Good Things Always Come in Threes

Logo-apertura-victoria-capital

February – 2018

Carlos García, leader of the fund that acquired Los Grobo in 2017, prepares the launch of his third vehicle to invest in the region. He defines himself as a generalist but does not look at regulated sectors.

downloadHe goes unnoticed, hidden behind his common name and last name. But Carlos García is not just somebody else in the private equity world: he leads Victoria Capital, a company that raised three funds for US$ 1700, focused on Latin America and created in 2002 by practically the same management of Donaldson Lufkin & Jenrette – known in the industry by its acronym, DLJ – a company that García joined in 1995 and where he led all the investments for Latin America. But that’s history: last December, Victoria Capital finished its second fund, of US$850 million, and is preparing the third one, which apparently will be neither the last one nor a small one.

Having a low profile in Argentina, in 2016 Victoria Capital increased its holding, when it acquired over 70 percent of Grupo Los Grobo and injected US$ 100 million together with the International Financial Cooperation (IFC), UTIMCO (The University of Texas Investment Management Company), and the FMO, the Dutch Development Bank. The purpose of the transaction, as specified in the formal press release, is to double the size of the company in the next four years. “It’s not that we are investors oriented to the agricultural sector, but we see in it that Argentina has a sustainable competitive advantage,” says García, although he states: “It’s not the first one. In 2014 we acquired control of a company, Satus Ager (dedicated to the production of counter seasonal seeds to then sell them in the Northern Hemisphere).” Last July, one of Victoria Capital’s trusted collaborators, Jorge Arpi (a 56- year-old Certified Public Accountant, with an MBA abroad), landed from Grupo Newsan as CEO of Grupo Los Grobo. “He was one of our key executives at Peñaflor”, remembers García. He replaced Horacio Busanello, who in 2017 had already been in the company for six years. But beyond the fact that its last bet in Argentina was Los Grobo, García defines Victoria as a “generalist” investment firm, although the regulated industries are the exception to the rule. “We’ve never wanted to get involved in those businesses. We’ve been saying “no” throughout the region and ever since the company was created”, he states. Neither does he feel the obligation to invest a certain number of times per fund, although the figures in the first two were almost the same (nine companies). “We have full discretion to choose at any time of the fund’s life – any of the funds – where to invest in and what type of transaction to make”, he says.

Victoria is not a third sector company, and García wants to make that clear. “The purpose as a private equity firm is to generate a capital gain for our investors” he admits, and he talks about the returns premium that governs the American market. “It is of 500, 600 basis points above public markets, that’s in a long series of 10, 15, 20 years. If you look at the historical series, it should yield around 13, 14 percent in the developed world”, he continues. But he is in Buenos Aires; in Sao Paulo at most. “In order to invest in Latin America, we aim to generate returns above 20 percent in US dollars”, he explains. He talks about the dream, which does not always come true. “In the life of a professional asset manager there’s always an ugly duckling and a pretty girl.” Out of the nine investments Victoria made in the first fund, García recalls it had “half a failure” – he doesn’t specify which – and no failures have arisen yet from the second one.

“Out of the nine transactions of the second fund, there are two that will probably show clear signs of success and partial realizations of the investments soon. Soon.”

Next Harvest

January and February are months of work for García and his team, who are already thinking about the raising of the third fund. “Our last fund was of US$ 850 million. It hasn’t been defined yet, but I would say that, given the regional circumstances, it certainly won’t be higher than that sum, because I don’t think that the appetite for the region will enable us to go further beyond that”, he points out. The investment period of the second fund ended on December 29th. “Therefore, we will tap the market some time during the first two months of the year”, García adds. He will target an institutional model. “All international pension funds, international insurance companies, university endowments, sovereign funds”, he explains. He does want a change: the place of origin of those funds. “We would like to have institutional Latin American investment funds:

An active fund
Current investments, by year
2010
• Grupo Santillana

• 2011
• Ideal Invest (Brazil)

2012
• Oncoclínicas (Brazil)

2014
• Corona (Colombia)
• Energy (Chile)
• Satus Ager (Argentina)
• FLC
• Elemidia (Brazil)

2016
• Los Grobo (Argentina)

2017
• Cellera Farma (Brazil)
• Oncólogos del Occidente (Colombia)

 

Chilean, Colombian, Peruvian pension funds… or insurance companies. We didn’t have them in the second fund because it was raised too fast and too soon we were oversubscribed by people outside Latin America”, he recalls.

The fact that it comes to the market now is due to internal circumstances and organizational situations of the firm. “This is a business where the essential decision made by the investors is to bet on what is called track record. And we have a couple of transactions about to be closed, which will generate very attractive returns for our investors. So, from the point of view of timing, it may be better to wait a little and present them closed, agreed on.” He has already prepared a preliminary pipeline with companies of the region, but is cautious. “This business has a very low success rate.

We ended up closing, in the life of the fund, 0.75 percent of the operations we had assessed. In round figures, out of nine investments, we looked at 1000 opportunities throughout five years.”

This won’t change a lot in the future. “We will probably end up closing 1 percent of what we are looking at”, he states.

He can’t even think about dedicating himself just to his country: he attests it with the regional strategy. “In 2007, we had an office in Sao Paulo and another one in Buenos Aires. In 2011, we extended our presence to Bogota and in 2012, to New York, mostly for administrative matters and the relationship with investors”, García highlights. But this is not all, since Lima is part of the plans. “It’s one of our five target markets, a relatively large one: a Peruvian person has been working with us for a long time in Buenos Aires, and the time has come to open it. In order to gain opportunities you have to be close to where they happen”, he says. With fewer certainties, García talks about Chile, a country where oddly enough, they haven’t landed yet. “Eventually, some day, and we will thus have presence in the five countries we have defined as target markets”, he explains.

He looks at the region. However, he knows it has changed in the last couple of years. “Until 2013, it was extremely attractive and hit record levels in fundraising to invest. Statistics have decreased substantially in terms of the funds that have been raised, because the region itself, since 2013, started to lose appeal.” But devoting exclusively to Argentina would be a crazy thing to do these days, he believes. Anyway, he outlines a hypothesis in case he did: “If today I wanted to raise a fund exclusively devoted to any country of Latin America, except for Mexico and Brazil, I probably wouldn’t succeed. It’s also a matter of size. Today you can go to a regional model like ours, that includes Argentina, and raise capital: yes.”

With US$ 1700 million and the trust of renowned funds backing him, neither García nor any of his collaborators ever remained silent in a Board’s meeting, regardless of the company they joined. “In general, in three out of four transactions we make, we take control of the companies, and in the fourth one we don’t, but we share it with someone else, with a shareholders’ agreement; this allows us to keep a certain number of decisions for ourselves. What we never do is become a passive minority partner: that is out of our philosophy”, he informs.

Certain requirements must be for me to decide to share decisions. “The partner’s character and personality: that is a decisive matter for us. Because if the quality of the partner is not the appropriate one, we will very probably end up having some problem”. The famous comment of the industry summarizes the risks:
“With good partners you can solve the problems of a business that is going wrong. With bad partners, you cannot solve the problems of a business that goes well.” he says.

Investors by type
In Percentage

García can be aloof and talk difficult when he wants; he uses the mechanism when referring to the valuations Victoria Capital stamps on contracts. “We set them based on a price that will enable us to generate an adequate return, based on a reasonable risk perception. ” And then simplifies the explanation: “We are, by definition, conservative. We tend to be acid regarding the achievement of a business plan”. A word to the wise is enough: “Throughout my 30 years of experience doing this, not very often have I seen a long term plan work out just like it was presented. This makes me inevitably skeptical.” He was not dazzled by the Internet bubblein 2001, when DLJ was a shareholder of Editorial Atlántida. “We received a huge number of opportunities to invest in Internet businesses”, García recalls, and did what he does now: gathered the troop, placed the papers on the desk, and started running the numbers. “We took the 100 projects we had seen that were based on advertising income, we picked the size of the biggest advertising market those estimations provided, summed up the market shares each of the 100 projects said, and it was 30 times the size of the market. The investor heard the “boom” before time and ran away. “Something is not working here”, he said at that time.

With a bubble or without it, García receives the figures and turns them upside down, always to his favor. “We prepare an adjusted business plan, modified according to our perception of potential risk of business execution. Then, according to that, we take a view on when and how we can exit that business. And the how is very important, because I am implicitly defining at what multiple or at what value I think it may be sold. From there, I define the entry price, in order to generate the return rate I seek”, he explains and describes the total antagonism with the venture capital industry. “It is a business much more centered on identifying opportunities that are not necessarily correlated with the history. They are much more disruptive things. Our business, originated in the buyouts and growth capital model, is one that tries much more to build the bridge that explains why we will go from the current reality to a different one.

”The manager sees that international firms will walk with an Achilles heel through Argentina. “The big problem, in my view, is that by definition they leave out a number of opportunities they cannot capture. That’s why mega funds are giving a huge opportunity to the mid-market buyers.” Many new firms are created by former members of big firms. “They seek to capture the opportunities that are left out”, García explains. And he makes to himself a logical question, when talking about the new Apollo fund, of US$ 24.000 million. “How can it become interested in Latin America? How many transactions can they find to place a US$ 1000 million check? This space will be captured by other firms, smaller, that hopefully will be us, the Latin American firms”.
But he warns not to be overconfident, since others are lurking: “There’s a large universe of investors still interested in investing in Latin America”. ■ A.E.

2018-04-24T20:07:58+00:00 February 10th, 2018|Argentina|