Although exits may not be easy to come by, there won’t be any shortage of opportunities for private equity funds over the next couple of years, according to Paulo Henrique De Oliveira Santos, CEO of Votorantim Novos Negocios (VNN), the venture capital and private equity division of Brazilian industrial group Votorantim. In a recent interview with Knowledge at Wharton, Santos discussed how the shortage of liquidity, stalled growth and other symptoms of the ongoing credit crisis — along with new areas for venture capital investment like green energy — add up to “new business” for companies like VNN.  

An edited transcript of the conversation follows.

Knowledge at Wharton: Our guest today is Paulo Henrique De Oliveira Santos, CEO of Votorantim Novos Negocios (VNN), the venture capital and private equity division of Votorantim, a Brazilian industrial group. Thank you for joining us today.

Santos: You’re welcome.

Knowledge at Wharton: I would like to start with a question that is probably on everybody’s mind these days: What are your thoughts on the world financial crisis, and what has been the impact on the Brazilian economy?

Santos: I think nobody knows what is going to happen. Everybody is scared. And let us see if the measures that the governments in the U.S. and Europe are taking are going to solve the problem. It is going to take a while to solve everything.

In Brazil, the situation is not going to be different, I think. Right now, we are suffering from a liquidity problem. The foreign banks and the Brazilian banks are having a liquidity problem, and it is [affecting] the real economy…. And it is going to hurt Brazil, I think. It is difficult to say what will be the magnitude of the problem that we are going to have here, but it is going to be, I think, a very, very difficult time next year in Brazil.

Knowledge at Wharton: Specifically, how do you see private equity being affected?

Santos: Private equity, I think, is a bit different…. Last year, and the year before, prices of assets here were high, very high. Now, with this kind of market, we are seeing some adjustment on these prices. And I think the private equity and the venture capital industry — especially private equity — is going to have a lot of opportunities [at] a fair price — better prices than two years ago.

Knowledge at Wharton: Where are these good opportunities?

Santos: Everywhere — in every single industry. It is hard to say any specific example, but in every single industry we are going to see opportunities because of this lack of liquidity, because of the lack of growth. Sooner or later, the market is going to come back. And I think next year is going to be the right time to position your investments.

Knowledge at Wharton: You mentioned the impact on the real economy. How long do you think the turnaround will take? Any guesses on your part?

Santos: It is a guessing [game], right, because nobody knows what is going to happen. But I would say at least one and a half years.

There are some people who are saying that in six, seven or eight months, we are going to see the market coming back. I think it is going to be longer than that. My [guess] is 18 months at least.

Knowledge at Wharton: What do you think is going to be the impact on IPOs?

Santos: IPOs [are] probably going to be [scarce] for around two years in Brazil, especially because there will be opportunities outside Brazil in more mature markets for IPOs.

Knowledge at Wharton: Do you see this as a problem only within Brazil or also internationally? Will there be any exit strategies possible for venture-funded companies?

Santos: It depends on what stage you are at with your company. In our case, for example, we do not [see a problem]. I mean, [whether we are looking ahead] 24 months or 36 months, we do not see any kind of problem because our fund … is an open-ended fund. So, we are patient.

Our companies are generating cash and we are pretty much okay. But there are some funds that are going to be liquidated or will have to be liquidated next year, for example. And they will have to postpone the liquidation because there is no market for them, unless they sell the company to another private equity fund or to another strategic buyer. [Any] IPO is going to be difficult next year.

Knowledge at Wharton: Another, somewhat related problem is that for a long time, the real was appreciating against the dollar, and suddenly the opposite has begun to happen. I have heard that there are companies that had made some derivative bets against this not happening, and they are suffering now. Is there any chance that this could affect Votorantim?

Santos: It has affected Votorantim in a way. Last week, we released statements saying that this kind of transaction … caused us to [change our strategy to avoid further exposure]. And some other companies will release the same kind of statement because a lot of companies were in the same position that we were in until recently.

In our case, we are a cash-rich company. We generate a lot of cash as well. That is not a big issue. It is part of the business. But some companies are going to suffer more than others. Let us see what happens.

I think it is worth mentioning that these companies were not speculating on the dollar. Most of these companies are exporters…. They were hedging their costs with [financial instruments].

What is going to happen now because of this appreciation of the dollar [is that] things for the exporter are going to be much better than they were. I think the positive side of this crisis is the foreign exchange rate. At least right now, we hope that it is going to be [at] a fair level for our currency.

Knowledge at Wharton: You referred to your company and especially the VNN part of the operation. Could you explain a little bit of the background and the philosophy that you have regarding venture capital and private equity?

Santos: We started this operation here eight years ago. The idea at that time was to invest in venture capital. It was the end of the Internet era and at that time we saw a lot of small entrepreneurs making a lot of money. So we decided to set up a company that would invest in the companies that were coming to the market at that time.

So, the Internet bubble exploded and we decided to transform Votorantim Venture Capital at that time to Votorantim New Business. Votorantim New Business means private equity and venture capital as well. And we are right now focusing on three major areas here which are IT BPO, biotech, and mineral exploration. We have been investing in biotech since our inception in 2000; IT, the same; and mineral exploration [we began investing in] about two years ago.

Knowledge at Wharton: Could you give me some examples of the kind of investments you have made and your philosophy behind making the choices?

Santos: Our main focus is operations and strategy. It is less [focused] on the financial side of the business, more on the operation and strategy. It is part of the DNA of the group. It has always been this way. On the biotech side, we set up two companies, one called Alellyx and the other one called CanaVialis.

Mainly, the two companies focus on developing new varieties of sugarcane, GMO and non-GMO sugarcane varieties. We are the only company doing this in Brazil…. We have 150 researchers, scientists, working with us there. And we started this company from scratch.

On the IT-BPO side, we have right now, I think, one of the largest Brazilian IT companies, and we started it also from scratch, from zero.

On the mineral exploration side, a pretty new area, we are exploring some good areas where we see a lot of potential.

Knowledge at Wharton: Going back to the biotech side, could you explain a little bit about how you see the potential of that business and the positioning of your firm within that business?

Santos: As you probably know, the sugarcane industry in Brazil is pretty strong. It is growing and we see a lot of potential there. And until we set up these two companies, the technology did not exist. And because of this, because we were kind of alone in the marketing, we see a lot of potential for our company because of the potential of the area. We are linked to the sugarcane industry in Brazil.

Knowledge at Wharton: There is also the fact that there is a lot of impetus towards green energy.

Santos: Yes.

Knowledge at Wharton: Could you explain your strategy in that overall field, and do you plan to make any more investments in that area?

Santos: We just announced yesterday a co-investment with other investors in a company … which has developed … [technology] to transform sugarcane into diesel — it was announced yesterday. And this is the kind of stuff that we are trying to invest in. And we are continually trying to do something in the space of green energy and the related businesses.

Knowledge at Wharton: So clearly, you have quite a lot of interesting investments. How do you choose your investments?

Santos: As I said, we are focusing on three areas. And we have a specialist in each of these three areas — that is how we choose them.

Knowledge at Wharton: Could you tell me your major priorities for the next three to five years? What are you planning to focus on or invest in?

Santos: It is worth mentioning that the money [for investment] comes from the parent company, 100% of our money. We have no outside investors. So, this discussion is going on with the shareholders of the group.

We have $300 million to invest; it is the capital committed by the group. We have no limits. As long as the group has cash and as long as we have good projects, we present these projects to the group and they can give us more money if it is necessary. But it is difficult to say how much we are going to invest in the future because first projects have to come and we have to check if we have the desire to invest as a group.

Knowledge at Wharton: What are some of the major risk factors that keep you up at night when you think about the short term?

Santos: In terms of what is going on right now in the market, right? It is management, basically. I think the most important thing when we invest in a company is the management team. And this is what concerns me more for the next three to five years — thinking about how we are going to invest and where we can find a good management team.

Knowledge at Wharton: Speaking of management, could you tell me a little bit about your own personal journey and how you came to be doing what you are doing today?

Santos: Okay, I am an engineer. I started as a banker many, many years ago, 20 something years ago. I worked here in Brazil and in New York. I came back here and joined Votorantim Bank, in its beginning. Then, I went to the industrial part of the group. I helped them to acquire some companies during the privatization process here in Brazil.

Then, I went to turnaround three of our mining companies. Then they invited me to set up this company here. I spent, in ’88, a year in the private equity fund here in Brazil, a Brazilian private equity fund. That is my experience. That is why I became a venture capitalist/private equity investor.

Knowledge at Wharton: If you were to think back on your career, what would you say is the toughest leadership challenge you have faced? How did you overcome it, and what did you learn from it?

Santos: I think it was the turnaround of these companies in Votorantim. The situation was quite delicate at that time and we had to replace a lot of people, and some tough decisions had to be made. And I think this was very difficult.

Knowledge at Wharton: For people who may not know the background and the context, could you explain the situation and why it was tough?

Santos: The three companies were losing around $15 million per year, and the revenues were around $200 million. And the shareholders were concerned about the future of the company, so then they invited me to help to do the turnaround.

After three years, when we left the company — because it was not myself only, it was myself and another person together with other colleagues — the three companies were making money, US$100 million in EBITDA, which is a tremendous turnaround. And everybody was happy with the type of work we did. And to replace people in an environment like that — during a kind of recession, the country was not growing as well — it was very difficult and [they were] people that were with the group for many, many years. So, it was very tough.

But, of course, you learn a lot when you do something like that, and I learned a lot — and also when I set up this company, Votorantim New Business, because I started it from zero and a blank piece of paper, and I got to do something. And I started doing this without any support, let us say, but I think it has been quite successful and we are doing well, a very good experience.

Knowledge at Wharton: One last question. How do you define success?

Santos: How do I define success? It is when you learn the people who work for you are happy with the environment and with the results — not only you, but the people who are working with you.

Knowledge at Wharton: Thank you very much for your time today.

Santos: Thank you.