The Prolifico Report Mar & Apr 2015 May 14 th 2015 EMPOWERED ALLIES Photo: Michel Temer (vice-president of Brazil, PMDB), Eduardo Cunha and Renan Calheiros (presidents of lower and upper houses, PMDB) SUMMARY “It is in our view a good time to buy.” – Ric Clark, Chief Executive of Brookfield’s real estate business (Wall St Journal, May 5 th 2015) “Brazil’s economy will come back, there’s no question about that.” – Brian Porter, CEO of the Bank of Nova Scotia, Canada (Bloomberg, April 9 th 2015) “It does feel like now is an interesting moment…..we’re starting to see some opportunities that we weren’t seeing six months ago…..and once the all clear sounds, it sometimes feels like it’s a bit late.” – Kenneth Caplan, Global CIO of the Blackstone’s Real Estate Group (Wall St Journal, May 5 th 2015) The last 2 months have seen Dilma Rousseff make some bold political moves, such as appointing the president of the coalition party, Michel Temer, as the government’s “political coordinator” , to ease some of the resistance that she has been experiencing with Congress. The bet on Temer has already paid off, since last week, after intense negotiations, Congress approved some of the measures included in the much needed fiscal adjustment elaborated by the new finance minister, Joaquim Levy. Petrobras has finally released its financial statements and now has access to the capital markets again. As for the real estate market, large real estate investors such as Blackstone and Brookfiel d are taking advantage of the political upheaval and economic slowdown in Brazil by bargain hunting in the country. They say that they have confidence in the strength of the engines that until recently powered the country’s strong growth, including its abu ndant natural resources and growing middle class. Foreign investors are also taking advantage of the recent plunge in the Brazilian real, which is near to an 11 year low vs. the US dollar Prolifico is working on a number of exciting opportunities and curre ntly has strong interest in its platforms from some large capital partners. Please read on for more on the above and for some other interesting topics. All the best, The Prolifico Team INSIDE BRAZIL Dilma Rousseff appoints Temer to “unlock” Congress After facing resistance from Congress on a number of issues, Dilma Rousseff appointed her vice-president, Michel Temer (PMDB), as the government’s “political coordinator”. The PMDB currently holds the most seats in Congress and the party has not been fully supportive of Rousseff recently. Temer is recognised for his ability for reconciliation and dialogue, in contrast to Rousseff. He is expected to get his party back in line and ensure the fulfilment of the fiscal target (only 22% depends on Congress), at a time when, mainly due to the Petrobras case, some voices in the opposition have been calling for impeachment, although most commentators agree this is unlikely. Michel Temer, vice-president of Brazil Petrobras regaining credibility Petrobras has finally released its 2014 audited financial statements. The company estimated its losses from corruption at R$6.2bn and took an impairment charge of R$44.6bn, resulting in a R$50.8bn write-down in assets. Although the amount is high, it is significantly below the initial estimates of R$88bn. The market received the news well and the company’s share price continued its upward trend. Since the appointment of the new CEO (Feb 6th), Petrobras shares have risen more than 40%. Furthermore, the release of the financial statements unlocks the company’s access to the capital markets and reduces the pressure on its financial situation and its credit rating. Exchange rate stabilises; Inflation and interest rates rise Reaching R$3.30 in March, coupled with significant volatility, the US$/R$ has recently stabilised around 3.00, after the disclosure of Petrobras accounts and some weaker US macro figures. Inflation (IPCA) reached 8.12% in March, mainly fuelled by temporary shocks, such as the much needed adjustment and end to the subsidies in the energy sector (electricity bills have increased 36% this year). The Central Bank responded by raising the benchmark interest rate (Selic) by 0.5% to 13.25%. Market consensus is for inflation converging to its target of 4.5% (+/- 2%) during 2016. Petrobras floating vessel Oil & Gas bidding may secure the government R$ 2.5bn The government will officially launch in May the 13th bidding round for oil and gas exploration, expecting to raise up to R$ 2.5bn. The auction will take place in October and the contracts are expected to be signed by December. These concessions will ensure a much needed boost to the Treasury’s accounts, helping the government to reach its fiscal targets. However, according to Eduardo Braga, minister of Mines and Energy, the government’s main goal with the concessions is to create an environment of confidence in the recovery of the economy and foster investments in a strategic sector. BRAZIL EXTRA Carlyle invests R$ 1.75bn in a hospital group The private equity firm Carlyle has bought an 8% stake in Rede D’Or, the largest hospital group in Brazil for R$ 1.75 billion. The proceeds from the deal will be used to finance the construction of new hospitals, expand the existing facilities and finance new acquisitions. U.S. private equity firm Advent buys university Advent has recently closed a deal to acquire Faculdade da Serra Gaúcha (FCG), a for-profit Brazilian university. The firm’s plan is to use FCG as a platform for future acquisitions, according to Newton Maia, an Advent director. FGC has 10,000 enrolled students and future acquisitions will focus on education companies with at least 3,000 students. Mr. Maia says the sector remains excessively fragmented and still presents fast growth opportunities. Rede D’Or hospital, Rio de Janeiro USA’s Major League Baseball (MLB) invests in Brazil Known as the country of football, Brazil has an increasing number of fans in other sports, such as baseball. The main league in the US, Major League Baseball (MLB), has been experiencing a rapid increase in its popularity and viewers in Brazil. In 2014, 1.4m Brazilians watched MLB games, a rise of 93% from 2013. Since 2010, the league has been investing in Brazil, in order to promote the sport and scout new talent. However now, the MLB executives plan to bring the sport to a new level in the country, by building a stadium in one of Brazil’s cities. Areas in São Paulo and Recife are being considered, but no budget has been defined yet. Jorge Paulo Lemann keeps expanding his empire Jorge P. Lemann, Brazil’s richest man, together with his two Brazilian partners at 3G Capital and Warren Buffett, announced in March the acquisition of Kraft Foods and its merger with Heinz, in a US$ 46bn deal that will create the fifth largest food & beverage company in the world. The 3G trio has been responsible for some of the biggest PE Kate Upton, MLB’s celebrities game deals in recent years. In 2008, they created the largest brewer in the world, AB InBev, and two years later they took Burger King private, just before teaming up with Warren Buffett to buy Heinz in 2013, in a US$ 27bn deal. Brazil wants to create a global network of food banks In the next G-20 meeting, Brazil will propose the creation of a global network of food banks, as a measure to reduce the waste of food on a global scale. Food banks are organisations that collect donations of food and distribute it to needy people. Currently, the waste of food is estimated at 1.3 billion tons every year or the equivalent to US$ 750 billion. Jorge P. Lemann in cartoon by The FT REAL ESTATE Sotheby's International Realty returns to Brazil Sotheby's Realty, the world leader in luxury residential real estate, has returned to Brazil through a franchise deal in a partnership formed by four companies. Sotheby’s were previously in Brazil between 2006 and 2012 but the company ended up exiting the country after breaking the contract with its former partner. The first office is located in São Paulo and includes 60 qualified brokers. The plan is to expand to 8 offices throughout the country within 3 years and achieve annual revenues of R$ 1bn within 5 years. The initial target markets will be the top neighbourhoods in São Paulo and Rio de Janeiro, as well as beach houses in the south of Bahia. First residential towers announced in Porto Maravilha Last month, the area of Porto Maravilha in Rio de Janeiro announced the commencement of the construction of its first upscale residential towers. Named “Lumina Rio”, the project consists of 4 towers, each with 30 floors. The first tower is expected to be ready in two years. Porto Maravilha is undergoing a massive revitalisation, mainly driven Sotheby’s Realty branch by the infrastructure project sponsored by the City Hall. Currently, there are 128 projects waiting for planning permissions. E-commerce creates opportunities for storage businesses The growth in e-commerce is fuelling the growth of self storage and traditional storage/distribution in Brazil. Two of the main warehouse developers in Brazil, WTorre and GLP, are currently investing R$2bn in the sector. WTorre is developing 950,000 m2 and 35% of its new clients are e-commerce businesses. Its president says the market has large growth potential, since the entire country of Brazil currently has circa 10 million m2 of traditional warehouse space, significantly below large cities such as Los Angeles (72m) and Chicago (105m).