Renato Weiss, Principal at Lexington Partners, talks about the plans of the newly-opened São Paulo office and says that the crisis reinforces the positioning of alternative assets for offering solutions to investors and managers.
The covid-19 pandemic may stimulate the development of the secondary market for alternative assets in Brazil. During the crisis, fund shareholders crave liquidity and managers prefer to wait for the turbulence to pass, in search of greater profitability, which opens a window of opportunity for secondary companies like Lexington to provide liquidity to investors and long-term capital to managers, assesses Renato Weiss. "After two years of recession, from 2015 to 2016, and the current pandemic scenario, the expectation is that the secondary market will grow more and more. The moment is favorable for the segment," he evaluates, in an interview with ABVCAP.
Looking at the maturing of the private equity and venture capital industries in Brazil, Lexington opened its first office in Brazil in January of this year, in São Paulo, the second in Latin America after Santiago, Chile. The goal, according to Weiss, is to reinforce its presence in the region and to be closer physically to Brazilian managers and investors, who are increasingly more experienced and qualified. "The proximity reinforces the relationship we already have and helps establish new bridges. Having a local presence makes it easier to get to know managers and companies better than remotely," says Weiss.
Lexington has investments in about 20 funds managed by more than a dozen managers in Latin America. Brazil concentrates two thirds of this amount, in a growing market, which led to Lexington's decision to open an office in the country. According to Weiss, Lexington is looking for opportunities in the secondary market with managers of excellent quality. And even though he evaluates the secondary market in the country as incipient, he sees a great potential for growth, which should be driven by the consolidation of the primary market for funds. Read some excerpts of the interview.
Why opening an office in Brazil?
It really makes sense to be in close physical proximity to the managers. Lexington has investments in thousands of funds, managed by hundreds of managers, all over the world. In Latin America there are about 20 managers who have their headquarters or an office in Brazil, which accounts for two thirds of the active managers in the region. The proximity reinforces the relationships we already have and helps us build new bridges. Having a local presence makes it easier to get to know managers and companies better than remotely.
Did the current macroeconomic situation contribute to the decision?
The decision to open an office in São Paulo has a long-term profile and is independent of the current macroeconomic situation. Nevertheless, the current moment of low interest rates and the continuous growth and sophistication of the investor profile have contributed. We see more and more interest from families, multi-family offices, and institutional investors in search of profitability and looking for alternative assets. In this context, local presence allows us to be close to them as well.
How can the secondary private equity market benefit from this scenario?
In the last 12 years, about US$ 70 billion was raised for private equity funds in Latin America, and much of it is still on the ground. On the one hand, limited partners (LPs) are pressing for liquidity, and on the other hand, managers, who have gone through several crises, are waiting for more time for the invested companies to reach a higher growth potential. All of this creates a very favorable condition for the secondary market, which acts precisely to solve this issue: leaving shareholders with the possibility of liquidity, and the manager with the chance to keep the companies for a longer period to maximize the return on the capital invested.
What will be the strategic approach of Lexington's Brazilian headquarters?
The São Paulo office complements Lexington's presence in Latin America, considering the Santiago office opened in 2016. As the financial center of Latin America, São Paulo serves as the headquarters for many high-quality national and regional private equity groups, many of whom Lexington has long-standing relationships with. Therefore, the São Paulo office will allow us to strengthen our existing network and establish new networks. In addition, we see increasing interest from family offices and institutional investors in international investment options, and a local base allows us to be in regular contact with them.
What are the differentials of the Brazilian investment industry that caught Lexington's attention?
The representativeness and development of the Brazilian private equity market stands out in relation to other peers in Latin America. In Brazil there are several managers with excellent skills, who have been in different cycles for several years, and have well-established teams. They are professionals who have raised several funds, many of which we have already invested in. We are close to global institutional private equity investors, including sovereign, pension and insurance funds, among others. And we often see Brazilian funds in these portfolios. It is an interesting time to have private equity exposure in Brazil.
Are there other Latin American capitals that are on Lexington's radar to expand internationalization?
For now, we intend to keep the offices in Santiago and São Paulo.
In Brazil, how do you evaluate the potential of the secondary private equity and venture capital market, amid the continuing covid-19 pandemic?
On one hand, the pandemic reinforces the tendency for managers to be cautious when selling assets. Some may prefer to wait for a more appropriate moment to do so. On the other hand, other investors seek more liquidity, for different reasons, and the secondary market comes in precisely to make sure that everyone achieves their goals. By investing in a certain fund, we can give liquidity to an LP, always valuing quality, and give more time to the manager who wants to keep his portfolio of companies.
How do you evaluate the size and potential of the secondary private equity market in Brazil?
It is still early stages, because the secondary market usually develops about ten to fifteen years after the primary one. It is natural, after there is a primary fundraising and stock formation, it is expected that in the following years, a portion of these same funds will be traded in the secondary market. If we look at fundraising from 2010, 2011 and 2014, we had spikes in performance. We see some funds becoming concentrated in the hands of a few players, but there is already a primary market of sufficient size to guarantee more and more volume in the secondary. After two years of recession, from 2015 to 2016, and the current pandemic scenario, the expectation is that the secondary market will grow more and more. The moment is favorable for the segment.
Given the secondary market in Brazil is still in its early stages, is there potential?
Yes, for sure. In 2021, several vintage funds from 2010 and 2011 will end. Many of them are assets that went through impeachment (of former president Dilma Rousseff), economic recession, covid-19, currency depreciation, among other factors. And the managers recognize that they are particularly good quality companies, and they do not want to have the obligation to sell them in a hurry. They know that if they stay a little longer, they will be able to multiply the value of these companies. This collective perception strengthens the potential of the secondary market in Brazil.
Even though you invest in funds and not directly in companies, which sectors are most representative in Lexington's portfolio?
Each of our funds does almost a hundred transactions, buying stakes in about 500 funds, and thousands of companies. Globally, these companies are from sectors that private equity managers around the world also invest in. Nowadays, the most representative sectors in our portfolio are healthcare, information technology, financial services, and consumer. In Brazil, they are basically the same sectors, especially the first three. They are generally resilient and volatility-proof sectors.
How does the leading position in the secondary market guarantee a strategic differential in Brazil?
Leadership in the secondary market is crucial and more important than in the primary one. This is because we naturally get exposure to private, non-liquid funds, with information that is not public. When you look at an investment portfolio of dozens of private equity funds and hundreds of underlying companies, the best way to get access to information is to already be an investor in those funds. This is the case at Lexington: we are investors in thousands of funds, managed by hundreds of managers. Another reason is that secondary market transactions are typically large in volume, sometimes over $1 billion. Therefore, having robust funds helps us offer a complete solution to sellers.