Latin American real estate offers an abundance of attractive entry points and long-term growth opportunities, particularly in markets such as Brazil and Mexico, as their middle class demographics continue to rise, writes James Williams.
Over the last 10 years Brazil’s middle class has grown by 40 million and those people are now buying goods and services which were previously unavailable to them.
That is showing up in the rising numbers of shopping malls, improved healthcare as these people move up the pyramid (private healthcare), the demand for bigger houses and luxury apartments and so on.
“The growth of the middle class and subsequent consumer demand are drivers, either directly or indirectly, in the businesses that we participate in; whether it be logistics, hospitality, shopping malls: our investment strategy is focused on businesses that have huge untapped demand,” explains Thomas McDonald (pictured), Managing Partner, Jaguar Growth Partners, a New York-based investment firm focused on real estate private equity with an office in Sao Paulo.
With more than 100 years’ experience within the team, Jaguar is an active partner with the real estate-related operating companies it invests in throughout Latin America, the aim being to build scalable, institutional-quality businesses.
The firm has just announced the final close of its first fund, Jaguar Real Estate Partners I LP (JREP), having raised USD350 million in discretionary and non-discretionary capital. JREP focuses on the most compelling markets in Latin America including Brazil, Mexico, Argentina, and the Andes region. Retail, residential (single family and multi family), speciality finance, logistics warehouse distribution, hospitality are just some of the investment opportunities the team looks for.
“Politically, we’ve seen a positive trend over the past 12 months in Latin America compared to the previous five or six years. There’s been a move away from the political left towards the centre ground in places like Argentina with former President Cristina Fernandez de Kirchner indicted and Pedro Pablo Kuczynski being elected in Peru. There are still outliers like Venezuela that remain an issue, but there is relative political stability, generally speaking,” comments McDonald.
He says that 20 years ago, real estate investing in Latin America was largely focused on capital intensive private growth businesses. There were no relevant public real estate companies, as such. Fast forward to today, and the public markets in countries like Mexico and Brazil are deep and vibrant ‘although I would say they are still in their first phase of evolution; some companies probably shouldn’t be public.
“This represents deep value opportunities: either right-sizing public companies, taking subsidiaries out of public companies, merging public companies and taking them private. Those kinds of opportunities have widened our universe substantially compared to 20 years ago. We have a combination of deep-value investments and more traditional growth investments in the JREP portfolio,” explains McDonald.
Over the past year Jaguar has committed in excess of USD200 million of capital in several portfolio companies including LatAm Logistic Properties (LLP), Brazilian retail property company Aliansce, and, most recently, Brazilian AEL home builder, Tenda.
Emerging markets generally require a great deal of experience and patience. There is often volatility and sometimes it can be significant. Where Jaguar brings value to its LPs is from having invested in Latin America for more than 20 years through different economic cycles.
“We are very familiar with companies like Tenda. These are companies we’ve either been directly involved with previously, or have worked with their management teams previously. The same applies to Aliansce, Brazil’s third or fourth largest commercial retail operator in Brazil. We believe there is still room for Brazil’s shopping mall sector to grow organically and also through consolidation,” opines McDonald, confirming that in the past, Jaguar’s partners have also worked with BR Malls, Brazil’s largest shopping mall operator.
“We participated on the investment committee and have acted as catalysts for the consolidation of the shopping mall industry in Brazil for the past 10 years. Investing in Aliansce therefore represented an opportunity for us to participate in what we see as the next stage of consolidation in Brazil’s shopping centre sector. It’s a company we know well, we know the board members so it was familiar territory for us. That’s not to suggest the investment process is easy. Choosing the right partners is the most difficult part of the equation.
“We draw on all of our experience when entering into any new investment opportunity,” explains McDonald.
Jaguar might, to some, be regarded as contrarian investors. At a time when private equity groups are looking at core markets in more developed markets, Jaguar is exploiting the chance to invest in under-valued real estate companies where there is less competition to put capital to work.
Asked where this level of conviction comes from, McDonald responds: “We’ve seen cycles over the past 20 years and frankly much prefer to be looking at investments when the airplanes aren’t full of people travelling from New York down to Brazil or Argentina. That’s when you find better opportunities and more attractive entry prices. If one considers the Aliansce deal – if you look at historic valuations, they were well below where traditional shopping centre operators had traded, mainly because of short-term concerns over Brazil – we had been looking at that deal for 18 months before actually pulling the trigger.”
Being patient, but also having the conviction and the ability to make an investment decision when the time is right, is key to investing in Emerging Markets, he says. “Our LPs are providing us with that responsibility and support in making those judgment calls. These are private equity investments not trades. We benefit from years of having studied these companies and become familiar with management. In every case, we’ve had year long conversations with management and gone through various iterations before arriving at the final deal.”
There are a couple of criteria that are consistent in all of the investments that Jaguar makes.
One is assessing the ability for the target company to build a scalable platform. The second is management. What is the quality of management, the alignment of management with shareholders in the target company? In most instances, management teams need to be improved, says McDonald. Having an understanding and agreement with the company’s founders and key shareholders on what needs to be done “is part of what goes into the work we do”.
Right now, he says that Jaguar particularly likes the logistics sector.
“It’s a sector we’ve invested in previously in Brazil, Mexico and China. In our first fund we have a logistics platform focusing on the Andean region called LatAm Logistics Property, which operates in Peru, Colombia, Costa Rica and Panama. We see opportunities beyond that in Argentina and Brazil that in some cases are more developed than the Andean region and yet are still under-penetrated versus more developed markets. We like the logistics space across LatAm as a whole.
“The majority of the fund is invested. We are working currently on our final investment for the fund, which will represent the conclusion of JREP’s investment activity,” confirms McDonald.
One of the key skills for any investment manager, is right sizing the deal. How does a manager know what the appropriate capital commitment should be for a specific investment opportunity, ensuring the optimum risk/return outcome?
McDonald says that, ultimately, it comes down to portfolio diversification.
“We think about that in four ways for the fund. One is geographic; the JREP I fund has two investments in Brazil, one in the Andean region and one in Mexico. The second is sector diversification; we have Aliansce on the retail side, Tenda on the homebuilding side, LLP on the logistics side, etc. The third component is the fact that we cover the spectrum from early-stage businesses to well-established public companies.
“The fourth and final component is, what does the business need for the next round of capital in the private space? And with respect to the public space, what size of participation in a business will allow us to have portfolio impact but also have a voice in the company by sitting on the board?
“We take each investment on a case-by-case basis but we will typically look at them through those four lenses.”
Building experience in Latin America, and other emerging markets, takes many years and requires boots on the ground to not only source deals but work with local partners to navigate the sociopolitical risks. As Jaguar has been active in Latin America for decades, McDonald says that the boards of target companies “understand our roles and desires and embrace us as catalysts for change. We will not invest in a company without the support of management and the board.”
Current investors in JREP I include prominent institutions such as New York Life. They were, says McDonald, looking for a trusted partner to provide them with access to emerging markets generally, as well as real estate and private equity specifically.
“We therefore ticked all three boxes. Another investor in the fund was looking for a regional approach as opposed to trying to pick the right country and the right manager and our model was very attractive for them; we ticked the emerging market, real estate and regional boxes for them,” adds McDonald.
Jaguar is currently in the process of completing the final deal in JREP I. “We participate in sectors that we think will be attractive to further investment and liquidity,” concludes McDonald.
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