Marcos Duarte, co-founder of Brazil-based Latin American event-driven fund Polo Capital Management, says the worst is over. “There have been massive redemptions in emerging markets funds, particularly from foreign investors, and these have created huge disruptions in liquid names in Brazil but the worst appears to be over now and there are opportunities to be had,” he says.
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“The opportunities that will come are great. Next year should be much better for alpha generation even if a slowdown occurs” Marcos Duarte, Polo Capital Management |
Duarte highlights Brazilian financials. “Brazilian large banks have not suffered as much as banks in other parts of the world. Some are trading at 2.5x book value, and have a ROE of 25. So for each dollar, you are making 10% a year in terms of capital invested. Small banks you can get for 40% of book value due to forced liquidations. If there is not a massive slowdown in the economy, you will see your money back fast.” Brazil has also benefited compared with the rest of the world from the fact that its population is relatively lightly leveraged. It has also avoided a property boom, with square foot prices a unit going up only with inflation. Duarte is confident that Brazil has room to manoeuvre if the economy should deteriorate, as interest rates are relatively high. “The slowdown should be less aggressive than in the rest of the world and companies linked to the local economy should not suffer that much. Credit has been tight but we are beginning to see signs of relief,” he says.
For those with stable capital, 2009 will hold opportunities. “The spreads will be much fatter, so to produce alpha you will need less capital. The opportunities that will come are great. Next year should be much better for alpha generation even if a slowdown occurs,” says Duarte.
Stephen Rothwell, executive director of Argo Capital Management, which looks at private equity and credit investments in emerging markets, believes there are some distressed opportunities in broader Latin America. “There are a lot of distressed credits around. Venezuela and Argentina sovereigns might start to attract interest. In corporates, the beef sector is suffering alongside companies that have had funding difficulties and losses from derivatives contracts.” Argo launched a multi-strategy fund in September looking at distressed opportunities globally and is considering a private equity fund launch that focuses on emerging markets.
