Windows of Opportunity – They Open and They Close
“Windows of opportunity for running for the presidency close quickly. And [Obama] should not assume, if he passes up this window, that there will be another.”
Senator Tom Daschle speaking to Barack Obama about what Daschle, months prior to the 2008 presidential election, saw as Barack Obama’s moment.
“The voting booth is one of the few areas in American society where there are zero cameras, and essentially no rules. “Because of that, and the anger that so many have toward a broken political system, millions are going to vote for Trump not because they agree with him, not because they like his bigotry or ego, but just because they can.”
Michael Moore, popular liberal writer, predicting Trump’s victory five months before the election. The opinions of Trump’s ego and bigotry (a different word for racism) are the opinion of Mr. Moore, not the opinion of the author of the newsletter.
Timing Matters
I was in Atlanta on November 4, 2008 having a beer with good friends watching the presidential election results on CNN when Obama won the US election. That night was almost a festival in the USA. There were parties everywhere and most young people in the USA were very excited. Obviously, Obama’s candidacy was historic based on his ethnic background, but he was also part of a new generation of politicians and at the time was only 47 years old.
When Obama first started his candidacy, it was a long shot but he took advantage of a special moment in time and a strong desire for change. Obama had the advantage of having strongly opposed the invasion of Iraq before the war started. He was able to use this opposition as an effective argument to show his judgement when his opponent, John McCain, was very much a proponent of an unpopular war. In addition, Republican candidate John McCain, a maverick, was not popular in his core political party. Finally, Obama was the first candidate to use social media very effectively. The campaign had more the feel of a movement than a presidential campaign.
Donald Trump, even more unique candidate and a Window that Many did not See
OK, now move to November 8, 2016. I was at home watching the results of the election. Hillary Clinton’s planned celebration party ended up being a large sad event, and Donald Trump, as we all know, completely surprised the world.
Donald Trump, running effectively as an independent, hijacked the Republican party, won the Republican nomination, and defeated Hillary Clinton by winning states that neither McCain nor Romney (two previous Republican candidates with political experience) were able to win: Ohio, Wisconsin, and Michigan. The Republican party is stronger than it has been in a generation, with control of the House of Representatives, Congress, and the White House. It was a monumental win. It literally shook the world and shocked many in a nation.
Donald Trump took advantage of the largest pool of candidates for the Republican nomination, 16, and had the advantage that the establishment could not choose between four potential candidates. He was able to use his approximately 29% of loyal Republican voters to win the nomination because the others could not choose an establishment candidate. His last remaining competitor, Ted Cruz, almost no one liked. Finally, he ran against Hillary Clinton who had almost zero enthusiasm behind her. I was with a taxi cab driver in Florida recently and he told me about a Hillary Vice Presidential Candidate rally where there were only two people in attendance. Two people…
Why Does This Matter?
Both of these events were results of special moments and special times. A convergence of factors created a unique window for these individuals. No matter how qualified or unqualified each of these candidates is in your or my opinion, if these factors and timing had not been in place, it would have been very difficult for them to win.
And Now Back to Brazil… And This Particular Moment
“Joseph, we really want to figure out how to invest in Brazil. It seems like there should be some interesting opportunities.” An actual recent phone call from a key decision maker in one of the largest alternative asset managers on planet earth.
There are windows in time that create tremendous opportunity. And as a Brazilian Real Estate Asset Manager, you are now living in one of those moments.
Brazil is in a very special situation currently. Based on the forward yield curve and the lack of liquidity, some of the largest and most sophisticated investors on earth are actively looking to invest in Brazil through a deep-value investment strategy. We work with these investors intensively and they are not seeing the right deals, with the right terms, with the right sponsorship to close. Their problem is your unique opportunity. For smart Brazil Real Estate Asset Managers, this is your Barack Obama or Donald Trump moment. An inflection point and a window of opportunity.
The Real Estate Cycle and The Foreign Investor
Explaining the Clock
You have likely seen the clock below before. Let’s talk about it in regards to how this window of opportunity works and why it is so important. Each different time in the cycle attracts a different type of investor. It is important for Brazil’s real estate asset managers to be mindful of this clock because what happened in the last cycle and its overhang create certain challenges and opportunities as we repeat the real estate cycle.
6 to 12: The Growth Period AND The Period of Slowing Growth
This was the period where Brazil was approaching investment grade and then became an investment grade nation. This was also the period where Brazil was on everyone’s radar. It was a market that you effectively had to be in if you were a global investor. It attracted growth capital and new fund managers were able to get started as they had the wind at their back. People wanted to believe the Brazil story. It is safe to say that this period is now over.
The investors that made money in this phase got in early, 2006 to 2008, and sold in the 2010 to 2013 time frame. These investors are happy as they had large IRRs and significant currency gains and some may come back.
There are other investors that invested in 2012 to 2013, the end of the cycle, that literally bought into the crisis. Often these investors set up small offices, some invested in large-scale development, and they tried to ride Brazil’s growth. Many arrived late in the cycle. This type of investor cannot hear the word Brazil and avoid getting emotional. They are likely to have spent time in therapy sessions at some resort in Arizona thinking about the meaning of life. Believe me, I know some of these investors… Brazil was the worst professional experience of their lives. They will not be back in this lifetime.
12 to 3: The “All My American Friends are Leaving Brazil” Period
There was a period here in Sao Paulo from 2014 to 2015 when every week an American or European friend of mine left Brazil and asked when I was leaving. Brazil went into a cloud of negative news and uncertainty. This peaked late 2015 and this was the ideal time to buy assets, but very few foreign investors could wrap their heads around the political uncertainty to make a large-scale investment decision. However, InDev has smart local clients who acquired assets at yields then that are impossible to achieve now. Well, I miss my friends but their departure has created a “window of opportunity” for our small small firm. InDev is now the tallest midget in the room as we are likely the only real estate focused merchant bank helping asset managers find large-scale partners during this cycle 🙂
3 to 6: The Brazil Real Estate Asset Manager’s Barack Obama and Donald Trump Moment
This is our window together. We are approaching and/or are at the bottom of the Brazilian real estate market. It is clear that the market will not get worse, the political situation, while still Brazil, is far from where it was in 2015, and Brazil’s fiscal policies are at least headed in the right direction.
Right now, the largest and most sophisticated investors on earth, not the happy ‘I love Brazil’ investors of the earlier period but the completely location agnostic investors, are looking at the Brazil real estate market intensely.
Why is this so important for you and for InDev Capital? It is a large wave with only five to six groups, we know them very well as they call us asking questions almost daily, and each desires to invest US$200M to US$500M. In my place of birth, the Great State of North Carolina, this is what we call ‘real money.’
Deep-Value Investor Orientation
These large macro investors are not looking for a long-term relationship and will not be drinking lots of coffee in your office. They do not want to know about your family and are even less concerned about your hobbies. They are completely agnostic about Brazil and have no emotional attachment whatsoever. It is all about mispricing and buying assets cheap with more significant upside and limited downside. Period, end of story. What we mean by cheap is that these investors believe that Brazil’s market may have overreacted to a given situation.
These investors focus on markets and assets that are undergoing transition, have liquidity issues, and usually have significant distress. These investors have studied Brazil since late 2015. They are ready now but are not seeing appropriate transactions presented by appropriate sponsors. Largely, there is a disconnect in what is deep value and what defines a qualified local sponsor. While this is difficult to do, InDev has some unique ideas and strategies we can discuss to bridge this gap to make a transaction happen and bridge it fast as the trade is moving right now and the window is short.
But I want to be Barack – I still do not get it. How do I move forward?
These large-scale deep-value investors are perfectly positioned for the right emerging market asset manager. They are not looking to do separate accounts or invest on a discretionary basis on a specific strategy with large funds here in Brazil, and they are not allocating discretionary capital. They are looking for someone to bring them a deep-value transaction to execute immediately.
These investors have the following characteristics:
- Large-scale and interested in investing in the next six months
- Will not invest in local funds on a discretionary basis, will not help your competition
- Are not interested in setting up an office
- Do want local sponsors to assist them in execution
- Will pay fees and promotes related to transactions
- Desire a partner to execute
- Will close fast given the right transaction
OK InDev, how do I get started? I am a smart guy and I have transactions that I want to execute!!!!!!!
The key is what real estate sector and asset types you understand deeply combined with your passion for that sector (you need to live and breathe it), and then matching that with the investor behavior pattern of investing and current desire in Brazil. If you have passion and experience and there are deep-value-based opportunities, we have a chance to make it happen. However, admittedly, if your idea involves ground-up development, it may take further along in the cycle to source this type of capital. Currently investors are strongly oriented towards assets that either are generating or can quickly generate cash.
Pathway to Work with These Large-Scale Deep-Value Investors
- Sectors that you understand deeply
- Sectors for which you have passion
- Investment thesis match with investors
To make this work, the sponsor will need to have the three stars align. As much as I wish to tell you that anyone can be Barack or Donald, it is not easy.
Asset Class That You Understand Deeply – This is where the best deep-value transactions come from. You are able to see what others cannot see. You can understand value, know the players and can move fast. Importantly you are able to articulate intelligently why this is a deep-value transaction and you have the strongest chances to source this type of opportunity.
Asset Class For Which You Have Passion – Even with deep-value investors, at the end of the day it comes down to people and passion. The math of the investment must work, but as the process moves forward an investor will quickly be able to determine if the sponsor lives and breathes the space where the real estate asset lies. Without that passion we have noticed that details and key business points fall through the cracks. This passion is demonstrated by your having been focused in the industry and the sector for at least ten years.
Assets and Strategies where Investors Can Achieve Their Returns within Their Behavior Pattern – Alas, this is the hard part. Investors have biases. Some are changeable and some are not. If, for example, an investor is not willing to take development risk in the USA, you are not going to convince them to take development risk in Brazil. It is very important that your transaction be in the “realm of normality” for this investor. This is investor specific and we will dive into this in future newsletters.
Next Steps
If you have experience and passion for a sector of real estate and you have a special investment opportunity that generates 25%+ nominal IRR returns with total profits above US$25M+, it may be a moment where you can change your firm’s trajectory. Perhaps we can help. Please click here and let’s set up a 15-minute phone call.
(Obviously you will not be talking to Barack Obama, but the writer of this newsletter is a black guy that went to Harvard so you are somehow at least close to that phone call.)
Warm Regards,
Joseph W. Williams
CEO & Founder InDev Capital
