I keep a pretty close eye on what private equity (PE) investors are doing with their cash. Their buying-and-selling activities can often give solid insight into the valuation of a particular sector or asset class. Their focus on valuation and extended time frames is very similar to my own, so it makes sense for me to look for coattail opportunities.
I subscribe to several private equity news sites and have word searches set up in Google (GOOG, GOOGL) news for industry leaders such as Leon Black, David Rubenstein and Henry Kravis. I track them as closely as I do the leading value investors as I detect ideas to steal in my ongoing search for long-term market profits.
In the past couple of weeks, there has been a substantial amount of talk in the PE world about Brazil. Carlyle Group is raising a fund to take advantage of low asset prices and corporate valuations there. Gavea, a Brazilian based PE-fund run by a former Brazilina Central Bank president, is raising a $1 billion fund . So is Patria Investments, another Brazilian based fund that Blackstone (BX) has invested in. Kohlberg Kravis and Roberts (KKR) just made its first investment in Brazil by purchasing a data center company called Aceco. GP Investments is said to be increasing its stake in its home country by focusing on infrastructure and real estate related deals this year.
Private equity investors seem to be taking Sir John Templeton's advice in Brazil. For long-term bargains, the legendary value investor advised avoiding the best economies in the world and shopping in the worst economies. Brazil certainly qualifies on that count as the country is seeing slower growth and rising inflation in a scenario much like the morass the U.S. experienced in the 1970s.
Rating firm Moody's recently said of Brazil: "The credit-negative trends of lower growth and higher inflation suggest that macroeconomic conditions will not improve during the rest of the year, even after uncertainty surrounding the coming October general election fades away. Accordingly, we now expect lower real GDP growth of 1.3% in 2014 and 1.5% in 2015, with risks tilted toward the downside."
Although the Brazilian equity markets have rallied a bit since bottoming in March of this year, there are still some bargains to be found by individual investors. While the market is off the bottom, it is still about 40% below the 2008 peaks. I ran a quick screen this morning and found several Brazilian bargains that still trade below book value.
Gafisa (GFA) is a Brazilian homebuilder whose continued existence was called into question several times during the worst of the global financial crisis. The company has since sold some divisions to raise cash and now it looks like it can survive until it can thrive again in the future. The stock is trading at about half of book value so there is enormous upside in the stock if Brazil gets even a hint of a long-term recovery.
Centrais Electricas Brasileiras (EBR) or Electrobras is one of the cheapest stocks in the world -- the stock is currently trading at 20% of book value. The weak economy and adverse regulatory policies from the Brazilian government have hurt the company and the share price but that could change dramatically after the October elections. If shares of Electrobras doubled over the next couple of years, they would still trade at just half the pre-crisis highs.
Brasilagro Companhia Brasileira de Propriedades Agr (LND) is in the agriculture, cattle and forestry business in Brazil. They own owns nine farms with an area of 160,815 hectares six Brazilian states. Although stagflation could hurt short-term results the company could see operating results and land values improve substantially when the economy turns in the right direction. The stock trades right around book value at the current price.
Private equity funds are starting to look at Brazil as the land of long-term opportunity. If President Dilma Rousseff loses the October election, things could turn around quickly. Even if she wins re-election, she will have to change polices in a direction that will eventually lead to an economic recovery and much higher asset values and stock prices. Following the PE funds into the Latin American nation is probably a sound idea for long-term investors.
