Distressed assets put Brazil at the center of emerging markets opportunities

StoneX Prime News

By Hugh Leask

With Russia and China looking increasingly uninvestable for emerging markets investors, the coming 12 months offer “an amazing environment” for distressed and special situations opportunities in Brazil amid a shifting inflationary and interest rate backdrop, according to Brunel Partners, a Latin American-focused capital advisory and placement agent.

Established in 2015, Brunel Partners has worked with an assortment of firms focused on a range of asset classes and strategies spanning liquid funds, venture capital, hedge funds and traditional private equity approaches, including growth and buyout funds.

Partner and Co-Founder Daniel Rummery describes the São Paulo-based firm – which has raised between $2.5 billion and $3 billion of inward investment from international investors over the last six years - as a “boots-on-the-ground” operation, with a team of 15 comprising a mix of British and Brazilian staff.

“The opportunity set here is really strong here,” Rummery said of the prevailing investment landscape, particularly within the distressed and special situations sphere where a growing number of companies face bankruptcy pressures amid the high interest rate and inflationary backdrop in the aftermath of the COVID-19 pandemic.

Delayed distress

The firm recently partnered with Jive Investments, the largest distressed asset manager in Brazil, on fundraising for its latest Jive Distressed and Special Situation IV fund, which is targeting investment opportunities in corporate credit, real estate assets and legal claims among mid-to-large cap companies under pressure.

The fund had its first close on July 1 following a six-month fundraising process, having attracted $560 million from investors. São Paulo-headquartered Jive is now working on a second and final close towards the end of this year or Q1 2024, with a target of $1 billion and a hard cap of $1.2 billion.

According to Rummery, Jive is “as excited by the current environment as it has been for any of its previous funds”. He said the current unfolding economic landscape is similar to when Jive was raising capital for its first fund, where interest rates had been high for a sustained period of time, at around 14%.

“The market’s not easy at the moment globally, so we were very pleased to reach $560 million dollars in total fundraising for that that first close,” Rummery told Alternatives Watch in a recent interview. “We’ve gone through different cycles for Brazil over the years - we had Brazil’s worst-ever recession when Jive started, which was in 2015, with a negative 10% GDP growth in 2015 and 2016. That’s really the genesis of how Jive came to exist in distressed assets, and how it built what is now the largest distressed assets fund manager for Latin America.”

As Brazil’s government increased liquidity support for the country’s financial system during the pandemic, that helped temporary ease the pressures faced by corporates from banks and other lenders. “It’s the same story across the world – interest rates were kept artificially low, and then coming out of Covid-19 interest rates were hiked,” he said.

“Yet because of the historical nature of inflation and the wariness of inflation here, when Brazil hikes, they really do hike pretty quickly,” Rummery explained, recalling how Brazil went from 14% rates in 2015, down to 2% in 2019, and then back to almost 14% post-pandemic. “There has been a lot of delayed distress building up, as companies who would otherwise have been in distress during COVID had been given a free pass.”

Unique edge

Now, as Brazil’s central bank commenced rate cuts earlier this month, with a 50-basis points reduction bringing the current rate to 13.25%, the next 6-to-12 months look set to be “an amazing environment” for Jive to purchase assets while companies continue to feel the impact of the recent high interest rate backdrop.

“The banks are actually coming through and foreclosing or restructuring loans, which is where Jive plays mostly, and so you are now starting to see a large increase in the number of restructurings or bankruptcies in the last six months,” Rummery said.

While certain industries are currently performing well in Brazil, namely agriculture, others such as infrastructure continues to face pressures. He added that with 250 employees, Jive’s servicing platform capabilities lends the firm a strong competitive advantage in distressed investing in Brazil.

“Jive’s unique edge is its ability to go to the banks and buy up these portfolios of bad loans, restructure them and help clean up the capital market system,” Rummery explained. “They can do that across all sectors - there are not many other groups which have that kind of capability.”

Jive’s strategies have a strong distribution among Brazilian family offices, while its offshore client base comprises a mix of institutional investors, including a large sovereign wealth fund, and international family offices in the U.S. and Europe.

“Jive has maybe a hundred different families investing with them in Brazil – that helps if they need to reference-check or find out more information on a potential asset or a business that they're looking at. They can use that network to take a deeper dive. From cosmetics business to oil and gas to infrastructure to real estate developers, Jive’s team can quickly get a grip on a certain company using that network.”

Game-changer

Structurally, Jive’s strategy does not fit into a traditional private equity bucket in investors’ portfolios.

Rummery noted: “It’s a slightly more mixed approach. Essentially it’s private equity-esque returns with credit risk, but at six years, it’s shorter duration than private equity. Many of the assets are relatively short-term, at around 12-18 months. Fundamentally Jive are credit investors – they don’t take equity risk. Yet because it’s special situations and distressed, Jive is able to get 20+% returns in dollars, which is important.”

Delving deeper, Rummery also pinpointed currency as “super critical” issue for investment managers actively fundraising in Brazil at the moment.

“Historically, the currency has been very expensive to hedge, and most managers have not hedged the currency, which often led to weaker performance and returns in U.S. dollars,” he said.

Fundamental investments have not been bad necessarily, but because the currency had depreciated significantly over the last six or seven years - from as low as 1.6 in 2012 to 5.5 last year there has been a huge drag on U.S. dollar performance.

“But what Jive has been able to do since Fund III, which has been a huge positive for them, is that they were able to create a hedged share class,” Rummery explained. “That allows them to hedge into dollars, costing around 2% a year of the return. So there’s not this huge differential between what you generate in Brazilian reals and what you’re generating in dollars.”

He described the hedge as a game-changer in terms of raising money.

A shifting narrative

Reflecting on recent macroeconomic and investment trends, Rummery acknowledged that Brazil has been a tough market to sell to investors over the past few years despite a boom in the venture market.

However, as Brazil begins to cut interest rates ahead of the curve, with inflation heading towards being among the lowest out of the major economies, the macro narrative is beginning shift, particularly within the emerging markets space.

“The opportunity set in Brazil is either more in the special situation sector, where you can generate 20%+ IRRs net in dollars - not always distressed, but more of a downside protection with kind of equity upside approach. Or, there is the mid-market private equity space in Brazil, which is also very interesting,” he said.

“Jive is not the only fund we work with – we work with 15 different groups, all doing something slightly different. While Jive is on the credit side, there are a number of other funds which are more equity-style that are active in distressed. People like Starboard, which is part of Apollo, who we work with.

According to Rummery, for investors looking to allocate to emerging markets, there are not many large markets in which to invest where the rule of law works and is performing reasonably well.

“Clearly Russia is uninvestable, and will remain so for a long time. Eastern Europe, because of Russia, is also difficult,” he added. “China has become uninvestable for almost all of our institutional clients in the U.S. China had become a huge market and was a large allocation of capital for investors’ emerging markets focus, but I don’t see any of the large pension plans and foundations and endowments investing in China anymore. Then there’s India, which has become expensive.”

That leaves Brazil and the related Latin American region.

“We’re heading into a potentially heading into an environment where asset managers in the Lat-Am region, and this includes Mexico, should see some good flows in the next two to three years,” he commented.

This article, “Distressed assets put Brazil at the center of emerging markets opportunities” was originally published on August 21, 2023 on Alternatives Watch and is republished here with permission from BMV Digital, Inc.


See why StoneX is a partner of choice

Have questions about our products or services? We're ready to help.
See why StoneX is a partner of choice
StoneX: We open markets

Our market expertise, advanced platforms, global reach, culture of full transparency and commitment to our clients’ success all set us apart in the financial marketplace.

  • Partnership icon
    Globality

    With access to 36+ derivatives exchanges, 180+ foreign exchange markets, nearly every global securities marketplace and numerous bi-lateral liquidity venues, StoneX’s digital network and deep relationships can take clients anywhere they want to go.

  • Price tag
    Transparency

    As a publicly traded company meeting the highest standards of regulatory compliance in the markets we serve; our financials and record of accomplishment are matters of public record. StoneX’s commitment to “doing the right thing over the easy thing” sets us apart in the industry and helps us build respect, client trust and new partnerships.

  • PC Monitor Blue
    Expertise

    From our proprietary Market Intelligence platform, to “boots on the ground” expertise from award-winning traders and professionals, we connect our clients directly to actionable insights they can use to make more informed decisions and achieve their goals in the global markets.

Request more information

+
!

By submitting this form, you are sending StoneX Group Inc. and its subsidiaries your personal information to be used for marketing purposes. View our  Privacy notice  to learn more.

By submitting this form, you are sending StoneX Group Inc. and its subsidiaries your personal information to be used for marketing purposes. View our  Privacy notice  to learn more.

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

StoneX Outsourced Trading services are provided by StoneX Outsourced Services LLC, an SEC and CFTC registered broker dealer and member of FINRA, NFA and SIPC. The information contained herein is not intended to provide a sufficient basis on which to make an investment decision and should not be regarded as an offer to sell or a solicitation of an offer to buy any security or financial product. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Advisor. References to securities trading and prime services are made on behalf of the BD Division of SFI. References to exchange-traded futures and options are made on behalf of the FCM Division of SFI. You can learn more about the background of StoneX Financial Inc. on BrokerCheck.

StoneX Financial Inc. and StoneX Outsourced Services LLC are wholly-owned subsidiaries of StoneX Group Inc. Securities products offered by StoneX Financial Inc. (“SFI”) & StoneX Outsourced Services LLC are intended only for an audience of institutional clients only. Securities products offered by StoneX Securities Inc. and investment advisory services offered by StoneX Advisors Inc. are intended for an audience of retail clients only.

StoneX Financial Ltd (“SFL”) all rights reserved, is registered in England and Wales, company no. 5616586. SFL is authorised and regulated by the Financial Conduct Authority (registration number FRN:446717) to provide services to professional and eligible customers including: arrangement, execution and, where required, clearing derivative transactions in exchange traded futures and options. SFL is also authorised to engage in the arrangement and execution of transactions in certain OTC products, certain securities trading, safeguarding and administration of assets and precious metals trading. SFL is authorised and regulated by the Financial Conduct Authority under the Payment Services Regulations 2017 for the provision of payment services. SFL is a category 1 ring-dealing member of the London Metal Exchange.

StoneX Financial Pte Ltd (Co. Reg. No 201130598R) (“SFP”) is regulated by the Monetary Authority of Singapore (“MAS”). SFP holds an MAS Capital Markets Services License for Dealing in Securities, Units in Collective Investment Schemes, Exchange-Traded Derivatives Contracts, OTC Derivatives Contracts, and Spot Foreign Exchange Contracts for Leveraged Foreign Exchange Trading, an MAS Major Payment Institution License for Cross Border Money Transfer Services, and is an MAS Exempt Financial Adviser.

Options are not suitable for all investors. There are risks involved in any option strategy. Individuals should not enter into option transactions until they have read and understood the option disclosure document titled "Characteristics and Risks of Standardized Options," which outlines the purposes and risks of option transactions. This booklet is available from your Financial Advisor or on the OCC website. Supporting documentation of claims will be supplied upon request.

Hedge Funds are unregistered private investment partnerships, funds or pools that may invest and trade in many different markets, strategies and instruments (including securities, non-securities and derivatives) and are NOT subject to the same regulatory requirements as mutual funds, including mutual fund requirements to provide certain periodic and standardized pricing and valuation information to investors. Hedge Funds represent speculative investments and involve a high degree of risk. An investor could lose all or a substantial portion of his/her investment. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment.

Trading financial instruments involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any product or service or enter into any transaction. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

Trading futures involves the risk of loss and is not suitable for all investors. Please consider carefully whether futures are appropriate to your financial situation. Only risk capital should be used when trading futures. Investors could lose more than their initial investment. You must review customer account agreement prior to establishing an account. Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Additional disclosures can be found on www.stonex.com/disclosures.

©2024 StoneX Group Inc. All Rights Reserved.