After spending more than a decade shut out of credit markets and with a volatile history of economic prosperity and often collapse, Argentina may be the next investment play. At least according to Maglan Capital.
The New York-based event-driven hedge fund, which specializes in distressed situations, is launching the Maglan Argentina Opportunities Fund. The new fund, which launches in July and has a $100 million cap, will focus on equity and debt of small- and mid-cap Argentine corporations as well as companies that do business in the South American country.
It is a bold bet, but David Tawil of Maglan Capital doesn't shy away from bold moves. Prior to founding Maglan in 2011 he was an investment banker at Credit Suisse, where he focused on leveraged finance. Before that, he was an attorney focusing on bankruptcy and workout situations at Davis Polk & Wardwell.
"I get the best out of myself when my feet very close to the fire; I rise to the occasion. Also, I can't handle bureaucracy," Tawil said about his career path in an interview with Real Money on Thursday.
Perhaps this is why he is placing so much faith in Argentina's new president, Mauricio Macri, who is tasked with turning around a country plagued by decades of economic turmoil and corruption. Before being elected president, Macri served as Buenos Aires' mayor. Faith in Argentina's economic prospects appears to be growing as the country's $16.5 billion debt offering last month was met with high investor demand.
"It's essentially been offline for the past 15 years," Tawil said. "They've missed out on a lot of worldwide developments. They've taken their lumps -- 2008 hurt them as much as it hurt anybody else, but they haven't had the benefits of expansion over that period of time. Now's their time to go ahead and, in some ways, play catch up."
This is not to say that Argentina, or investors in the country, are going to have an easy time.
Although Argentina was one of the 10 wealthiest countries in the world prior to the start of the First World War, the last hundred years have been less kind. The latter half of the twentieth century saw the country succumb to a series of dictatorships and the economic and political uncertainty that goes along with it.
Most recently, the country was in a tailspin due to its shaky recovery from an economic crisis that led to it having five presidents in less than a two-week period in 2001 and 2002. President Cristina Kirchner, who was Argentina's President from 2007 to 2015 (serving after her husband Nestor, who led from 2003 to 2007) did little to quell fears. Her reign was marred with corruption scandals, the growth of the black market for U.S. dollars, and a long-standing dispute with Elliott Capital Management and other hedge funds over bond payments. (She famously called the funds "vultures.")
The history is a lot to digest, so why invest now?
"Mauricio Macri is the most accomplished leader in the free world and he's only been in office all of six months," Tawil said. Macri received similar praise from President Obama in March; Obama called Macri a "man in hurry" due to his success in lifting the capital and trade controls imposed by the previous administration as well as securing a deal with the country's creditors.
Maglan's interest in Argentina is not new. It was piqued a few years ago based on investments Canadian-based Madalena Energy made into the region.
"It's always been something that's been interesting to us, but not from an investment perspective," Tawil said. "Nevertheless, some of the best investments start out that way."
From Argentina's commitment to energy independence, Tawil sees positive spillover effects in the country's banking and professional services sector.
However, growth of the financial sector depends in part on citizen's trust in the system, which has been poor. For example, in the years following the economic crisis of 2001 and 2002, citizens were known to operate outside of their banking systems. Stacks of U.S. dollars were kept in homes, dollar to peso exchanges occurred in the black market, and members of the country's international population often relied on their dual citizenship to store money in European banks.
Tawil sees a positive change coming on that front, though it may take a year or more for trust to be restored in the system. One of the first areas to see a boost could be real estate. Most real estate transactions have been handled in cash, often U.S. dollars vs. pesos, but Tawil believes careful growth in lending could help.
"You inject a little bit of leverage -- just a healthy amount -- in a system and all of a sudden, the prices that people can pay are much higher than they were able to when it was just cash," Tawil said.
As for his fund's advantage, Tawil credits his firm's deep knowledge of Argentina's close-knit business community, which should prevent the crowding-in effect seen in so many hedge fund plays.
"I don't think the average multi-billion dollar fund is going to be able to dedicate resources and raise capital to justify investing, and that's where we think we've found a good investment niche, which is we'll raise $100 million and successfully put it to work in a region that has tremendous tailwinds."
