Alternative Latin Investor: Issue 12 by Alternative Emerging Investor

Agribusiness

Issue 12

Social Housing

Investment Opportunities in Brazil

Colombia PrivateEquity Investment

A Recap of the Bloomberg

MILA Conference

Hedge Fund

FOCUS 1 Parque de la Luz Medellin, Colombia

Contents

Sectors

Issue Focus: Private Equity

Renewable Energy Argentina’s Renewable Energy Industry: Revealing the Enormous Potential of the Country........................................................6 Philanthropy Big River Foundation: Preserving LatAm’s one remaining kingdom .......................40

Hedge Funds Brazilian Pension Funds Expand their Horizons (PREMIUM)..........................14

Ventures Loogla: multimedia second language learning platform .....................................44 Political Moves Brought to you by LatinNews.com.......16 Art The Museum of Latin American Art – Buenos Aires - Turns 10 ...........................25

Meta-Trends in LatAm Investment: Interview with Daniel Enskat (PREMIUM)..10 LatAm Hedge Fund Round Overview (PREMIUM)............................................37

Infrastructure Infrastructure Debt Funds & Exchange Rate Risk in Latin America ....................46 Emerging Markets Alternative Latin Investor Profiles LatAm Expert: John Price....................................28 12% - Understanding Brazil’s Interest Rates (PREMIUM).................................43

Diversifying outside and within Brazil (PREMIUM)...........................................24 American Business Practices in Brazil: A Contrarian’s View (PREMIUM)...........59

40 25

Regulation FDI Regulation and Public-Private Partnerships in Brazil......................................33

Cover Stories Real Estate Minha Casa Minha Vida: A Look at Social Housing Investment Opportunities in Brazil......................................................30

37 10

Private Equity Colombian Investment Advice: Access Local Knowledge......................................11 Hedge Funds A Recap of the Bloomberg MILA Conference................................................18

Agribusiness Limes: Big Business in Latin America..35 Interview with Brazilian Agritech V Francisco Jardim (PREMIUM)...........48

36 3

Contributors

Letter from the Editor Dear Alternative Latin Investor readers, I hope you enjoyed reading our first Premium issue as much as I enjoyed putting it together. I am extremely excited to be speaking with the best minds in the alternative investment space and in turn being able to share their insight and wisdom with you, our readers. While we still maintain the same quality and quantity of free content, our Premium subscribers receive double the number of stories, with Premium content focusing on a specific sector. Our previous sector focus was private equity, while our next three issues will cover hedge funds (October), family offices (December), and real estate (February). For our upcoming issue on hedge funds, we spoke with several asset managers as well as fund managers to help us provide the most in-depth overview of the LatAm hedge fund industry available. Despite the incredible potential of the region, the industry is but a drop in the bucket on a global scale: with worldwide fund AuM totalling US $1.3 trillion. LatAm funds (excluding mulitmercado funds) total just US $65 Billion. But from a small seed a mighty tree will grow, and I am pleased to see greater regulation in the industry, a minimal amount of redemptions and a plan for the future. With the joining of the Peruvian, Colombian and Chilean exchanges, LatAm can provide what the world wants to see: greater liquidity, size and diversity off assets. The interest is already here; people want to allocate to Latin America but are waiting for the financial infrastructure to align with their needs. From my desk, here in Buenos Aires, I see that alignment is well on its way. As always I am eager to hear your comments on current content, suggestions for future articles and general feedback, all of which can help make Alternative Latin Investor as useful to you as possible. Please email me directly at editor@alternativelatininvestor.com. And again, thank you for helping us make ALI the regional leader for alternative assets.

Managing Director

Nate Suppaiah

Content Editor

Amanda Carter

Public Relations Director

Tiffany Joy Swenson

Sales Director

John McNamara

Staff Writers

Michael Romano Marc Rogers

Contributers

Stephen Kaczor Particio Abal Adler Martins Felix Villalba Carlos St. James Johanna Styles Joseph Hogue

Design

Arman Srsa

Sales Director

John McNamara

Social Media Coordinator

Vidhya Narayanan

Consultants

Adam Berkowitz Tyler Ulrich Jennifer Peck Lydia Holden

Contact: info@alternativelatininvestor.com; (202) 905-0378 2011 Alternative Latin Investor. No statement in this magazine is to be construed as a recommendation for or against any particular investments. Neither this publication nor any part of it may be reproduced in any form or by any means without prior consent of Alternative Latin Investor.

Renewable Energy

██ Carlos St. James 6

GY PO T ER E N T I A L

R E S ’ NE A N I T N E ARG

L E EN B A W

Renewable Energy

here is a growing trend towards investment in renewable energy generation in LatAm, as the region’s abundant natural resources can easily be harnessed into clean energy solutions that will fuel the region’s continued economic growth. A recent study by Bloomberg New Energy Finance shows that in 2010, over US$13 billion was invested in LatAm clean energy generation, and this number has been growing at a compound annual rate of 70% since 2004. That’s almost twice as fast as global investment in the industry, which in itself is among one of the fastest-growing industries in the world.

And while Brazil has been on the receiving end of much of that investment, particularly in ethanol production, the trend is now towards investment in more countries as well as in a far broader range of technologies. Argentina is particularly well positioned in this regard given its abundance of natural resources and a need for additional energy generation to continue to expand its rapidly growing economy. Argentina currently has a mere 553 megawatts (MW) of installed renewable energy, and three quarters of it comprises minihydro projects; this represents less than 2% of the country’s energy matrix. Furthermore, almost all of the investment pre-dates the 2006 Renewable Energy Law, which requires that by 2016 fully 8% of the energy matrix be derived from clean energy. This represents a legal requirement to have more than 3,000 MW of renewable energy operating in the next five years and will require no less than a US$5.5 billion investment. This investment will change Argentina’s energy matrix in an important way and will come at the expense of fossil fuel usage. As seen in the two graphs, less than 2% in 2010 will grow to 8% by 2016 and will be coupled with a doubling of nuclear power generation. Wind energy is the technology that is most likely to receive the largest share of this required investment. While there is only 65 MW of installed wind energy at this time, many of the largest players are already present, even if on a very small scale, and they in-

Renewable Energy rates of US$80/MWh in Brazil and US$90/ MWh in neighboring Uruguay. But wind is just one of the technologies receiving a lot of attention and investment. In the solar photovoltaic sector, Argentina’s NW corner – adjacent to the Chilean Atacama Desert – is considered among the top spots globally to be developed in the coming years because of its unique solar radiation.

clude (from largest to smallest market share): IMPSA/Grupo Pescarmona of Argentina; Vestas; GAMESA; Wobben Enercon; Siemens; SeaWind; and NRG Patagonia, another Argentine technology provider. Additionally, General Electric and a number of the larger Chinese wind-turbine manufacturers are establishing beachheads in the country. The opportunity for a big upside is enormous. Brazil has 1,000 MW of installed wind energy already operating, and its growth rate is slowing down noticeably. Argentina, with just 65 MW trending towards close to 3000 MW in the next few years, is clearly a country on which to focus.

Not only that, the country is known to be one of the best locations for wind energy anywhere in the world. A recent study, entitled The State of the Argentine Renewable Energy Industry: 2011, expects that by 2013 there should be 2,276 MW of installed wind energy distributed not only in the southern Patagonian provinces but throughout the country after the first two large clean energy tenders (known as GENREN I and II) are completed and the private sector executes the projects. The first round of investors closed power purchase agreements (PPAs) with the national electricity company at an average price of US$127 per MWh over 15-year contracts. This compares quite favorably with the rapidly descending

Mini-hydro is the granddaddy of clean energy in Argentina, with some facilities in operation since 1911. While there are over 420 MW of this technology operating, another 11 MW are coming online in the coming months, with many more projects in the works. Given the country’s long Andean spine, the resources are enormous. The first investors closed PPAs at an average of US$162 per MWh over 15-year contracts. Within the technologies that encompass what is known as ocean power, such as tidal energy and wave energy, Argentina is also attracting significant attention. Tidal energy is the third-fastest growing clean energy technology (after wind and solar) and is receiving new investment at a faster pace than biofuels, geothermal or biomass, for example. Once again, Argentina’s Patagonian coastline is considered among one of three global hotspots, which also include the coast of South Korea and the northern coast of Australia. Korean, Russian and U.S. technology providers are establishing connections in Argentina to develop this technology, which can be harnessed at very attractive rates. In biodiesel, Argentina has already established itself as a leader and is currently the fourth largest producer in the world and number one exporter. As a matter of fact, there is a race for third place going on between Argentina, Brazil and the United States (after Germany and France, the world’s two largest producers). Biodiesel production levels are head-to-head between these three countries and it will be interesting to see which country takes the lead. Argentina, with a B5 mandate that has already been increased to a B7, is working towards establishing a B10 mandate.

Renewable Energy Given this industry’s maturity, all of the large biodiesel technology providers are present in the market, with Germany’s Lurgi AG holding a commanding 45% market share, followed by companies such as Westfalia, Desmet and Crown. The recently published State of the Argentine Renewable Energy Industry: 2011 study holds these and many more specific details regarding the ups and downs of an industry that should have far more ups than downs in the coming decades.

About the Author Carlos St. James is the Managing Director of Santiago & Sinclair, LLC, an Austin, Texas-based firm focused on clean tech solutions in LatAm. He is also the founder and President of the Argentine Renewable Energies Chamber (CADER, by its initials in Spanish); board member of the Global Renewable Fuels Alliance (GRFA), based in Toronto, Canada; and Regional Director and board member of the Latin American and Caribbean Council on Renewable Energies (LAC-CORE) based in Washington, D.C., all ad honorem roles. He also sits on a number of private sector boards focused on various aspects of renewable energies. He is the author of more than two dozen published studies and articles on the industry – almost all available in both Spanish and English – and has spoken at more than thirty conferences in fifteen countries on four continents over the last four years, sought out by both the public and private sector for his understanding and insights into the renewable energy industry in LatAm. He obtained his undergraduate degree in International Economics from DePaul University in Chicago, Illinois, and his master’s degree in International Relations from the Fletcher School at Tufts University in Medford, Massachusetts; he holds both Argentine and United States citizenship. He can be contacted at cstjames@santiagosinclair com.

Hedge Funds

Meta-Trends

in LatAm Investment: ALI Speaks with Daniel Enskat

he progress of alternative asset investment in LatAm is following two basic meta-trends, that is, large-scale and long-term patterns that transcend specific products, firms or opportunities. These meta-trends are, first, the increasing interpenetration of managers from the so-called developed and developing countries into each other’s markets, and second, the global movement toward tapping the wealth of LatAm high and ultrahigh net worth individuals, who are increasing in number in a region that already has the highest density of HNWI in the world.

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Such is the view of Daniel Enskat, a Senior Managing Director and Head of Global Consulting at Asset International’s Strategic Insight, a mutual fund research and consulting firm. Mr. Enskat has written several books on global asset management, including the recently-released State of the Global Asset Management Industry. Over the last ten years, he has spent substantial time on the ground in emerging markets and, as part of his research, has interviewed over 1,200 asset holders, including representatives from private banks, central banks, sovereign wealth funds and family offices. These meta-trends emerged, he says, as he sought a holistic perspective of what is being offered in these “faster growth” markets and what asset-holders are buying. “We have seen

numerous developed market managers move ‘West-to-East’: U.S. and European firms going into LatAm and Asia to take advantage of the growth there, whether from an investment or a distribution perspective. However, now we are also seeing the opposite: more aggressive expansion and penetration from emerging market managers into so-called developed markets (those that could soon be called formerly developed markets).” As a result of this miscegenation, he says, much of the global growth from the first half of 2011 has come from emerging regions such as LatAm and Asia. As an example he gives HSBC, two-thirds of whose revenues came from those regions; and Credit Suisse, a large portion of whose second-quarter profitability came from Hedging-Griffo, its boutique manager in Brazil. The biggest selling new fund of 2010 was the Numora U.S. highyield bond fund linked to the Brazilian real; it raised over US$10 billion, and the complexity of its production and structuring, he says, is emblematic of the sophistication with

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Private Equity

rivate equity (PE) investing is usually limited by a firm’s ability to protect its capital. In the LatAm of today, a good PE investor can find opportunities to make high returns with relatively lower risk than 10 to 20 years ago. This is mainly due to newfound stability in countries like Peru, Colombia, Chile and Brazil. This high return/low risk can only be accomplished by managing risks. Finding the right local adviser is therefore key unless someone on your team is intimately familiar with the methods and structures for doing business in a given country. If there is a hedge in crossborder PE, it is precisely in finding the right local partners. Knowing how to create the necessary complex capital structures that must go along with PE is essential when entering the LatAm market. The challenge is how to accomplish this without triggering unnecessary taxes and bureaucracy. Added to that, bureaucracy means others delving into your private matters, such as the amount of capital invested and who earns it. That can be a dangerous thing in some

LatAm markets. For security purposes, you don’t want your affairs to be public. It is always best in business to be under the radar with respect to who earns what. Let me give you an example of the positive and negative turns that setting up a deal can take in Colombia. In an investment made with a company that wanted to issue common stock and preferred shares, the common stock (or “acciones ordinarias”) was a relatively easy endeavor to set up. It took in total perhaps a couple of hours to complete. Adding the preferred shares was a totally different matter. The company, not knowing how to set this up in the most efficient way, went ahead with the same structure one would use in the United States. The essence was the important matter here. The PE firm just wanted to make sure that they would get their principal back as first money out, plus a minimum yield prior to sharing proceeds with the managers. Not having the right local adviser to explain that it was best to do a private investor’s agreement within the company, they proceeded to the Chamber of Commerce

(in Colombia, the chambers take the place of the Secretary of State in the US). The local government officials, not being used to setting up preferred shares, proceeded to create all sorts of barriers. All in all, the company ended up with a huge tax bill (as a percentage of the invested capital); preferred shares that had to be set at the same nominal price as the common shares (they argued that it is not possible to have different per share values, as is the norm in the U.S.); and a large legal bill for setting up the bylaws with the preferred structure. In Colombia there is no double-taxation, hence the taxing authority does not necessarily care who receives the after-tax proceeds. It is OK to set up the firm with Common Shares and do a private Investors Agreement that divides the proceeds. That is perfectly legal and easy to do in the Colombian system. Had this firm come to us, given our PE background and knowledge of the Colombian system, they would have avoided all the added costs, headaches and delays. At that point our fees looked very inexpensive.

INVESTING IN LATIN AMERICA:

ACCESS L O C A L KNOWLEDGE ██ Felix Villalba

Private Equity

Agribusiness The above example was only the beginning of the deal; now imagine what can happen throughout the life of the investing cycle without the right local partner. Another very important aspect is culture, a subtle topic that is usually underestimated. Culture may be the difference between success or failure, high IRR or low IRR. In a deal we in which we were involved, a U.S. institutional investor did not understand certain cultural subtleties and as a result did not close on a deal that another more savvy investor took and closed, gaining a very high return. Cultural differences can change the outcomes of litigation if a deal ends up in that extreme. The local team understands litigation in their country and therefore there are items that will absolutely scare them away even if the deal has arbitration in a location like Delaware. There are several challenges within the scope of culture, like the differences between the nationalities within LatAm itself. Or perhaps even more challenging is that the cultural differences between North Americans and Latin Americans are sometimes so minor that they appear as if there are no significant differences except for language. For example, a LatAm executive is traditionally less likely to joke under certain business circumstances, while a North American may try to crack a joke to lighten up negotiations. At times this may irritate the Latin American although he/ she would not say so, and good negotiators know that this may mean the difference between a good start and a bad start. A LatAm investor may not accept certain clauses within a contract simply because they are not standard in their home country and are therefore seen as extremely onerous or unnecessary. As it turns out, there are usually other ways that local business people handle the same desired outcome with a different clause or methodology that is not insulting to either party. Lawyers will tend to make the ambience even more tense because both sides will be coming from a different legal basis. There are big egos in PE and among LatAm executives, and these two may clash to the detriment of a potentially great deal. The above goes both ways and hence a savvy LatAm management team will look for our advice because we can also explain the reasons why a North American investor asks for certain items and wheth-

er these items are or are not standard business practice in the US. Keep in mind that on average, the LatAm negotiator does not have the same focus on trust that a U.S. investor has. The Latin system is in fact embedded with mistrust. Take the extreme use of notaries and how embedded it is in the system. In Colombia for example, several years back the congress enacted a law whereby it is unnecessary to sign documents via notaries. However, the average person will not cut a deal without a notary’s involvement. For the U.S. investor, having a long legal document explaining details is a big step toward creating trust, however in many cases it is just the opposite with the average LatAM executive. Why? Because in LatAm,

introducing legal agreements usually means introducing delays. To achieve success, both sides must learn to give: the Latin executive has to understand the nature of a deal with a complex capital structure and the cross-border PE investor must understand what works and does not work in that country’s system. This win-win situation can only be successfully accomplished with the right local partners. These must be partners that have done business both in the U.S. and in LatAm. Otherwise, everything will be subject to experimentation, and that can be an expensive indeed.

Author Biography Felix Villalba has over 15 years of experience on both the operating side and the investment side of business transactions. After his MBA, Felix worked for captive financial services companies at Dell and Whirlpool, and later spent over five years as CFO with two venturebacked technology companies. Dell’s successful effort to start Dell Financial Services marked Felix’s official involvement in the venture industry in 1997. It was after that when he joined an Austin-based ventures-backed company that later led to his joining Pacesetter Capital Group. At Pacesetter, a PE firm, he was Vice President and served as Portfolio Manager for several inherited deals, some of which required intervention strategies. In 2009, Felix formed his own PE management firm, Accordo LLC, and raised Accordo Fund 1 and 2, placing investments in residential and hospitality developments in Colombia. Felix is a graduate of the University of Notre Dame with three degrees, a Masters in Business Administration, a B.S. in Civil Engineering, and a B.A. in Economics. He successfully completed the Harvard Business School’s Executive Management Development Program.

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Brazilian Pension Funds

Expand Their Horizons

lternative asset managers around the globe are vying for the attention of Brazil’s swelling pension funds. As of early 2011, these funds had a total of $342 billion under management and had grown an average of 14% per year for the last five years, one of the highest rates in the world, according to Towers Watson, an industry researcher and consultant. Legislative reforms in 2009 and 2010 loosened the restrictions on where and how those funds could invest, raising the limit on investments in foreign assets from 3% to 10% and allowing for more allocations in domestic alternative assets, including real estate and infrastructure. These reforms, com-

bined with massive demand in all sectors of the economy, a maturing investment culture and, most recently, declining fixed income rates, have impelled Brazilian pension funds to look beyond the traditionally conservative confines of their portfolios. As the Economist reported earlier this year, Brazil’s pension funds already account for over 20% of the country’s investments in private equity and venture capital – a figure which should rise dramatically. Valia, the pension fund of the mining company Vale, had increased its private equity allocations, as of the beginning of 2011, from 1% to 6%. Petro, of the energy giant Petrobras,

has begun removing money from government bonds and reallocating to real estate and credit funds. Bloomberg reported that the same fund was pursuing private equity investments in health, education and technology.

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Political Moves: Brought to you by Brazil’s corruption matches Bolivia’s GDP On September 14 Brazil’s octogenarian tourism minister, Pedro Novais, stepped down amid corruption allegations. President Dilma Rousseff has accepted the resignations of five ministers in eight months, only one of which was not linked to corruption. Having initially dithered, Rousseff, under pressure from the press and the public alike, is now taking no prisoners in her quest to rout entrenched official graft, which she argues is public money meant for schools and hospitals. According to official estimates, total annual corruption in Brazil is worth some US$19 billion, which is the equivalent of Bolivia’s GDP. Rousseff ’s ‘zero tolerance’ policy is popular on the streets, but it has put a heavy strain on her relations with the legislature, damaging governability. There is also the risk that voters might seize on the issue to punish the ruling coalition in next year’s municipal elections, particularly if the economy comes off the boil. For that reason, the president is keen to get it off the front pages of the press. However, the president and senior colleagues, including Justice Minister José Eduardo Cardozo, have given tacit support to the new civic movements against corruption that have sprung up spontaneously on social networks. The M-7S (the September 7 anticorruption movement, so named after Brazil’s national day of independence), which has the backing of senior senators and leading business sector groups, led another ‘March of the Indignant’ on September 20 in central Rio de Janeiro. In support of the march, a local NGO planted 594 yellow- and green-painted brooms, representing the federal parliament’s 81 senators and 513 deputies, on Rio’s Copacabana beach – a striking visual display. An accompanying banner appealed to the national congress to “help us sweep out corruption in Brazil.” Brazil’s Conference of Catholic Bishops (CNNB) later called for “a profound political reform” that “eliminates secret balloting of lawmakers” and “extirpates old damaging practices for the improvement of democracy.” Leonardo Steiner, the chair of the CNNB, stated, “We feel great concern not only because of corruption, but because of impunity.”

A new direction for Chile The big political beneficiary of the four months of protests against the government’s proposed reforms to the education system is an independent politician, currently outside congress, Marco Enríquez-Ominami. Enríquez-Ominami, a former socialist deputy, ran for the presidency in 2009 and claims that both the left-of-center Concertación (which ruled Chile from 1990 to 2010) and the current right-wing government led by President Sebastián Piñera are much the same. What is striking from the most recent opinion polls is that the electorate agrees with him. The ratings of both the government and the opposition are low and falling. The August Centro de Estudios Públicos (CEP) poll, which takes six monthly readings, had President Piñera’s support at just 26%, the lowest for any president since the country’s return to democracy in 1990. His rejection rate also set a new record: 52%. In December 2010, the CEP had Piñera at 44% support and 36% disapproval. It is worth noting, however, that the CEP found public support for Piñera’s education policy rising from 38% at the end of 2010 to 44% now, though the evaluation of the government’s implementation of its education policies has fallen from 32% support at the end of 2010 to 10% support now.

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What is interesting is that 46% of those polled by the CEP disapprove of the Concertación and only 17% approve, while 25% are neutral and 12% don’t know or don’t care. In Santiago, support for the Concertación is running at just 9% and disapproval is now up to 53%. Such disgust for experienced politicians shows that Chile could be about to veer off in a new political direction.

Argentina’s capital flight In the first three weeks of September the central bank (BCRA), the state-owned Banco Nación and the social security agency (Anses) have sold dollars to the local market, allowing for only a slight depreciation of the local currency (of 1.2%). This, however, has cost the BCRA US$1.13 billion, a month-on-month increase of 96.5%. On September 19 the BCRA sold US$270 billion, bringing its reserves below US$50 billion (to US$49.22b billion), the government’s ideal reserves target. Uncertainty about the future of the economy, coupled with an all-but-assured second mandate of President Cristina Fernández, has investors (of all sizes) and local savers extremely worried, to the point that capital flight has accelerated to extraordinary new heights, with some estimates putting the end-of-year figure at US$20 billion to US$24 billion. If this outlook proves accurate, capital flight would at least double the expected trade surplus, predicted to come in at US$9 billion. Fuelling this flight is the expectation that neither President Cristina Fernández nor Economy Minister Amadou Boudou will address the market’s worries until after the October 23 election, by which point the depreciation of the Brazilian Real (of 14% since July) may have priced Argentine products out of its main regional export market.

Mexico’s electoral picture resolving The race to become the next president of Mexico is beginning to take shape. The clear frontrunner is Enrique Peña Nieto, the candidate from the Partido Revolucionario Institucional, which lost the presidency for the first time in 2000 and failed to regain it in 2006. Peña Nieto has just completed his term as the governor of the Estado de México, the richest and most important state in country. Political commentators from across the spectrum assume that the election, which will take place on July 1, 2012, is already Peña Nieto’s to lose. He has all but sewn up the PRI nomination. The ruling Partido Acción Nacional, which won the presidency in 2000 with Vicente Fox and then won again in 2006 with Felipe Calderón Hinjosa, has three declared candidates. The strongest of them is probably Josefina Vázquez Mota, a former leader of the PAN in the lower chamber and a former minister of education (in the Calderón administration) and welfare (under Fox). She is more popular with rank-and-file Panistas than Ernesto Cordero, Calderón’s preferred candidate and his former finance minister, and Santiago Creel, whom Calderón defeated for the PAN nomination in 2005. On the Left the race is between a radical, Andrés Manuel López Obrador, whom Calderón defeated in 2006, and Marcelo Ebrard, the mayor of México City. About LatinNews.com LatinNews (historically known as Latin American Newsletters) has been at the forefront of respected political, economic, security and strategic analysis since 1967. We provide a comprehensive intelligence resource on 33 countries in Latin America and the Caribbean; covering political, security, economic and strategic issues. LatinNews is the de facto intelligence source for serious Latinamericanists, executives, governments and academics worldwide.

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Update on the Integrated Latin American Market

(MILA) ██ Joseph Hogue

n May 30 of this year, the Integrated Latin American Market (Mercado Integrado Latinoamericano, or MILA) was launched, combining the stock markets of Colombia, Chile and Peru into a single crosstrading platform. A key component of a regional trend toward integration, MILA has been widely lauded as an important move toward bolstering the already robust growth of the three constituent countries. Investors expect the platform to increase the liquidity of companies by giving them easier access to global capital, and to attract more foreign investors to the Andean region, especially as they begin diversifying away from Brazil. MILA began as the largest public equity

market in the LatAm region in terms of total listed companies, with 560, and the second largest in terms of market capitalization, at US$578 billion, ahead of Mexico (US$387 billion), and behind only Brazil’s BM&F Bovespa, at US1.2 trillion. Though its advent was welcome news, the MILA’s complex integration process hit trouble early on and has progressed slowly. Bloomberg reported recently that, between May 30 and September 16 of this year, only 183 transactions occurred across the platform, totaling US$2.9 million, the equivalent to the volume traded on Brazil’s Bovespa exchange every twenty seconds. The slow pace has stemmed in part from the downturn in

global markets as well as disparities in the three countries’ tax regimes, currencies, and securitization rules. Another important factor, however, has been the significant political uncertainty in Peru. Less than a week after the launch, the leftwing candidate Ollanta Humala won the Peruvian presidential election, spurring fears in the investment community that he would arrogate more control of the economy to the state; Peru’s benchmark index dropped twelve percent the next day. The Humala administration soon complained publicly of an imbalance in the benefits of the MILA arrangement among the member countries, saying that the MILA integration process

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MILA began as the largest public equity market in the LatAm region in terms of total listed companies

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had been completed too hastily. Initially there had been plans for the companies running the Colombian and Peruvian stock exchanges, Bolsa de Valores de Colombia and Bolsa de Valores de Lima, to merge, but the Humala administration put this plan on hold to consider the issue more closely. Eventually, in August, the merger was canceled – news that sent the two companies’ stocks tumbling, even as all parties involved insisted that the MILA itself would be unaffected. However, in spite of MILA’s slow start and the uncertainty in Peru, several recent developments signal a continuing and increasing confidence in the MILA platform and the Andean region as a whole. There has been widespread discussion of the inclusion of Mexico, Panama, other Central American countries and possibly even Brazil in a later stage of the MILA integration process. In August, Standard & Poor created the S&P MILA 40 Index, tracking the integrated market’s forty most liquid companies. In February of this year, in anticipation of the MILA launch, Global X Funds, a New York-based exchange-traded fund (ETF) developer, launched the Global X FTSE Andean 40 ETF, the first ETF targeting the Andean region, which also tracks the

40 most liquid companies in the region, to be traded on the New York Stock Exchange. Meanwhile, Blackrock, the world’s largest money manager, launched ETFs in Colombia and Chile, to be traded locally on those country’s respective exchanges. On September 22, the Bloomberg MILA Conference was held in New York, to discuss the MILA’s problematic beginnings

Trading volume to date has not lived up to expectations, but increased access to funding for companies has exceeded expectations. and promising future. Below is a recap of the conference from one of its featured speakers, Joseph Hogue, an analyst at Efficient Alpha.

██ A Recap of the Bloomberg MILA Conference Bloomberg held its conference on the MILA integration at the New York Academy of Sciences on Thursday, September 21. Though the consensus was that trading in the integrated markets for the first three months was clearly underwhelming, the mood was generally positive that the region would benefit from the integration going forward. Trading volume to date has not lived up to expectations, but increased access to funding for companies has exceeded expectations. IPO activity for companies like Nutresa and Avianca has been well subscribed and many companies are coming back to market for share offerings to fund expansions. One reason for the lack of trading volume that was not discussed at the conference is the lack of free float available in many markets. The average controlling interest in shares traded across the region is upwards of seventy percent. Pension funds are estimated to own another ten percent of the shares outstanding. This means that the free float for shares is only around 20% of shares outstanding, which must be traded among domestic and foreign investors.

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“A Closer Look at the Companies Listed on the MILA” Emilio Echavarria, President Valores Bancolombia Guillermo Tagle, CEO IM Trust Mark Teare, V.P. Canacol Energy No explicit mention was made of Brazil’s interest in the exchange, despite the President of Colombia publicly disclosing last month that Brazil was interested in joining the exchange. The president of Valores Bancolombia, Emilio Echavarria said the next countries to join would be Mexico and Panama but that further integration would most likely be a couple of years out. Mexico has expressed interest in the exchange and Panama was added as an observer within the formation process. The participants generally agreed that the main focus, and notable success, in the first stages of the MILA integrated markets has been to increase the exposure of the retail investors within the capital markets. Success in this goal was evidenced by Mr. Echavarria with a recent bond issued by Banco de Credito that was over 50% subscribed by local investors. A sentiment brought up by Mr. Echavarria and echoed throughout the day was the need for coordination of tax policies for investors across the three countries. The effects of different regulatory regimes and further integration was a central theme throughout the conference, but the group consistently returned to the need for similarity in tax treatment.

“Trade, Politics, Exchanges and the Andean Markets” Maria Jose Ramirez, V.P. Bolsa de Valores de Colombia Francis Stenning, CEO Bolsa de Valores de Lima Beyond the integration of equity trading on the three exchanges, the Colombian and Peruvian exchanges had been planning a merger until recently. These plans have been called off, and though officials have displayed optimism over future negotiations, no statements have been made. A tense moment occurred during the panel when the speakers were asked if there was still the possibility of the merger. Both participants froze for a moment and then deffered to “focusing on the MILA integration for the time being,” as Mr. Stenning put it. “The MILA for Fixed Income and Equity Investors” Erich Arispe, Lead Sovereign Analyst Fitch Ratings Jason Press, Equity Strategist Citi Investment Research Standard & Poor’s has created the first MILA exchange-related index tracking the 40 most liquid issues across the three exchanges. Recently, Global X Funds has created an exchange traded fund to track the index trading under the ticker AND. Jason Press talked of the global economy and the firm’s view going forward. Though European problems may accelerate, he did not believe here would be a recession in the U.S. economy, as was currently priced into the market. If this view holds and equity prices do rebound, stocks with higher betas would appreciate faster than others. Within the integrated markets, sectors with higher betas than the global markets are energy, materials, and financials. Mr. Press did concede that the equities within the MILA markets will not appreciate unless there is a general rebound in the global economy or a decrease in fears of a recession in the developed markets. “Funding the Next Big Thing: Hidden Gems in the Andes” Joanne Freeze, CEO Candente Copper Daniel Gamba, Head of Latin America & Iberia Blackrock Joseph Hogue, Analyst Efficient Alpha Daniel Gamba, Head of Latin America and Iberia at Blackrock, said that currently much of the market potential has not been realized because the pension funds had not started trading in the foreign markets. I reiterated this with information relayed earlier in the day that the Chilean pension funds had not yet received authorization to trade on the integrated exchange. Chilean funds, by regulation, are allowed to invest up to 80% of assets in foreign markets, which would mean significant inflows for Colombian and Peruvian stocks.

Hedge Funds Later in the day, Gerardo Hernandez Correa, Colombia’s chief securities regulator, announced that talks would be held to ease the rules for pension fund trading in the market. I also talked about my methodology for looking at sectors within the region. While I agree with Mr. Press above that higher beta stocks will rebound more quickly with a global recovery, I am looking at sectors that will benefit directly from regional development and are less exposed to the global economy. If one compares the sectors’ weighting in the integrated market with the sector composition of GDP across the countries, you get a sense of the sectors that may have historically been favored with access to the capital markets. The financial, materials and energy sectors are all over-represented in the equity markets compared to their relative positions in the economy. Consumer goods, technology and construction are not as well represented in the equity markets. With increased liquidity and IPO activity, these sectors may have greater access to the capital funding needed for expansion. I have also been looking at productivity growth rates in the region since 1980. Productivity growth rates in the agricultural, materials and energy sectors have been comparable with those in the United States. All other sectors have experienced productivity growth of less than two-thirds that of the developed market. The notable exception is in Chile where productivity growth has been comparable with the U.S. across almost all sectors. Consumer goods is a key sector for the region and investors looking for diversification away from the failing global economy. Demand for commodities in the other emerging markets is driving economic performance and a rising consumer demand in the MILA markets. The Chilean retailer Falabella has revenue exposure to all three markets: Chile (69%), Peru (20%), and Colombia (4%). The company owns a diversified mix of retail operations including department stores, home improvement, malls and supermarkets. Companies in the construction industry could do well for two reasons. One, governments in the region have agreed to the need, and promised increased spending, for infrastructure within their countries. Secondly, increased access to capital funding through the MILA markets may help construction companies acquire the needed funds for capex spending on the machinery that will drive productivity growth. The Peruvian cement company Cementos Pacasmayo is the second largest in the country. The company has shown good sales growth and a dividend yield above three percent. Financials in the region could also benefit as the integration drives development of products and services. Domestic demand and a low loan penetration relative to other markets present better fundamentals than in the developed markets. Interview with the Minister of Finance of Peru Luis Miguel Castilla Mr. Castilla was positive of the progress made with the MILA integration and was supportive of the markets going forward. A few of the attendees I spoke with expressed a position I hold, that Mr. Castilla was there generally as a show of the newly elected President Humala’s support of the markets. Mr. Castilla relayed that the president’s two principal goals are that growth continue and that the level of private support for public projects increase. Author Biography Joseph Hogue is a research economist for the State of Iowa and a candidate for the level III Chartered Financial Analyst exam. He is a regular contributor to the website Seeking Alpha and the Director of Virtual Relations on the board of the CFA Society of Iowa. Efficient Alpha, provides investment research & analysis solutions for small and medium-sized businesses. Core products include: financial newsletters, blogging, investment analysis & due diligence, and real estate analysis. www.efficientalpha.com

Art

Hedge Funds

Diversifying Outside and Within

Brazil

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iven its robust growth in recent years and massive wealth compared to its neighbors, Brazil has attracted the lion’s share of global investment in LatAm, with foreign investors allocating especially aggressively to equity and government bonds. Brazilian investors, meanwhile, have been reluctant to look beyond fixed income, as the risk-free returns they find there are better than those in other, more volatile asset classes. Brazil’s benchmark Selic interest rate is, at 12%, the highest among G20 nations.

still focused on Brazilian assets instead of exporting their liquidity abroad. The inertia to do nothing is pretty much still there.”

“Nowhere else in the world,” says Ernesto Leme, CEO of Wealth Management at Claritas Investments, a Sao Paulo-based hedge fund, “have investors been able to find that combination of economic and political stability, high level of interest rates and strong currency that you have in Brazil. In the past three or four years, the vast majority of our clients that have generated wealth have preferred to leave their assets inside the country, and they have made a lot of money in dollar terms.”

“If you look at the portfolios of LatAm-focused funds of funds or LatAm institutional investors,” says Daniel Osorio, CEO of Andean Capital Management, a Colombian hedge fund focused on investments in the Andean region, “I guarantee you they hold 10 funds that invest 90% or 95% of their assets in Brazil. Their Brazil concentration is too extreme, and this was made very evident by people’s

Mauricio Bicalho, the Director of Triscorp Investimentos, a Brazilian hedge fund, agreed, summing up the state of Brazilian investors’ mentality: “Right now, Brazilian investors are

But as the benchmark interest rate has fallen significantly in recent months and macroeconomic concerns persist, Brazilian investors have begun looking elsewhere for their customary returns, hedging themselves against inflation and volatility. And with the poor performance of the Bovespa index in recent years, foreign investors are coming to question their faith in Brazilian equity.

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Art

The Malba turns 10 On September 11, 2011, the Malba (Museum of Latin American Art of Buenos Aires), brought to the city by the Constanti Foundation, celebrated the 10th anniversary of its opening. Over the past decade, the Malba has grown steadily in terms of both attendance and works. In the culturally vibrant city of Buenos Aires, the Malba was founded for the purpose of showcasing Latin American art produced from the early 20th century until today. According to a recent press release issued by the Malba, “In the past decade the museum has been visited by over 3,200,000 individuals, an average of 350,000 persons per year. It has become a point of reference on the Latin American cultural scene.”

lternative Latin Investor recently attended a press conference commemorating the celebration, during which F. Constantini, the museum’s founder, spoke with emotion regarding his hope for the future of the museum and its expansion. As an institution he feels that they have a responsibility to continue to be a focus for cultural events in the city of Buenos Aires. “On the occasion of the 10th anniversary of the opening of the Malba,” Mr. Constantini said, “I would like to reaffirm the Malba’s strong commitment to the future. Along these lines, one strategic project that

we hope to bring about in the short term is the expansion of the museum’s building. That would enable us to expand the Malba’s existing cultural and educational programs, and to increase the Museum’s ability to produce and house exhibitions of still greater importance.” Mr. Constantini added: “The Malba will also set out to strengthen and increase its presence on the cultural scene both throughout Argentina and abroad, furthering collaboration and exchange with institutions that share its values and eagerness to contribute to knowledge about and communication of Latin American art.”

██ The Malba on the World Stage From an international perspective, the Malba has become an interactive center for cultural convergence and conversation. The primary goal of the museum – to preserve and exhibit Latin American art – is reflected by the impressive increase in the strength and diversity of its holdings over the last ten years. According to a recent press release, Malba ‘s current holdings consist of over 500 works of art – a number that has doubled since the museum was founded, thanks to donations,

Art (Right) Antonio Berni Manifestación 1934 180 x 249,5 Tempera on Burlap (Below) Dissolving Bench Malba 2011

loans and the museum’s own acquisition program. Since the museum opened its doors in 2001, over 120 temporary exhibitions of modern and contemporary art from Argentina and the rest of Latin America and the world have been held. The total number of artists who have shown their work in the Malba exceeds 850, and more than 70 catalogues have been published. With numbers such as these, it comes as no surprise to hear the Malba has loaned over 130 works of art to other institutions in Argentina and abroad, and that many of the exhibitions it has produced have been presented at different museums around the world. As a reflection of the Malba’s presence in the international art scene, here are examples of some of the museum’s exhibitions that have been displayed at museums abroad: Xul Solar. Visions and Revelations • Pinacoteca do Estado de São Paulo, 2005 • The Museum of Fine Arts, Houston • Museo Tamayo Arte Contemporáneo, Mexico City, 2006 Víctor Grippo. A Retrospective (2007) • Works 1971-2001 were exhibited at Miami Art Central (MAC)

Félix González Torres - Somewhere / Nowhere, Algún lugar / Ningún lugar (2009) • Museo de Arte Universitario Contemporáneo of the Universidad • Nacional Autónoma de México (UNAM) The Malba has worked diligently to reinforce its international presence by forming longstanding partnerships with other prestigious international institutions. These collaborations include the exchange of exhibitions and the creation of publications and other initiatives, all with the

aim of promoting Latin American art within the region and abroad. The most prominent of these partnerships is with the Museum of Fine Arts Houston (MFAH), a collaboration that has been in place since 2005. The current 10-year celebration is especially significant as the MFAH is also celebrating the tenth anniversary of the creation of their Department of Latin American Art, headed up by curator Mari Carmen Ramirez. As Ms. Ramirez stated at the press conference, “Houston and Malba share a long term com-

Art mitment to Latin American art; they are two parallel projects that share the same affinity and many points of convergence, although they are quite different as institutions.” Starting on September 21, the Museum will commemorate its celebration with the opening of a retrospective of the Kinetic artist Carlos-Cruz Diez and a new vision of 20th-century Latin American art with major works from the permanent collection as well as fourteen pieces on loan from The Museum of Fine Arts Houston. The museum will also hold an international conference, expecting participation from an important and diverse group of curators and museum directors. This group of individuals has been fundamental in initiating some of the major transformations that have taken place in Latin American art in the last decade. It is events such as these and collaborations such as the MFHA/Malba partnership that are helping to increase awareness regarding Latin American art on a global scale. Miss Ramirez adds, “It seems that

this is a model of collaboration that is working towards opening new doors for Latin American art…. I feel this is an important initiative during a moment in which Latin American art is on the rise throughout the world, a moment in which the principal museums in North America are open to the art and artists of Latin America. Unfortunately in the South we still experience a lack of infrastructure in respect to the museums and institutions dedicated to art. In this sense, I feel that the Malba, despite its mere 10 years in existence, has become a fundamental point of reference, not only for Argentina, but for the whole world.”

• •

██ Interesting Malba Stats •

•

The Museum invests US$5 million in kind every year. The Fundación Costantini covers 60% of the Museum’s operating expenses, with a contribution of US$3 million The Museum staff consists of 100 professionals trained in specific areas of

•

museology: curatorship, education, museography, design, outreach, cultural administration, etc. 30% of the Malba visitors are foreign. Malba is “a must” for tourists visiting Buenos Aires. In conjunction with its programming, the Museum publishes an average of 500,000 brochures every year, which are distributed free of charge to the general public. Over 200,000 children have participated in school visits and family programs, an average of 20,000 children per year. Since 2003, over 148,000 individuals have participated in Malba’s educational programs and programs geared towards senior citizens, the handicapped, students and educators. Over 75,000 individuals have participated in courses and presentations organized by the Museum’s Literature Department.

Emerging Markets

Alternative Latin Investor Profiles LatAm Expert:

John Price 1. Â When did you begin working with LatAm and why? I first moved to Mexico in 1992 for personal reasons and was quickly intrigued by the opportunities and challenges of living and operating in that country. My initial attempts to represent different manufacturers as their agent in Mexico failed miserably because I misread the buying culture. After a year of misfiring sales efforts, I found my niche studying the Mexican market for foreign suppliers who wanted to enter the soon-to-be NAFTA partner country. 2. How has business changed since then? Surprisingly little. Latin America is still under-reported as a business region, still devoid of reliable sector- and company-specific intelligence, and remains a business culture that requires contacts in order to penetrate and understand. Those challenges oblige foreign investors to contract firms like ours to gather sound intelligence, and convert it into actionable strategic insight.

Emerging Markets

3. What is the first thing people should know about doing business in LatAm?

Sometimes global firms bring excellent sector specialization to the task as well.

██ About Americas Market Intelligence - Miami

The lack of a sound and reliable legal system means that all successful business relationships in Latin America are built not by contracts and email but by persistent and highly personalized contact.

Regional (LatAm) firms are almost always better at collecting information than a global firm. Good intelligence gathering is the starting blotck of useful insight. Without solid market intelligence, no amount of analytical skills will lead one to valuable insight.

Companies require Market Intelligence in order to make business decisions. We offer four lines of service:

4. How does due diligence compare between the U.S., the E.U. and LatAm? In the U.S., reputational due diligence is conducted through databases which house incredible volumes of data about every individual and company. To a lesser degree, the same holds true in the E.U. In LatAm, public databases are either very sparse or illegal to access without the target’s written permission. Therefore, thorough due diligence in LatAm relies on human intelligence, well placed individuals and companies in the market. 5. What are the pros and cons of contracting firms within LatAm versus outside? A global firm may be better equipped to compare LatAm versus other markets of interest to the client, like the rest of the BRICs or more developed markets. This can be useful when board level approval is needed.

6. How would you rate transparency within LatAm?

Strategic Analysis – valued by companies making monetarily or strategically significant business decisions (market entry, product/service launch, acquisition, distributor search, etc).

Pretty low. LatAm firms, many familyowned, are notorious for squashing on minority rights and not revealing as much as they should of their firm to shareholders.

Monitoring – popular with companies that need to make ongoing tactical decisions to defend market share or support continuous sales efforts.

7. Which countries or sectors do you believe provide the best return for risk and amount of ‘local delays/problems?’

Market Research – chosen by companies striving to deepen their understanding of their customers and potential customers. Intelligence Plaza software – supported by our partner, GIA, this web-based platform is ideal for companies with dynamic internal and external market intelligence gathering programs who struggle to manage all of the information and distribute it efficiently within their firm.

1. Mexican manufacturing 2. Brazilian retailing 3. Brazilian B2B services (logistics, corporate finance) 4. Brazil/Colombia/Chile/Peru construction equipment 5. Central American low income housing in large urban centers (Honduras, Nicaragua, Guatemala) 6. Argentine food processing companies

Author Biography John Price, Managing Director of Americas Market Intelligence (AMI) John Price has practiced market intelligence in Latin America for the last twenty years. He founded InfoMex in 1992 which later became InfoAmericas with offices in SP, DF and Miami. In 2007, InfoAmericas was sold to Kroll Associates and John founded Kroll’s Market Intelligence practice. More recently, John launched AMI with offices in Miami and Mexico and an affiliation with GIA, the world’s leading competitive intelligence provider with 25 global offices. Mr. Price is a strategic advisor to clients, providing advice on competitive intelligence, market entry strategy, transactional market due diligence, and business risk analysis.

Minha Casa Minha Vida: Hedge Funds

Agribusiness

A Look at

Social Housing Investment Opportunities

in Brazil ██ Joanna Styles

long with exuberant carnivals and exotic beaches, Brazil also brings to mind the image of its infamous favelas, vast slum areas that are part and parcel of many large cities. These dwellings and overcrowded lodgings have for decades been the only housing option for millions of Brazilians. With the introduction of the federal government’s social housing program, Minha Casa Minha Vida (MCMV), in March 2009, this panorama is changing. For the first time ever, many poor Brazilian families have the opportunity to buy their own homes and substantially improve their living standards. “This is perhaps the most striking aspect of the program,” says Gary Hardacre, CEO at Obelisk International, “that it is making a tangible difference to Brazilians’ lives.”

Real Estate From an alternative investment viewpoint, MCMV offers scope for considerable returns over a short timescale within the context of a government-backed and -financed program with a ready-made exit strategy. In its brief lifespan, MCMV has attracted all the big players in Brazilian development plus numerous foreign investors.

██ The Brazilian Solution Brazil’s real estate market is characterized by massive demand fed by small supply. Official government estimates place the housing deficit among Brazil’s low-income families at around 7.2 million homes, although some experts believe the real figure is considerably higher. J.P. Morgan, in “Latin America Equity Research” (April 2011), points to “1.5 million new homes demanded every year, with almost half of this market being for lower-income housing.” To address this problem, the Brazilian government under President Lula da Silva introduced a nationwide social housing program in early 2009, christenin it “Minha Casa Minha Vida” (My House, My Life). The initial stage planned the construction of 1 million homes with a budget of R$60 billion by the end of 2010. The second stage, launched in May of this year by Lula’s successor, president Dilma Rousseff, intends to build a further 2 million homes by the end of 2014 with an allocated budget of R$100.4 billion. The principal objective of MCMV is to ease the housing shortage by 42% and, by extension, reduce the need to live in slum areas or substandard housing. In addition, the program aims to boost civil construction and open up the historically small and underdeveloped mortgage sector in Brazil.

██ How It Works MCMV specifically targets Brazilians earning between zero and three times the monthly minimum wage (R$545) with the property allocation for this income group running to 1.6 million homes. A further 1 million social housing units will be built for families with salaries between three and six times the minimum wage; the remaining 400,000 units are destined for those earning from six to ten times minimum wage. To qualify for the program, families must meet income and residence requirements plus prove they own no other property. Once their eligibility is confirmed, families join the municipal waiting lists. If successful in their bid for a social housing unit, qualifying families receive preferential mortgages (100% loan-to-value and 4.5% interest for the 0-to3-times minimum wage income bracket) and tax exemptions, as well as federal government aid with mortgage payment default in case of unemployment or illness. All finance for the program is managed by the federal bank, Caixa Economica Federal, the largest publically owned bank in Latin America and market leader in the Brazilian mortgage sector. Finance is two-fold in the form of mortgages for homeowners and funds for developers.

██ Progress So Far By the end of 2010, all MCMV objectives were partly achieved, a pattern that has continued throughout 2011. In December of last year, just over 1 million units had been contracted (although not delivered) with 85% of these for families within the 0-to-6-times

minimum wage bracket. Delivered projects – most large cities have at least two so far – attract huge media attention, with local and government officials present at completion. Brazil’s civil construction sector has received a huge boost from the program. Some 665,000 jobs have been created at national level, a major factor behind Brazil’s current low levels of unemployment (6% in July). Local economies have benefitted directly and indirectly from the program – for example, the state of Rio Grande do Norte has received an injection of R$1.4 billion since MCMV began. Brazil’s mortgage sector has experienced a similar boom as seen in statistics from the Brazilian Mortgage Association (ABECIP). The total value of home loans in 2010 reached R$56.2 billion. In May this year, mortgage lending had already reached R$70.9 billion, an increase of 26% on last year’s total. Caixa reported a 59.1% rise in home loans in the first semester of this year when the bank approved loans for 550,000 MCMV clients, reaching a value of R$12.6 billion.

██ Investment Opportunities Real estate construction on this scale presents numerous investment opportunities. As A.T. Kearney , in “Recovering Markets, Revised Ambitions,” “low-cost housing is a new frontier for developers in many emerging markets.” Attractions of the Brazilian program include its vast scope (3 million units), 100% government backing and finance, and millions of Brazilian families desperate to be one of the lucky homeowners. Despite the low-cost nature of the program, high profit margins are available in projects

Regulation in the right location and with Caixa approval. “Interest in the program has been huge,” says Mr Hardacre. “All Brazilian home developers are participating plus many foreign investors through association with Brazilian partners.” Investment options vary from participation in a real estate fund (including MCMV projects) to capital investment within a specific MCMV project. Direct investment in MCMV units is not possible since nonresident foreigners are not permitted to own social housing in Brazil. Due diligence is, as always, essential in the

choice of social housing investment. Projects should meet Caixa criteria including adequate location (proximity to schools, health centers and transport) and construction by a Caixa-approved developer. Area location is another consideration – profit margins (and therefore returns on investment) tend to be better outside the metropolitan areas of Brasilia, Rio de Janeiro and Sao Paulo where land prices are high. Under MCMV regional distribution, Brazil’s Northeast has an allocation of 34%, similar to the Southeast (37%). Much cheaper land costs and comparable demand levels give northeast Brazil the edge on MCMV investment potential.

In less than three years and only half-way through its schedule, MCMV has already brought dynamic changes to Brazil, providing first homes and job opportunities, boosting construction and mortgages, and producing unprecedented expansion within the real estate sector. Unsurprisingly, this social housing model has attracted international attention from emerging markets such as China, Colombia and Uruguay, keen to learn from Brazil’s success.

Author Biography Joanna Styles writes for Obelisk International, an investment company specializing in social housing projects in Brazil. Obelisk International currently has over 3,300 social housing units under construction and management within the Minha Casa Minha Vida program in northeast Brazil. www.obeliskinternational.com www.minhacasaminhavidainvestment.com

Regulation

FDI regulation

and Public-Private

Partnerships

in Brazil ██ Entry and registration of Foreign Capital

t is mandatory for every foreign investment made in Brazil, either direct productive investments or investments in the stock market, to be registered under the Central Bank of Brazil. Upon registration and issuance of the “Foreign Capital Registration Certificate,” the non-resident investor will be granted three specific rights: I) remittance of profits; II) repatriation of the capital, at his or her will; and III) right to reinvest the capital in Brazil. Those specific rights do not exclude private property rights, which are currently constitutionally protected in Brazil, as well as extensively covered by the Civil Code and other regulations. The registration of foreign capital must be made through the “Electronic Declaration Registry for Foreign Direct Investment,” RED-IED in the Portuguese acronym, which is part of the Central Bank Information System.

██ Different classes of foreign direct investment I - Currency Investments No preliminary official authorization is required for investment in currency. The investment to subscribe for capital or to buy a stake in an existing Brazilian company can be remitted to Brazil through any banking establishment authorized to deal in foreign exchange. However, closing of the exchange contract is conditional on the existence of a RDE-IED registration number for the foreign investor and the Brazilian investee. II – Investment by conversion of foreign credits

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Pursuant to article 8 of the Annex to Circular 2.997/00, conversion into foreign direct investment is defined as “the transaction whereby credits eligible for offshore transfer based on prevailing rules are used by nonresident creditors to acquire or pay up capital ownership in a Brazilian company.”

Regulation

Foreign credits, in this scenario, would be, for example, payments due by the Brazilian importer or international loans yet to be paid.

Against Financial Illicit and Supervision over Exchange and International Capital (DECIC).

Conversion into investment of foreign credits duly registered in the RDE-IED Mode is not conditional on the Central Bank’s preliminary Authorization.

III – Investment by import of goods without exchange coverage

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Investments related to foreign resources not registered in the RDE-IED System are subject to preliminary authorization from the Central Bank Department of Combat

Investments made via import of goods (tangible only) without exchange coverge, that is, without payment to the foreign seller, as contribution to corporate capital, do not require the preliminary approval of Central Bank. Although, they still require registra-

tion. Intangible assets, on the other hand, must be subject to DECIC’s approval. Registration through the RDE-IED Mode requires that both tangible and intangible assets

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Art

Limes

██ Stephen Kaczor

A Big Business in LatAm

ince 1985, citrus consumption and production have increased steadily, and due to improvements in transportation and packaging, costs have lowered as quality has improved. Limes are the smallest members of the citrus family, but they are big business. It is rare to find a market or even a kitchen without limes. Mexico and India grow the most limes, each producing more than 2 million tons annually, though India does not export them, as domestic demand exceeds supply. Argentina and Brazil each produce more than 1 million tons of fresh limes on an annual basis. Argentina dominates exports of fresh lemons, but it is the world’s third-largest lime exporter, just ahead of Chile. In Brazil limes comprise 20% of the world’s largest citrus crop, making it the world’s second largest exporter. Mexico is by far the world’s leading exporter of fresh limes. Mexican limes, known as “limón” or “key limes,” are sour, but Mexico also grows the sweeter Persian lime for export. Lime trees are more sensitive to cold than lemon trees and they prosper in warm, moist climates with moderate rainfall. Although lime trees are drought resistant, they commonly fall prey to fungal diseases when presented with too much rain. Seedling lime trees yield fruit in 3 to 6 years, reach peak yields within 8 to 10 years of planting and produce well for at least 20 years. Production was increasing at 3.6% annually during the 1990’s, according to the Foreign Agriculture Organization, dropping below 2% in recent years.

Agribusiness The top-growing region in Latin America is Martinez de la Torre, Veracruz, which exports to the U.S., the E.U. and Asia. Mexico grows limes primarily for sale as fresh fruit, but also exports juice and lime oil. Oil from lime peels is used in cosmetics, shampoos and body lotions. Only 20% of fresh production is exported, compared to over 50% of processed production. In my experience working with lime growers in Martinez de la Torre, it has become clear that this is a volatile market. Properly tended orchards are solid investments over the long-term, but they are inherently risky in the short term. Growers that survive bank a significant portion of their profits during good years because price fluctuations guarantee bad years as weather and disease affect global yields. The upside of this market is that that demand for limes is consistent, strong and growing. Fresh produce is not a business where publically traded companies prevail. Nor are many farmers vertically integrated. Farmers are routinely represented by distributors or cooperatives that manage packing, logistics and retail sales on behalf of their farmers. To enter the lime business as a wholesaler, it is necessary to cultivate relationships with corporate procurement and merchandising professionals at Fortune 100 retail grocery chains. According to Tom Argyros, a retail sales specialist at L&M Companies, “We advance funds to Mexican growers for limes to ensure good delivery to the border. Sometimes we also pay cash for the product at the shed level, other times we negotiate deals at a 10% commission, plus expenses incurred. Other major players in the industry are Coast Tropical, GM Super sales, Food Source/CH Robinson, London Fruit, Tavilla Sales, Splendid Products, and I. Kunik.” L&M, a major produce importer based in North Carolina, carries a diverse line of fruits and vegetables, which is a necessary strategy at the wholesale level to gain access to retail shelf space. It seems as though, aside from Mexico, other Latin American markets are realizing the potential of the citrus market. In May of 2011, the Venezuelan national executive gave its approval for a Bs5 billion (€812m) citrus operation in the northern-central state of Yaracuy. Venezuela’s Land and agriculture minister Juan Carlos Loyo confirmed this during a recent visit to the region: “The minister said that the area of Nirgua in Yaracuy, as well as Miranda, Montalban and Bejuma in the neighbouring state of Carabobo to the east, form a territorial axis with great potential for the commercial production of fruit, particularly citrus.” A recent trend has involved the Venezuelan government stepping in to overtake land from large estates and encourage small producers to set up shop on the land. Some 376 hectares in the Yaracuy-Carabobo area have been ‘rescued’ in this way and citrus output has increased year on year in the first quarter by 291 tonnes. [1] In similar news, in July 2011 it was announced that Cuba will invest US$200 million in the island’s rapidly decreasing industry with the goal of increasing citrus production and helping the country to reemerge as a top citrus exporter. Luis Alberto Torres, technical director of the state-run Fruit Business Group (BFG), told China’s Xinhua news agency in an interview that the program is part of Cuban leader Raul Castro’s wide-ranging reform, which seeks to “upgrade” the Cuban economy, including special strategies to encourage domestic food production. The funding for the project will come entirely from

the Cuban government and it has been stated that the first results are expected to surface by 2013. [2] Cuba currently has 40,000 hectares cultivated with citrus. Export revenues from juice concentrates and essential oils used for cosmetics are worth between US$20 million and $30 million, while the industry generates another $60 million worth of sales in the domestic market, Torres said. Cuba celebrated heavy returns from the citrus industry in 1990, with a harvest of over 1 millions tons of fruit covering 112,000 hectares of land on the island. The revenue during that time was 180 million dollars with citrus as one of the island’s primary exports. At the end of the cold war, the industry all but fell in ruins as the primary export market was the former Soviet Union. The island has made various attempts over the years to reestablish the industry, however they have been thwarted by drought, hurricanes and poor management efforts. According to one news report, “Torres said the program for the recovery of Cuba’s citrus production will require investments of between US$150 and US$200 million, and the programme is scheduled to be carried out over the next 12 years.” [2] For more information on LM Companies, visit www.lmcompanies. com, or visit them at the Produce Merchandising Associations’ annual convention, Oct. 14-17 in Atlanta, www.freshsummit.com

Author Biography Stephen is Chairman of the Big River Foundation, a non-profit focused on river and watershed ecology conservation initiatives throughout the Americas. He is an organic farmer, eco-entrepreneur, consultant, and a writer with a documentary film in production in Central America. As a Panamabased consultant, Stephen’s focus is sustainable organizational development, research & management. In addition to consulting and writing, he is passionate about sustainable agriculture, Latin American culture, travel, and the ecology. www.BigRiverFoundation.org *[1] - http://www.fruitnet.com/content.aspx?cid=10600&ttid=17 *[2] - http://www.freshplaza.com/news_detail.asp?id=82979

Latin American Hedge Fund Overview

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Hedge Funds ██ LatAm Hedge Fund Roundup Hedge funds have become one of the most vital asset classes in LatAm in recent years, and LatAm hedge funds some of the most successful in the global industry, as local investors aim to diversify their strategies and exposure in the region while foreign investors vie for booming regional wealth and a deepening pool of talented local managers. According to a July report from Eurekahedge, a research firm that tracks the hedge fund industry, Latin America currently has 442 operational hedge funds, four times more than it had at the end of 2000, with a total of US$64 billion AUM, up 23-fold from 2000. These numbers do not include Brazil’s socalled multimercado funds, which are similar hedge funds but distinguished by tighter regulations; the Brazilian Financial and Capital Markets Association (ANBIMA) calculated the massive multimercado industry as having US$248 billion in AUM at the end of 2010, up 29% from the year before. Investors are attracted by the increased liquidity in the region, where Brazil’s stock market is currently the fourth-largest in the world and the recently formed Integrated Latin American Market (MILA), a cross-trading platform uniting the Colombian, Chilean and Peruvian stock exchanges, promises to dramatically improve the capital markets in the Andean region. They also see a proliferation of sophisticated strategies in local LatAm hedge fund mangers’ toolkits. And in Brazil specifically, some investors are drawn to the highly regulated and transparent multimercado model. “The Brazilian hedge fund is somewhat different from the average global hedge fund,” explains Mauricio Bicalho, Director of Triscorp Investimentos. “It looks very much to the UCIT-3 type of vehicle that is now becoming flavor of the month for European investors.”

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██ Brazil As Brazil has received the vast majority of foreign and local investment in LatAm, so has it lead the hedge fund charge. After a decade-long maturation process that saw its offshore hedge funds and onshore multimercado funds grow in size and sophistication, successfully weathering the storm of 2008-2009, it is now attracting major global

hedge funds to its market. Breven Howard of London, the fourth-largest hedge fund in the world, recently opened an office is São Paulo, while JPMorgan’s Highbridge, the world’s second largest, acquired the Brazilian firm Gávea, a US6-billion fund, last October. Brazil also boasts a handful of local funds with over US$1 billion. Ernesto Leme, CEO of Wealth Management at Claritas Investments, a São Paulo-based hedge fund, remarked on the change of foreign investors’ attitude toward Brazil: “I lived abroad for 7 or 8 years, in the U.S., England, Switzerland, and ten years ago, when I said I was from Brazil, they basically told me to sit

“I didn’t want to launch just a fixed-income fund, because I think when people want to invest in the developing world and in LatAm, they understand that that it involves extra risk and they want some extra juice for it. to the side and listen to them talk so I could learn something. But now when I go to Europe, everyone wants to give me the best seat at the table.” And while, several years ago, the interest came more from Europeans and American investors, Mr. Leme says it is more diversified today, with potential clients visiting from Africa, Asia and the Middle East. These investors are attracted, first and foremost, by the strength of Brazil’s economy, and especially for its independence, in many respects, from the generally bleak global context. As Mr. Leme sees it, “Brazilian internal demand is driving the economy. 2010 was clearly a year for companies that benefited from local consumption.” Claritas, his firm, has a fund called the Brazilian Value Fund, which focuses exclusively on domestic assets. “It was up 35% last year when the Bovespa was up only 2%, simply by focusing only on companies that tap domestic growth: retailers, toll road concessionaires, airplane carriers, etc., all these companies that benefit from this internal dynamic.” He is also confident in Brazil’s demographic advantage, as

well as the quality of its natural resources, including its soil and climate, for commodities and agricultural production. He says that infrastructure and education are two extremely important areas of weakness in the country that will require enormous investment. But in spite of global concern over a possible Brazilian bubble, he thinks the prices, overall, are still right. “We see many opportunities in Brazil, especially in the equity arena, as well as in the fixed income arena because of the interest rates. In terms of equities, we have companies trading at multiples that are deeply discounted even from the average of other emerging markets.” Yet, aside from Brazil’s strong and promising fundamentals, investors are attracted to the increasing sophistication of its local managers and the wider array of strategies and products they are utilizing for high returns. Versatile multimercado and Brazil-focused hedge funds are particularly attractive as equity-focused funds struggle with an underperforming market. “The Bovespa is very volatile,” says Alexandre Andrade, the chief economist of KLL Investments. “It’s not a proper investment for a typical individual investor in Brazil, because it has low return and very high risk due to the movement of the economy. We think structured products are more appropriate for the moment, and especially for us, because we are a small firm, and we’re trying to offer another alternative to Brazilian investors.” This alternative includes asset-backed and receivable funds aimed at giving credit to small cap companies, a type of product that, Mr. Andrade says, is relatively new in Brazil. Gabriel Pellegrini, the founder of Kondor Edge, a small firm focused on quantitative trading, has seen that strategy grow in recent years.

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In the end, we conserve only what we love; we love only what we understand; and we understand only what we have been taught. —Baba Dioum, 1968 Founder, International Union for the Conservation of Nature

Preserving the Last Central American Kingdom

Big River Foundation

██ Tiffany Joy Swenson

atershed ecology is more of a philosophy than purely a scientific investigation. It pursues not only the management of the world’s streams and rivers, but also the behavior of the people and societies interacting with and depending on these watershed ecosystems. The philosophy is based on a purposeful search for communal awareness, and a realization of the interconnectedness that ties together everything on and within this watery planet. It integrates geology, hydrology, chemistry, biology, sociology, economics, history and art into a composite science that can transcend many artificial and academic boundaries. The Big River Foundation is a 501c3 educational non-profit, whose goal is to offer individuals the opportunity to have hands-on, educational experiences focused on watershed ecology issues. Chairman Stephen Kaczor feels that the current generation is suffering from a “Nature deficit disorder” and in order to combat that, he has created a motto for their foundation – “Healthy Rivers, Healthy Communities.” The foundation was started in Los Dos Laredos on the Mexican/American border, where Eric Ellman, the foundation’s Executive Director, had been paddling the Rio Grande/Rio Bravo for more than a decade. In this community, however, many of the children had never even visited the river in their own “backyard.” When the Big River founders realized this, they conducted a study in Laredo and the

survey results showed that most of the people in the community felt that their river was dangerous. The mission of the Big River foundation is to dispel this common misconception and to teach communities to value the vital role rivers play in the web of life. They incubate programs that foster respect and appreciation for river ecology and conservation, encouraging kayaking, canoeing and rafting to explore rivers, their tributaries and watersheds. To date they have taken over thousands of paddlers and hundreds of trips down the Rio Grande. Furthermore, they sponsor programs in partnership with schools, youth groups, local governments, non-governmental organizations, river outfitters and community advocates. These grant-funded programs help to teach the children of the community that not only is the river a wonderful natural resource without which life would be impossible, but it is also a great recreational option, encouraging them to “get away from that video game” and out into nature. Through experiential education, recreation and advocacy, the Big River Foundation hopes to mobilize community support for river-based initiatives.

██ Preserving the Last American Kingdom

Central

When Mr. Kaczor relocated to Panama in 2009, he became involved with the Tjër Di Naso tribe, and quickly realized that his foundation’s mission is much bigger than any one river. Living along the Rio Teribe on the Costa Rica/Panama border, the Tjër Di Naso is one of the smallest in-

The Naso are a river people from birth

Philanthropy digenous tribes in Panama, and it currently faces a giant dilemma. The Tjër Di Naso tribe is the last kingdom in the hemisphere. In an October coronation celebration, the tribe will crown 30year-old Reinaldo Alexis Santana as the youngest king ever to rule the Tjër Di Naso. Aside from the cultural patrimony, the Tjër Di Naso’s land is the first international biosphere reserve, a precious commodity. There is currently a proposal for three damns to be built within the reserve, which would diminish the river and destroy the Tjër Di Naso’s way of life. One has already been constructed: a small micro-hydro project that fortunately by itself won’t make the river unnavigable, fill it with silt, or lead to a cascading system failure in the species that inhabit the river. However, with the addition of the other two damns, these negative outcomes are most certain. The proposals come from AES Changuinola S.A., whose parent company in Colombia is one of the world’s largest global energy businesses, and who will export electricity from the Naso’s territory to Costa Rica, for profit. In the eyes of the Naso, such corporations are this generation’s Spanish conquistadors. The Big River foundation is currently involved in creating a documentary film to bring media attention to the serious situation facing the Tjër Di Naso - collaborators are Jennifer Long of Costa Rica and award-winning filmmakers Jeffrey Porter and Tony Pagano. The goal, through the film and involvement with ODESEN (Naso Organization for the Development of Sustainable Ecotourism), is to create educational journeys down to the Rio Teribe – called ““Watershed Watch Expeditions” - to provide students exposure to how an intact watershed operates. This will help them to understand how a river system is designed to work naturally before the bulldozers are brought in, the damns are created, and the silt muddies the crystal waters. ODESEN leaders Adolfo Villagra and Edwin Sanchez have been developing ecotourism for the Naso for the past seven years.

██ Big River Foundation’s focus in Tjër Di Naso territory: Work alongside the Tjër Di Naso people to retain autonomy within their ancestral territory. They are currently lobbying to attain a “Comarca,” or autonomous territory. This was achieved by the Ngöbe-Buglé tribe in 1997 (see pull out box on page …) Start an eco-tourism project, which would al-

There are no roads, the Rio Teribe is the Naso freeway

low teachers and groups of students to come down to the area and participate in programs including hiking, kayaking and instruction regarding watershed ecology – in the end creating a new source of income for the Tjër Di Naso tribe. As the reserve upon which the watershed is located has been named a UNESCO world heritage site, the Big River Foundation intends to work alongside the UN and ODESEN to lobby against the construction of the two remaining new damns.

██ The Ngöbe-Buglé Saga The Ngöbe-Buglé is sitting on the largest remaining copper deposit in the Americas. In 1997 the Ngöbe-Buglé marched to Panama City to request a Comarca (autonomy over their territory). One of the largest tribes in Panama, the Ngöbe-Buglé represents 10% of the population. The Panamanian government granted the Ngöbe-Buglé autonomous territory and set aside almost 10% of Panama’s land for their inhabitance. On this land existed a traditional copper mine operated by Canadian company Tiomin Resources. Once the Comarca was approved, the mine was grandfathered by the Ngöbe-Buglé people. When PanaCobre realized the extent of the copper available on the land they set their sights on the creation of an open pit mine. “Canadian company Tiomin Resources, through its wholly-owned subsidiary PanaCobre, has construction planned for a project that could displace 15,000 people and create an annual 27 million tons of waste rock alongside 26 million tons of acid waste and sulphur dioxide.” Source: http://abyayala. nativeweb.org/panama/panama3.html

The government of South Korea lobbied the national assembly of Panama for a law, “Ley 8,” reforming the mining code in Panama and allowing for the first time direct foreign investment into the mining sector – specifically US$60 million toward the construction of the open-pit copper mine on the NgöbeBuglé’s comarca. Not only would open-pit mining destroy the watershed and ecosystem of the land, it is a direct violation of the indigenous rights of the Ngöbe-Buglé tribe. In early March 2011, the Ngöbe-Buglé people gathered forces and blocked the Pan-American Highway, gaining international attention. It was this opposition and the fact that polls show that 75% of Panamanians are against mining development, which led President Martinelli to repeal the law in late march. With the country’s desire to increase their tourism-based revenue, many are aware that all rivers lead to bays – the main resource for food and ecotourism activities. The NgöbeBuglé remain united against open-pit mining and have inspired the Naso to resist exploitation of their natural resources by petitioning the government to put indigenous human rights above corporate interests. The best way to support the Big River Foundation is via donations of either time or money; there are rolls for volunteers in programs both stateside and abroad. Please contact Steve Kaczor for information on how to be involved. Stephen Kaczor, Chairman Healthy Rivers, Healthy Communities Steve@Big R iverFoundation.org

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Emerging Markets

Understanding Brazilian Interest Rates

ast August, Brazil’s central bank surprised the world by cutting its benchmark Selic interest rate 50 basis points, from 12.5% to 12%. The cut reversed a steady tightening trend over the previous year-and-a-half, during which time the bank raised the Selic 175 basis points in an effort to prevent overheating and meet its professed inflation target of 4.5% (plus or minus 2 percentage points). Reuters reported after the cut that every economist it polled had expected the rate to hold steady at 12.5%, and 62 analysts surveyed by Bloomberg said they were surprised. Daniel Osorio, CEO of Andean Capital Management, a Colombian hedge fund, summed up the LatAm reaction, saying that “a lot of people were caught off guard.” Policymakers justified the move by arguing that the global economic situation had worsened significantly over the previous few months, and that, in the newly grim context, they could cut the rate and still reach their inflation target by year’s end. According to Bloomberg, stocks lost US$5 trillion globally between the central bank’s July and August policy meetings, and just a few days after the August 31 cuts, economists surveyed the central bank cut their Brazilian growth forecast to 3.67%. Goldman Sachs also cut its 2011 forecast from 4.5% to 3.7%. In addition, there were concerns over Brazil’s currency, the real, which many felt was overvalued; Brazil’s interest rates – still the highest among G20 countries – have attracted a flood of speculative foreign investment in government bonds in recent years, putting upward pressure on the real and weakening Brazilian industry and exports.

Many analysts disagreed with the government’s bleak prognosis of the global economy, as well as with their confidence that they could reach the inflation target. On the eve of the cut, inflation over the previous 12 months was 7.23, and the value of the real had already begun falling sharply against the dollar, due to the mass flight of foreign money from emerging markets in the face of the European crisis. This devaluation, combined with Brazil’s rapidly expanding credit and the lowest unemployment numbers on record, are worrying inflation-wary investors. As Mr. Osorio put it, “You speak to a LatAm banker and ‘inflation’ is still the most terrifying word you can say to him. We’ve prided ourselves in most of LatAm in having very autonomous and conservative central banks, just because we lived through the hyperinflation of the 70s and 1980s. I think the Brazilian stance of ignoring the inflationary concerns to increase growth is a concern.”

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Ventures

LOOGLA What is Loogla? Loogla (a portmanteau of “Looking Glass”) is a second-language learning platform that uses any foreign language text or web site as the basis for the learning experience. The most reliable predictor for effective language acquisition is the learner’s desire to comprehend what is being conveyed by the foreign language. With that in mind, Loogla uses a progress-management system to integrate targeted activities and lessons into any second-language text. How did you come up with the idea? As with most passionate endeavors, Loogla was born out of personal need. After a move to South America for business, it became apparent that just getting by in Spanish was not going to cut it, and taking time out to learn advanced Spanish was a huge burden. A survey of the available platforms, including direct immersion courses, left my partner and me feeling frustrated and let down. Loogla was an epiphany. It made immediate sense. How does it work? Loogla provides a means for instructors to create templated multimedia activities mapped to thousands of granular foreign language subjects that a student engages in while browsing the web. A preexisting interest in the subject matter increases receptiveness to the new language much in the same way that mnemonics are more effective than rote memorization. Content is orchestrated by a branching progress control engine called The Learning Horizon. Students learn from subject matter experts and teachers gain direct access to potential clients for one-onone tutoring. Has anyone else taken this approach? Using spontaneous text as a basis for teaching language is not a new idea, but to my knowledge it hasn’t been explored in this way before. Several companies offer browser integrated vocabulary flashcards or more robust learning objects based on pre-selected texts. Others use collaborative discussion

The Evolution of Language Learning

forums and homework correction to achieve a higher level of personalization. These approaches have their merits, but are more reactive than anticipatory.

corn. Most language learning programs are a derivation of static, ordinal lessons mixed with novice language-exchange partners targeted to beginners.

How has second language learning changed in the past 20 years? The social Internet lends itself well to computational linguistics, which explains the recent explosion in self-paced online language learning. The total market is an estimated US30 billion and English learning boasts a CAGR of 22%. Audio lessons continue to keep commuters reciting sentences about going to the dentist, but more interactive offerings now dominate. Rosetta Stone was the first to really bring language learning from the Walkman to the workstation, but they suffer from the same problem as their predecessors. Adult language learners usually pursue a new language for a specific purpose and have little tolerance for irrelevant content. The latest methodologies acknowledge this and create a more individualized experience. The trend of moving away from direct human instruction with software applications is also beginning to reverse as the technology to connect people improves.

Loogla’s instructor-authored activities position expert knowledge where it’s most effective, and our branching progress control engine allows students to advance in multiple dimensions at once. Students can opt for on-demand tutoring with the author they’ve met through an activity. The lesson plan for tutoring sessions is generated according to the student’s Learning Horizon so any instructor can rapidly familiarize themselves with a student and maintain continuity in their progress. We also manage burnout because the users choose their own content.

Who is your current competition? LiveMocha and Europe’s Busuu are doing well connecting early-stage learners with novice native speakers. Other important online players include iTalki and Babbel, though I’d say language immersion schools and faceto-face tutoring are our biggest competition. Most current language instruction is also geared towards beginners. We’re targeting the underserved intermediate and advanced learners who are stranded on the “language plateau.” We call our target customer “The Rosetta Stone Refugee.” How is your approach better than current methods? A close look at the language instruction landscape starts to resemble the cereal aisle at the grocery store: a myriad of ways to repackage

Does the flexibility and specific content of Loogla target those looking to do business in Spanish? Our methodology adapts to any niche. This is especially relevant where specialized lexicons figure heavily. Classic examples are business, medicine and law, but we believe that a curriculum should always be individual. Loogla fosters the acquisition of advanced language skills in conjunction with personal and professional interests, not at the expense of pursuing them. What stage are you at? We’ll soon be conducting a closed beta. What is your exit strategy We’ve built Loogla to be extensible and adaptable. Despite being founded with passion, it is a business, and we would entertain an attractive acquisition offer down the road, though preferably well down the road. Anything else you want the world to know? These are exciting times. Accessible technology is fundamentally changing the way we acquire new knowledge and skills. We’re thrilled to be at the vanguard.

Infrastructure Debt Funds Exchange Rate Risk in Latin America

Infrastructure

few months ago, I was asked to consult a investment professional at a certain infrastructure advisory firm on how managers of an infrastructure debt fund (IDF) in an emerging market hedge against exchange-rate risk. This matter is of critical importance when GPs lend to an IDF in a hard currency (e.g. U.S. dollars, euros, yen) and the IDF’s assets are in the project’s currency. It is also convenient for the lender and the economy as a whole because the number of potential borrowers exponentially increases. In those respects, I would like to highlight the value of providing debt financing in the same currency as that of the borrower’s revenue. High levels of foreign direct investment, fiscal conservatism and favorable trade conditions have resulted in wealthy LatAm treasuries. A neglected issue a decade ago, now the matter of currency appreciation often makes the headlines in LatAm newspapers. Due to the solidity of several domestic currencies, providers of financing have begun to explore and implement the idea of lending in domestic currencies. Still, of course, the issue of hedging against possible exchange rate fluctuations should be considered by managers of IDFs when their investors have provided them with a hard currency. Managers of an IDF have several possible ways to hedge against the risk of currency movements. Note that some of these ways are more conventional than others and that some require a legal feasibility analysis and structuring. It is interesting to note that, in some cases, these ways can supplement each other. (1) The use of forward contracts. When two parties execute a forward contract they are basically agreeing to exchange an asset at a determined future moment but at a price agreed upon during said execution. The customary maximum duration of these contracts can be helpful in dealing with the issue at hand. Because these are contracts and not options, fund managers would have to make sure that there is a safe incoming cash

flow (reviewable tariffs and off-take agreements, assignments) to service the debt. (2) The use of currency options. Given the nature of options, should the local currency go through an appreciation phase, the option holder is not obligated to exercise its right to purchase a certain amount of currency at a determined rate. (3) Sharing the risk with the project company. This is a more unorthodox solution but one that may be worth considering. The structure would be as follows (it should be adapted to the local scenario): a collateral trust would be opened where the project’s excess cash flow (in local and/or in hard currency, if applicable) would be deposited in case of a local currency devaluation to cover part of a certain percentage of the contingency. Should the local currency go through an appreciation the threshold for minimum amount deposited could be lowered. (4) Foreign exchange holding. The IDF can commit to maintaining a financially viable foreign exchange holding-to-total capital ratio or foreign exchange holdingto-total liabilities ratio. These ratios can have maximum and minimum thresholds and/or time durations. But the idea is that the foreign exchange holding would be enough to cover for the liabilities that can arise out of probable (key word) exchange rate fluctuations.

(6) Guarantee from the State. The fund managers can lobby with the State that is hosting the project, the execution and the implementation of guarantee contracts that provide exchange rate insurance. We have seen this in Chile and European countries such as Spain and Italy, but in those cases with concessionaires. The way it would work is rather simple. For example, should the cost of servicing a dollar-denominated debt increase more than 10% -- due to a currency fluctuation, say – the State would cover the difference; and should the cost decrease more than 10%, then the IDF would pay the difference to the State. Said difference could be deposited in a reserve trust. Author Biography Patricio Abal is an infrastructure law and finance professional, the Infrastructure Editor of Alternative Latin Investor and a Director at Latin Infrastructure Quarterly. He holds a J.D. from the Universidad Católica Argentina, is a Master in Project Evaluation Candidate at UCEMA & ITBA and a Master in Finance Candidate at UCEMA. He is an Attorney at DFG Abogados. patricio@alternativelatininvestor.com.

(5) Credit line with a Multilateral Financial Institution (MFI). The idea is to request disbursements to the MFI should there be a need to cover liabilities resulting from currency fluctuations. This can be done through a short-term renewable credit line if the fund managers are expecting a certain level of profitability. Also, and to be safe, the IDF’s managers should consider incorporating rollover provisions. Also, this credit line would have no cut-off date for a last disbursement, that is, the IDF would be able to request disbursements any time during the life of the credit line.

Agribusiness

Venture Capital Investing in Brazilian Agritech: ALI Speaks with Francisco Jardim of Criatec São Paulo

round 2005, the Brazilian National Development Bank (BNDES), one of Brazil’s largest institutional investors and the largest development bank in the world, noticed a void in public funding for early stage venture capital in the country, particularly in the areas of innovation and technology. Brazil’s universities were rife with entrepreneurs and innovators, and the balance had shifted at São Paulo’s business schools, with more and more top-of-the-class graduates embarking entrepreneurial ventures instead of traditional financial careers. The ecosystem for early-stage venture capital had been formed, but available capital was in short supply.

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To fill this void, BNDES decided to create a special seed fund, making a public tender for a private company to organize it. The winner, in turn, was to choose local fund managers to manage distinct regional funds, as BNDES felt that early stage venture capital investment required a local, on-the-ground presence across Brazil’s large, culturally diverse geography. The Rio-based company Antera

won the bidding founded Criatec Brasil, comprising six regional funds. Since 2007, Criatec has invested about R60 million in thirty companies, focusing on young companies that need capital but already have some footing, with US$6 or 7 million of annual revenue. One hundred percent of Criatec’s funding is public money, with eighty percent coming from BNDES. The São Paulo arm of Criatec, headed by Francisco Jardim, has invested about R20 million in eight companies, at various stages of development and from all parts of the São Paulo province. The agricultural biotechnology subsector accounts for four of these companies. Mr. Jardim says that this was not the fund’s intention at the outset, but that the

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Agribusiness