Wednesday, October 29, 2014

CPPIB's Risky Bet on Brazil?

Guillermo Parra-Bernal of Reuters reports, Canada's CPPIB to invest $396 mln in Brazil real estate:
Canada Pension Plan Investment Board (CPPIB) plans to invest about 1 billion reais ($396 million) in commercial property in Brazil, a few months after the Toronto-based pension fund opened an office in São Paulo.

In a statement released late on Monday, CPPIB said the investments include the purchase of warehouses, land and stakes in development projects in the logistics and retailing industries, adding to the fund's portfolio of more than 100 properties in Latin America's largest economy.

The move brings CPPIB's real estate commitments in Brazil to over $1.8 billion. Since 2009, CPPIB has bought real estate in Brazil to profit from rising demand for corporate and distribution facilities.

The Canadian giant, one of the world's biggest pension funds with more than $212 billion in assets under management, opened an office in Brazil in February to gain on-the-ground presence and business connections before tapping complex, sizeable investment opportunities. CPPIB's São Paulo office focuses primarily on investments in Brazil, Chile, Colombia, Mexico and Peru.

"Brazil remains a key market for CPPIB over the long term and we will continue to seek attractive investment opportunities through our existing partnerships with top-tier local partners while we continue to build our local presence in Sao Paulo," Peter Ballon, head of CPPIB's real estate investment in the Americas, said in the statement.

CPPIB will pay 507 million reais for 30 percent in a joint venture with Singapore's Global Logistic Properties Ltd. , the world's No. 2 owner of industrial properties, to run 32 logistics properties in São Paulo and Rio de Janeiro, the statement added.

Another 231 million reais were committed to GLP Brazil Development Partners I, a real estate investment vehicle in which Global Logistic Properties has a 40 percent stake and CPPIB a 39.6 percent stake.

CPPIB also pledged to spend 159 million reais to buy a 25 percent stake in a São Paulo logistics project alongside Cyrela Commercial Properties SA.

The fund also paid 100 million reais for a 33.3 percent stake in the Santana Parque Shopping mall, which is jointly run by partner Aliansce Shopping Centers SA, the statement added. CPPIB has a 27.6 percent in Aliansce, a shopping mall operator.

In a separate statement, the pension fund announced that Rodolfo Spielmann was named general director and leader of CPPIB's operations in Latin America. Spielmann, a former Deutsche Bank AG banker and a Bain & Co executive in Brazil for the past 14 years, started at the fund on Oct. 20.

CPPIB has committed $5.6 billion to investments in Latin America.
The Canadian Press also reports, CPPIB raises real estate commitments in Brazil to $2B, citing the figures in Canadian dollars:
The Canada Pension Plan Investment Board (CPPIB) has announced a combined $445 million of investments in logistics and retail assets in Brazil in a string of moves that bring its real estate commitments in the South American giant to more than $2 billion.

“Since making our first real estate investment in Brazil in 2009, CPPIB has become one of the largest investors in the sector with ownership interests in logistics, retail, office and residential assets or developments,” Peter Ballon, managing director and head of real estate investments — Americas, said in a release Monday.

“Over the past 10 months we deepened relationships with our key partners to commit additional equity in high-quality real estate assets that are important additions to our diversified Brazilian portfolio.”

The latest investments include $226 million in a joint venture with Global Logistic Properties to invest in a portfolio of 32 logistics properties that GLP previously acquired from BR Properties S.A. CPPIB will have a 30 per cent ownership stake in the joint venture. Logistics properties include warehouses, distribution facilities and the like.

Meanwhile, the CPPIB has committed an additional $103 million to GLP Brazil Development Partners I, an existing joint venture that is owned 40 per cent by GLP, 39.6 per cent by CPPIB and 20.4 per cent by the Government of Singapore Investment Corp. The additional capital will be used to acquire a strategically positioned land parcel in Rio de Janeiro comprising 3.8 million square feet of buildable area.

It has also committed $71 million to acquire a 25 per cent interest in a new logistics development project alongside longtime partner Cyrela Commercial Properties. Called Cajamar III, the development will comprise more than 2.7 million square feet of leasable area located on the outskirts of Sao Paulo.

And the CPPIB is acquiring a 33.3 per cent interest in Santana Parque Shopping for $45 million. Aliansce Shopping Centers, an existing partner, also owns a 33.3 per cent interest in the 280,000 square foot regional shopping centre in Sao Paulo.

“Brazil remains a key market for CPPIB over the long term and we will continue to seek attractive investment opportunities through our existing partnerships with top-tier local partners while we continue to build our local presence in Sao Paulo,” Ballon said.

Canada Pension Plan Investment Board is a professional investment management organization that invests the funds not needed by the Canada Pension Plan to pay current benefits on behalf of 18 million Canadian contributors and beneficiaries.
Soon after the news of this Brazilian transaction broke out, the critics came out swinging. Canada's Business News Network invited Jim Doak, President and Managing Partner of Megantic Asset Management, who said he was "suspicious" and "had a bad feeling about this." He questioned the valuations of illiquid investments and said he's "smelling ego here" and the CPPIB is taking on serious foreign country risk (watch the entire BNN clip here).

I don't know where BNN finds these people to comment on pension fund deals but this guy sounds like Andrew Coyne when he railed against the CPPIB in his comment on Ontario's new pension suckers. In fact, take a look at this snapshot I took on my computer from the BNN interview (click on image):

You'll see other clips with a negative spin on the CPPIB and their "expensive" and "complex" operations. Of course, they don't mention how CPPIB's governance is one of the best in the world and how they have been very careful investing in private markets in this environment, fully cognizant that deals are pricey.

Now, let me share my thoughts on this Brazilian real estate deal. From a timing perspective, this deal couldn't come at a worse time. Why? Because the Brazilian economy remains in recession and things can get a lot worse for Latin American countries which experienced a boom/ bust from the Fed's policies and China's over-investment cycle. This is why some are calling it Latin America's 'made in the USA' 2014 recession, and if you think it's over, think again. John Maudin's latest, A Scary Story for Emerging Markets, discusses how the end of QE and the surge in the mighty greenback can lead to a sea change in the global economy and another emerging markets crisis.

Mac Margolis, a Bloomberg View contributor in Rio de Janeiro, also wrote an excellent comment this week on why the oil bust has Brazil in deep water, going over the problems at Petroleo Brasileiro (PBR). A look at the one-year chart shows you a bit of how bad things are (click on image below):

You can say the same thing about Brazilian mining giant, Vale, which has also been pummeled in the last few months (click on image below):

The re-election of President Dilma Rousseff didn't exactly send a vote of confidence to markets as she now faces the challenge of delivering on campaign promises to expand social benefits for the poor while balancing a strained federal budget. President Rousseff says the Brazilian economy will recover and the country will avoid a credit downgrade but that remains to be seen.

Having said all this, CPPIB is looking at Brazil as a very long-term play, so they don't care if things get worse in the short-run. In fact, the Fund will likely look to expand and buy more private assets in Brazil if things do get worse. And they aren't the only Canadian pension fund with large investments in Brazil. The Caisse also bought the Brazilian boom and so have others, including Ontario Teachers which bet big on Eike Batista and got out before getting burned.

Are there risks to these private investments in Brazil? You bet. There is illiquidity risk, currency risk, political and regulatory risk but I trust CPPIB's managers weighed all these risks and still decided to go ahead with big investment because they think over the long-run, they will make significant gains in these investments.

My biggest fear is how will emerging markets act as QE ends (for now) and I openly wonder if big investments in Brazil or other countries bound to oil and commodities are worth the risk now.  Also, the correlation risk to Canadian markets is higher than we think. My only question to CPPIB's top brass is why not just wait a little longer and pick these Brazilian assets up even cheaper?

But I already know what Mark Wiseman will tell me. CPPIB takes the long, long view and they are not looking at such deals for a quick buck. As far as "egos at CPPIB" that Mr. Doak mentions in the BNN interview, I can't speak for everyone there, but I can tell you Mark Wiseman doesn't have a huge ego. If you meet him, you'll come away thinking he's a very smart, humble and hard working guy who's very careful about the deals he enters.

Below,  Reuters' Yiming Woo reports that Brazil's leftist President Dilma Rousseff narrowly re-elected in a vote that split along the country's social class and geography. I can't comment on President Rousseff except to say she will have big battles ahead, but I can tell you that Brazil is a great country with a bright future. Just like Neymar, it will rise and flourish again but the recovery could take a lot longer than CPPIB and others anticipate.

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