GP Investments’ Octavio Lopes: ‘The Whole World Is Deleveraging’

Octavio Lopes, senior partner of private equity firm GP Investments, is in the middle of raising what might be the largest private equity fund ever for Latin America. In a podcast recorded in Sao Paulo, Lopes discusses the prospects for investing in Brazil and Latin America, where he thinks commodity prices are headed, and how the discovery of oil in places like Brazil, Colombia and Mexico will affect the local and regional economy.

An edited transcript of the podcast appears below: 

Knowledge@Wharton: Could you tell us about GP Investments?

Lopes: GP is the leading private equity firm in Latin America. We have been around for 15 years, structured as a typical private equity firm from around the globe with a slight difference in that we are usually the largest investors in our private equity funds. We see ourselves not only as managers of third-party capital but also as principal investors. Most of our investments have been done in Brazil, but we look at investments across the region. We invest in every possible industry. We are opportunistic in how we select transactions and we usually look for companies where we can implement change.

Knowledge@Wharton: What amount of assets do you have under management?

Lopes: We have assets under management of about $2 billion; our total commitments to-date amount to about $4.5 billion…. We just started fundraising a few months ago [on our] fifth fund, and we had a first closing of $1 billion. The previous one — Fund 4 — was $1.3 billion and that is fully invested.

Knowledge@Wharton: How are investors in Brazil reacting to what is happening in the world financial markets?

Lopes: If you look at the public markets, investors are basically cutting out wherever they can. Brazil being the most liquid emerging market, the public market has suffered a lot. If hedge funds across the globe want to get out of emerging market risk, the easiest one to sell is certainly Brazil. So Brazil is one exchange that has suffered the most over the course of the year. So that goes for public investors.

On the private side, what is interesting is that we continue to see a lot of interest [from] endowments and sovereign funds as well as pension funds in the U.S. They see Brazil as a long-term exposure that they want to have. Usually they have very little exposure to the region. We are fundraising right now, and we are optimistic that we are going to be able to raise a considerable [amount] — actually, the largest fund ever raised for Latin America. Our previous fund was the largest fund at $1.3 billion and we expect [the new fund] should be beyond that. So there is still a lot of interest, especially for Brazil.

When investors across the globe look at Brazil and investors have a long-term view, they look at the macro changes that were implemented over the last 15 years and look at how strong the economy is in terms of growth nowadays. Of course, with the worldwide crisis, credit is becoming less available, companies in general are cutting their capital expenditure plans, and we are going to suffer a little bit, but we still should be growing at around 3% next year.

Knowledge@Wharton: News reports suggest that in the U.S. this could possibly turn out to be the worst year for stocks since 1937. For smart investors, this creates buying opportunities. Where would you look for bargains?

Lopes: We are a private investor and we only look for private opportunities, but if you are a public investor, I agree. If you have liquid assets, if you have a long-term vision, if you are Warren Buffett, then [this] is probably best time ever because there are going to be amazing companies [available at reasonable prices]. If you look at Brazil — the cyclical stocks like Vale and Petrobras, which are amazing companies that are really well run and have access to the best reserves across the globe — they are trading down considerably. Basically they are trading at a world catastrophe [level]. People will still be riding their cars and consuming basic goods a year, two years from now. Across the globe, there are amazing opportunities and I think emerging markets are a nice place to be nowadays …

What has happened for the first time at least in my professional life is that if you look at Brazil, China, Russia, and emerging markets in general, they should do better over the course of the crisis than the traditional markets in U.S. and in Europe. Usually we say, if the U.S. gets a cold, Brazil would spend a year in the hospital. Now we believe it is the other way around. Brazil should survive the crisis well. If you look at the real economy in Brazil, it is still the best economic times that we [have] ever had or that we had over the last 30 years or so.

Knowledge@Wharton: How do you see the prospect for commodities?

Lopes: That is a big question. There has been a major adjustment in commodity prices. We do not invest directly [in commodities] but, for example, we are the controlling shareholders of the largest oilfield service companies in the region. Our clients are worried nowadays, but my view is that there has been a reasonable adjustment. There was a commodity bubble when oil was trading at $140, but I personally do not expect commodity prices, be they for minerals [or] agricultural commodities, to come back to the levels they were four years ago. The emergence of China and India has shifted the commodity prices for the long-term, but it is going to be very bumpy ride. If you follow oil prices on a daily basis on the screen, it is pretty scary right now.

Knowledge@Wharton: Where do you think oil prices will be next year?

Lopes: Most of the Street now has revised the 2009 oil price numbers from $100-$110 [per barrel] to $80-$90.

Knowledge@Wharton: For Brazil this is significant because I understand that billions of barrels of offshore oil reserves were discovered four miles under the ocean.

Lopes: Yes.

Knowledge@Wharton: If this supply is tapped, will it turn Brazil into an oil superpower?

Lopes: I do not know exactly what an oil superpower is, but certainly Brazil should become a major exporter of oil over the long term. Those reserves apparently are huge, but they are not easily accessible. You are talking about 6,000 ft. of water plus another up to 8,000 ft. to 10,000 ft. of solid ground that you have to drill to get there. But eventually they will. If oil prices are at $70 to $80 a barrel, we expect [in] the broader long term that that oil will get out of the ground and then it will be important to Brazil.

It is also a risk. Oil-rich countries usually are not very well run. Brazil will need to be smart about how to deal with that and to not waste all that wealth at once. But it is important for the country and for us, given that we have a very large exposure to oil field services. We are very excited about the billions of dollars of capital expenditures that will be needed to get that oil out of the ground.

Knowledge@Wharton: How much will it cost to tap into these oil reserves? How long is it going to take and how will it change the equation of the oil market in this region?

Lopes: It is an important quantity of oil but it is not something that will shift the world’s supply balance. Generally, what Petrobras and other experts indicate is that the so-called presalt reserves — [so named] because they are below big chunk of salts — will be commercially explored starting in 2015 to 2017. So it is a few years down the road.

Generally for Brazil it will mean that in the long term, Brazil will become a net exporter of oil. Brazil was a net exporter for some time last year, and has become a net importer again this year. It is an important shift for the balance of payments in Brazil. Of course, the commodity price adjustment that happened over the last five years has completely changed the exchange rate dynamics in Brazil — getting dollars has become much easier for Brazil — so that should continue [being] the case moving forward.

Generally, the oil industry is booming in Latin America and … it is booming with oil at $70. We do not need $100 a barrel or $140 a barrel for this to continue to boom. So you have Colombia partially privatized in Ecopetrol, which is the local oil company. They are doing heavy investments. They believe that there is offshore oil off the coast of Colombia as well. Mexico is moving into a new onshore field, Chicontepec, which is really important and is going to demand very heavy investments. There is more oil to be explored in Argentina. It has not been explored right now because it has a very inadequate regulatory framework right now, but we do expect that to change. People focus a lot on Venezuela because of all that is happening [there] and how production is going down. But if you take the whole region into account, the fastest growing region in the world from a small base in terms of oil production is actually Latin America.

Knowledge@Wharton: Which companies do you think are best-positioned to take advantage of this trend?

Lopes: I do not know if it is positive or negative but, in general, following a worldwide trend, the national companies are the ones that are taking advantage. That includes Petrobras in Brazil; PEMEX in Mexico, which is a monopoly; Petroleos de Venezuela is also a monopoly; Ecopetrol in Colombia, which is not a monopoly but similar to Petrobras in Brazil — it has a very strong presence in the market. I think [these] are the ones that should benefit the most. They are not alone — for example, British Gas participated in a lot of the discoveries that happened in Brazil, the presalt discoveries, and there was a complete change in the size of the company because of those discoveries. There is larger gain for both national companies and internationals, and also for service companies. In Brazil, some $150 billion in capital expenditure will be needed over the next 10 years by Petrobras alone. It is a lot of money.

Knowledge@Wharton: Do you see any losers?

Lopes: Probably not. It is a positive movement and it is positive for the countries because it creates massive demand for labor. Picking one example … Brazil back in the 1970s had some important shipyards and was an important player in the ship construction industry worldwide. That industry was completely destroyed during the 1980s and the 1990s and it is starting to be revived because the number of vessels that are needed by Petrobras is in the hundreds. This is an industry that consumes massive amounts of workforce…tens of thousands of skilled workers are needed. If it is well managed, this movement will be very positive for the region as a whole.

Knowledge@Wharton: Will this surge of oil supply have any negative effect on efforts to build green energy in Brazil?

Lopes: I do not think so. Green energy is still marginal compared to the global equation. Brazil is already the largest producer of ethanol. It is also the largest producer of the green ethanol, which is the sugarcane ethanol. Brazil is also participating on the renewables factor, which is also a factor contributing to high commodity prices. A large portion of land in Brazil is dedicated to sugarcane … But of course land and water are becoming more scarce assets because of the need to produce renewable [energy] as well.

Knowledge@Wharton: What advice are you giving to investors these days?

Lopes: Stay put, and wait for better times. That is our general view. These are complicated times and generally we are usually more concerned about our companies doing well. We have a large portfolio of companies so we are in a good position because we use very little leverage. We do not have any refinancing risk in our companies. These days we need old-style management — being conservative, having a safe balance sheet, taking careful decisions on how you manage your cash flows and how you manage your cash. That is what everybody is doing. That is why the whole world is deleveraging, and asset prices are going down. But if you are a long-term investor, the prospects, if you look five or 10 years out, have never been better.

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