Canadian pension funds expand their investments in Brazil and celebrate their 'rediscovery' of the country well before its ascent in the international scenario
Canada's interest in Brazil is nothing new. In the early 20th century, the Toronto-based Light & Power Group began investing in the country and played a decisive role as a major electricity supplier to support the start of Brazil's industrialization. After selling off their power distribution assets, Light's controllers opened Brascan, which continued to invest in several segments including the local financial market. Foresight has been a trademark of Canadian pension fund operations in Brazil. Marcio Mello Silva Baptista, a partner with Tozzini Freire Advogados and head of the law firm's New York office, recalls that investments from Canadian private pension entities began to appear in Brazil even before the international risk agencies first rated the country investment grade in 2008.
American pension funds are usually reluctant to invest in countries without that stamp of approval. But the Canadians trusted their own assessments and beat the rush by investing directly in the Brazilian market, abdicating in some cases from using asset managers as intermediators and seeing no need for ratings. Their reward: good opportunities at rock-bottom prices. "We focused on the fundamentals of Brazil's economy, which looked good to us", states Wayne Kozun, senior vice-president of public equities at the Ontario Teachers Pension Plan (OTPP), a major Canadian investor. According to Kozun, Brazil achieving investment grade was only a matter of time.
The OTPP represents 289 thousand active or retired teachers in the province of Ontario. It manages US$ 94.9 billion and invests mainly in oil, mining and mall management companies. The fund began prospecting for opportunities in Brazil in 2006, when its executives made an investigatory trip to the country. Initially, an amount between US$ 400 million and US$ 500 million was invested in equities from such corporations as Petrobras and Vale. Today, the fund invests heavily in Brazil: about US$ 3 billion in Eike Batista's OGX oil company and approximately US$ 1 billion in Multiplan, the mall manager headed by José Isaac Peres. Both are viewed as good partners by the fund. The Canadians really like the fact that beyond founding their respective companies, the two entrepreneurs are directly involved in their operations to this day.
Overall, Brazil is already the fourth biggest recipient of the OTPP investments, after Canada, the United States and the United Kingdom. Among the four largest ownership interests held by the fund, three are in Brazil, where more than 5% of the portfolio has been invested. China and India account for less than 1% each. "China still hasn't returned to its pre-crisis levels", Kozun asserts. Brazil provided a quicker profit. OTPP celebrates the fund's results in Brazilian reais in 2009 (most recent available data): 255% returns from OGX, 163% from Multiplan and 570% from LLX. In addition to these companies, OTPP also holds interests in MMX and Brasil Foods. For major transactions, the fund invests directly in the target companies, but brokers (which the fund refuses to name) were engaged for some operations.
Starting this year, OTPP is planning to start retaining the services of BTG Pactual. On December 6, the fund joined a consortium with other international investors including the Government of Singapore Investment Corporation (GIC), the China Investment Corporation (CIC) and the Abu Dhabi Investment Council (ADIC) to acquire US$ 1.8 billion in new shares issued by the Brazilian bank. According to Baptista, Canadian funds are being advised to invest in Brazil and look beyond the mining sector – a traditionally strong industry in both countries — and this has been encouraging other investors to come aboard and invest in Brazil as well. He prefers not to name names, but assures that a Canadian bank is making an acquisition in Brazil. "It's a good indication that investors are going in a new direction", he says.
Its upcoming projects include the construction of a mall in Campinas, with the expected opening date in October 2012. The chosen cities are usually state capitals and economic hubs, i.e. significant cities within their states or tourist destinations. The rise of consumption in Brazil has made these choices extremely successful. Sales in malls have expanded relentlessly, even in the midst of crises. The operations are transacted through Ancar Ivanhoe, a partnership created in 2006 with the Ancar group, which operates across all regions of Brazil. The Caisse initially invested about US$ 240 million.
James Mohr-Bell, CEO of the Brazil-Canada Chamber of Commerce (BCCC) in São Paulo, observes that Canadians are naturally reserved and therefore not prone to shout their investments from the rooftops. Decades ago, they bet little of their investment money on Brazil, held back by the country's track record of hyperinflation, currency overhauls and other economic uncertainties. The few investments that did make it to the country were meant as portfolio diversifiers and nothing more. "Brazil's development, stable regulations for foreign investments, and the prospects created by the  World Cup and  Olympic Games have made the country an attractive option for investment funds", assesses Raul Papaleo, chairman of BCCC’s head office in Toronto. Brazil's good performance during the international credit crisis in 2008 and 2009 helped lure foreign investors. And the slow economic recovery of developed countries, particularly the United States, is helping the country retain its charm.
ON THE SAME SIDE OF THE GLOBE — In a survey by the Emerging Markets Private Equity Association (Empea) with 151 investors from across the globe, 19% intend to start investing in Brazil whereas only 3% are planning to reduce their interests in the country. According to the survey produced in April 2010, China is still the leading investment target. Brazil takes second place, with India close on its heels. But Brazil holds one advantage over other emerging countries: it's located in the Western Hemisphere, so it poses less of a culture shock than its Asian counterparts.
Baptista believes this is a very important issue. The work methods of Brazilians and Canadians are similar and communication flows easily. An increasing number of Brazilians speaks English; conversely, more Canadians and Americans are learning Portuguese. "The procedures to do business with China are a lot different. You always need a local partner and government permission. And India is extremely bureaucratic", he states. Lalonde from Ivanhoe Cambridge reveals a great affinity with Brazilians: "They're well-prepared people who know what they're doing".
Brazilian companies are also seeking to strengthen their bonds with Canadian partners. HRT Participações em Petróleo – a newcomer on the BM&FBovespa first listed in August 2010 – announced an agreement in late February for the acquisition of 100% of UNX Energy Corp, an independent Canadian oil and gas producer focusing on the sea of Namibia, in Africa. The operation will be implemented via share conversion and HRT will file for registration to issue global depositary shares (GDS) that will be distributed to UNX shareholders and listed on the Toronto Exchange. Also in February, the board of directors at Ventana Gold advised its shareholders to accept the takeover bid by AUX Canadá, a subsidiary of Eike Batista's EBX holding. The operation could reach US$ 1.5 billion.