widely circulated diagnoses in 2009.
However, what has not been widely discussed – even amongst those who provide the fuel that runs the Silicon Valley engine (ie the employees, not the founders or investors) – is how the compensation structure for tech startups in the US has not adjusted to fit this new world order. It used to be that top talent would take a paycut to work at a startup – trading the known compensation of a stable company (higher base salary, greater benefits, etc) for the potential upside on the equity (“sure I’m getting paid less but my 0.5% will be worth millions!”). In a universe where founders aspire to create $100 million not $1 billion in value, the potential upside for an employee is significantly lower than it used to be…and there is no economic incentive to take the chance on a startup…unless the startup pays employees significantly more cash or gives significantly more equity…and they are currently doing neither.
It may be that, for now, people are fairly content just to have jobs. However, as the job market loosens, and people have the freedom to risk-adjust their opportunities, there is the likelihood of a flight to more established companies and/or a departure from tech altogether. Which could have profound implications in the business of tech innovation in 2010 and beyond.
Posted: December 29th, 2009 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Macro Environment, posts | 5 Comments »
THE BIGGEST STORY OF 2009
My family has a tradition in which, sometime before midnight on New Years Eve, each person chooses the biggest news story of the ending year and makes one prediction for the coming year.
Regarding the biggest Brazil-related news story of 2009, there were several to choose from, including the still-unsolved tragedy of the Air France flight from Rio, the award of the 2016 Olympics, the rise of Sino-Brazilian relationships (China passed the US as Brazil’s largest trading partner) and the unfortunate Goldman-Bianchi custody battle.
In my opinion, however, the biggest Brazil-related biggest news story was not a single definable event but rather 2009 as the year in which Brazil took its place as an economic powerhouse on the world stage. In 2009, the world realized that Brazil’s legendary potential had become real.
2009 was also the year that Brazilians themselves accepted this new reality: some of the biggest skeptics of Brazil’s rise have been Brazilians themselves, who have been jaded by the country’s previous false starts but there are few skeptics left.
In the beginning of 2009, when I told people that I do business in Brazil, I often got blank stares or some form of the question, “Why?” By the end of the 2009, I got eager looks and some form of the question, “Can you tell me more?”
PREDICTION FOR 2010
Regarding predictions for 2010, I have nothing too creative. My primary call for 2010 is that the Brazilian IPO market will come back strongly, which will lead to large gains for private equity firms and drive further investment in Brazil-related private equity funds. This momentum will eventually drive investment in select venture funds, as well.
On the negative side, I feel concerned about further measures Brazil may take to prevent the appreciation of its currency. The goal is to help Brazilian exporters, which is understandable (stronger currency = more expensive products = less exports). The recent 2% tax on foreign investment, however, came as a surprise and a reminder of the risk of sudden changes in the rules.
The US will sputter along, with tepid growth derived almost solely from profligate government spending. Underlying economic fundamentals in the US are and will remain very poor. High levels of public spending, necessary to prevent financial collapse in late 2008 and early 2009, has recently devolved into the creation of massive new entitlement programs (e.g., healthcare) that we cannot afford at this time.
The world has begun to realize that the America’s balance sheet is not healthy – even China, the largest purchaser of US government bonds, has begun to get indigestion. Soon we will have to pay significantly highest interest rates to entice buyers to purchase our debt.
US citizens can look forward to a crushing debt burden and damaging inflation but those are probably 2011-2012 issues.
All the more reason to focus on Brazil for the next few years.
Personally, I feel grateful to be connected to two wonderful countries that, despite some near-term challenges for the US, have a wonderful long-term future.
Happy New Year – Feliz Ano Novo!!
Posted: December 18th, 2009 | Author: Ted Rogers | Filed under: Macro Environment, posts | No Comments »
BRAZIL NEARS TOP SPOT IN LATIN OIL OUTPUT
Wall Street Journal
December 18, 2009
By Jeff Fick and Laurence Iliff
RIO DE JANEIRO — Brazil is poised to overtake longtime energy powerhouses Mexico and Venezuela as Latin America’s biggest oil producer, a result of both political flexibility and natural resources.
Trends suggest Brazil could rise to the top of the heap by 2011, as its ultra-deep offshore fields start producing in the months ahead.
Meanwhile, Mexico and Venezuela have seen crude-oil output drop dramatically in recent years. Traditionally high oil production in those countries made state-owned oil companies complacent, said David Shields, an independent energy analyst in Mexico City.
“Basically, the reason is that Brazil had a crisis to deal with in energy and Venezuela and Mexico never did,” said Mr. Shields.
Brazilian state-run energy giant Petroleo Brasileiro SA, or Petrobras, was forced to adapt to free-market pressures in the mid-1990s when former President Fernando Henrique Cardoso opened Brazil’s oil industry, a Petrobras monopoly, to private competition.
The result was a wave of exploration, with production surging by about 50% since 2000. Petrobras, responsible for more than 95% of Brazil’s output, produced just over two million barrels a day in November.
Petrobras’s daily output, including production of natural gas and operations outside of Brazil, amounts to about 2.6 million barrels of oil equivalent, up 5.5% from a year ago.
The trend is for Brazil’s crude-oil output to keep growing as the offshore “subsalt” fields — where oil is buried under more than four miles of water, rock, sand and salt — start producing. Petrobras has targeted domestic output of 2.25 million barrels a day for 2010, growing to 2.43 million in 2011.
On Thursday, U.S. companies Anadarko Petroleum Corp. and Devon Energy Corp. said their joint project struck oil for a second time in the subsalt region of Brazil’s Campos Basin.
Another offshore area, the Tupi field, is the Western Hemisphere’s largest discovery since Mexico’s Cantarell in 1976. Tupi is estimated to hold between five billion and eight billion barrels of oil equivalent, and pilot production is expected to yield about 120,000 barrels a day in little more than a year.
Things are headed in the other direction in Mexico, which has struggled with declining output and little new development. Mexico’s crude oil output has dropped from a peak of 3.4 million barrels a day in 2004 to an average of 2.6 million barrels a day in the first 10 months of 2009. Production will likely come in at 2.5 million barrels a day in 2010.
The key factor was a steep dropoff at Cantarell, for years the cash cow for state-owned Petróleos Mexicanos. Cantarell averaged just 639,000 barrels per day in October, down from 947,000 a year ago and 2.2 million in 2004. The decline is expected to continue into 2010, though Pemex is also making forays into the Gulf of Mexico, where other oil companies, including Petrobras with private partners, have had success.
Despite moderate overhauls in 2008 designed to increase the scope of oil-services deals, Pemex has been unable to follow the lead of Petrobras and increase foreign cooperation — including entering the kind of deep-water, shared-risk contracts that have helped Brazilian production.
Pemex also has to fund more than a third of Mexico’s federal budget, limiting its own ability to invest in itself. Efforts to loosen the reins have been hampered by political gridlock.
The production decline in Venezuela, which holds enough reserves to put the country into the same league as Saudi Arabia, has been primarily self-inflicted.
President Hugo Chávez has diverted billions of dollars of profits from state-run Petroleos de Venezuela SA, also known as PdVSA, to welfare programs, hurting the company’s ability to invest. That has led to Venezuela’s crude-oil output sliding more than 700,000 barrels a day over the past decade.
As a member of the Organization of Petroleum Exporting Countries, Venezuela is also subject to the group’s quota restrictions. The International Energy Agency says Venezuela produced 2.22 million barrels a day in November, and OPEC offers a similar estimate. Venezuela, disputes that figure, saying daily output is closer to 3.1 million barrels.
Brazil has been invited to join OPEC, but declined.
PdVSA’s 2009 investment budget amounts to around 20% of Petrobras’s, suggesting Venezuelan output will continue to sink while Brazil rises.
—Dan Molinski in Caracas contributed to this article.
Posted: November 13th, 2009 | Author: Ted Rogers | Filed under: Macro Environment, posts | 7 Comments »
Today, The Economist came out with a special report on business and finance in Brazil.
The report paints a very positive outlook, one we obviously share, but also does not gloss over some of the challenges that we have discussed previously, like labor laws and taxes.
A couple of initial data points from the report: sometime after 2014 Brazil will become the world’s fifth largest economy, ahead of Britain and France (and behind China, America, India and Japan). By 2025, Sao Paulo will be the world’s fifth wealthiest city.
Anyway, the report serves as another indicator of Brazil’s rising importance in the global economy and as another boost in momentum for the country. Great stuff…
Posted: October 22nd, 2009 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Macro Environment, posts | No Comments »
Two days ago, Brazil decided to levy a two percent tax on all foreign investment in Brazilian stocks and fixed-income securities .
Some thoughts:
– Although the move was ostensibly targeted at speculators in the Brazil stock market, in reality it is meant to brake foreign investment and thus slow down the appreciation of the currency (the Real). The Real has appreciated 43% against the dollar since December, which has made the country’s exports much more expensive. The tax is about protecting the country’s exporters.
– Theoretically, the tax could plug some budget gaps for the government, although they deny that raising revenue had anything to do with the tax.
– Optically, the move looks bad. It reminds people of the old Brazil, where the government implemented quirky policies with unintended consequences. One article entitled Brazil Gets a Little Nutty , explains that odd moves like this one shows why one should avoid overweighting investments in Brazil, despite the country’s strong fundamentals.
– In reality, the move means very little and will change very little. If foreign investors slow down in Brazil, it will not be because of a 2% tax but because this move gives them pause regarding the predictability of the Brazilian government: you would be surprised how many people look at me funny when I talk about Brazil as a great investment thesis — they still lump Brazil in with South American neighbors like Argentina, Ecuador and even Venezuela. A move like this stirs up that image.
– As far as I know, this has no impact on investments in private companies in Brazil. If one invests in a private equity or venture capital fund in Brazil, one typically invests in a FIP (similar to a Limited Partnership). These are TAX FREE to foreign investors.
I am trying to confirm that PE/VC is not affected but it makes sense that it is not, since by definition it represents long-term investment in the Brazilian economy, not speculative/momentum investing.
– I have sympathy for the Brazilian authorities when I look at the unhealthy, ridiculous rise of the US market this year, which has been driven almost purely by institutional money and traders. In my humble opinion, there are few fundamentals behind the US market rally, except that companies have fired so many people and cut so many costs that reported earnings, as measured quarter over quarter, will soon “look” better. Instead of sitting and watching a similarly heated and potentially unhealthy rally in the Bovespa, the Brazilian government decided to act.
– In sum, the 2% tax is an interesting milestone on Brazil’s climb upward, not much more.
Onward…
Posted: October 16th, 2009 | Author: Ted Rogers | Filed under: Macro Environment, posts, US Venture Capital | No Comments »
So, we know Brazil continues to “run the table” with trade surpluses, strengthening currency and economic growth in the midst of worldwide recession. We know about its increasing international prestige – the 2014 World Cup, 2016 Olympics and, yesterday, election as a non-permanent member of the UN Security Council for the 10th time, a frequency matched only by Japan. We know about its burgeoning middle class, abundant natural resources and booming stock market.
What about the United States? My tag line for the last six months has been that “the short-term problems of the US are underestimated and the long-term problems are over-estimated”.
In the short-term, I don’t buy the hopeful reports of “green shoots” appearing in the economy and of unemployment having hit bottom. Over 500,000 people filed for unemployment benefits last week (yes, it was “less than forecast” – so what?) and we are on pace for national unemployment to rise above 10%. The real unemployment rate – people that want a job and have looked for one in the recent past – is 17%. The official unemployment rate for 16-24 year-olds is 21%.
Given that consumer spending makes up over 70% of our Gross Domestic Product (GDP), how will the economy recover if consumers have no jobs? Debt is also no longer readily available for the American consumer and, regardless, many have changed their wild spending habits, perhaps permanently.
Nevertheless, I feel it’s important to see everything through a historical context. The demise of the US has been predicted many times. For example, after the trauma of Vietnam, Watergate and the economic malaise of the 1970s, many foresaw the ascendance of the Soviet Union and the retreat of the US. Instead, communism collapsed and the US experienced 20 years of economic growth.
Why has the US always bounced back? Because freedom is the ultimate competitive advantage – the free market and individual liberty gives the US the agility to rebound. If you allow people to profit from their passions, to keep the fruits of their labor, they will naturally innovate and grow the economy. If you disconnect work from profit and confiscate the fruits of labor, you will suppress innovation and growth.
At the moment, my fear is that we are dampening our economic agility by swinging the pendulum too far away from the free market. It is understandable: the Great Recession that started in December 2007, like the Great Depression in 1930s, has made Americans wary of free markets and desirous of more regulation.
We already have unprecedented intervention/regulation in the industrial and financial sectors and, soon, we may have it in the health sector, in the form of universal health insurance.
This is an apolitical blog and I am not opining on whether there should be universal health insurance provided by the government. I am opining that it should not be implemented now: loading on the cost of a massive new entitlement will either necessitate higher taxes, which will smother growth, or more debt, which will result in higher interest rates, which will smother growth. Our deficit is already larger than any other country’s budget!
The only way we can climb out of this hole is through economic growth, which starts the virtuous cycle of higher employment and higher tax receipts for government (which allows us to pay off our debt and/or reduce the deficit). That is why our priority now should be pro-growth policies (e.g., lower corporate taxes), not further entitlement programs.
Regardless, the problems in the US will take several years to work out. We will not see real economic growth for another year and, even after that, growth will be tepid (below 3%) for another two more years. If we load on more debt, we will have a weak economy into the indefinite future.
So, for the moment, I am revising my tagline: the short-term problems in the US are underestimated… and so are the long-term problems.
