Investing in Venezuela: Valuations, Risks and Early Opportunities

During their recent episode, Taylor, Carlisle, and Francisco Amador discussed Investing in Venezuela: Valuations, Risks and Early Opportunities. Here’s an excerpt from the episode:

[Francisco] You’ll be surprised. You’ll be surprised because there’s, there’s, there’s everything. I mean, obviously with, with, so post, post January 3rd, the expectations of business owners went up a lot.

And in some cases to like ridiculous levels, like, like, you know, people, people thinking their company is now worth twice or three X what it was worth before. Right. So, so one thing is, one thing is what, what people are asking for when it comes to, you know, either raising capital or, or, or trying to sell their, their business.

The other thing is what is, what are actually transactions taking, taking place at. Right. And, and one, one interesting example is, is actually the real estate market, because that’s one of the more sort of liquid markets.

And, and the, one of the places that people sort of default to when they’re trying to like, you know, say, I want to get exposure to this market. Oh, let’s buy, let’s buy Caracas real estate or something. And, and to give you some idea of, you know, what we’ve heard is, is that those prices went up anywhere from 20 to 30%, which I think is reasonable.

Like it makes sense in some ways, I think it’s probably a better bet. I’d rather pay 20, 30% more knowing what I know now versus, you know, sort of from a risk reward standpoint versus, versus last year. But just, you know, if we want to take it to, you know, more specific company multiples, and these are just based on sort of things that come across the table for, for, for us and whatnot, not necessarily things that we have, we have transacted on, but you know, yes, you could, you could find stuff for, you know, three, four times EBITDA, which potentially could have a lot of upside, but require a lot of investment to get sort of modernised and, you know, start operating at the level you, you expect to.

But, you know, but then, again, other people might, might be asking for 12 times, and then you’re like, okay, but I can, I can, I can probably buy something for, for a lower multiple in the, in the US and have zero political and economic risks, right? So, so it’s, it’s very, it’s, it’s, it’s very broad.

[Tobias] Yeah. I was just, I was wondering what the level of sophistication is in the sort of investment community, but also in the business community, because even though they’ve been under this sort of socialist regime for 20 years, presumably there’s been some internet access. So folks are sort of cognisant of what’s going on around the world.

How do you, how do you assess it?

[Francisco] Yeah, there’s, there’s very little sophistication, which is one of the, well, it’s one of the biggest challenges and issues when, when you, you know, when you try to negotiate with someone to, you know, maybe you want to invest 40% of their, of their company and, you know, you want two board seats and some sort of control shareholders agreement and whatnot, but then even, even like arriving at the right price and explaining like some of, some of these business owners don’t even think in multiple terms, like they, they, they will just like, you know, throw their hand up in the air and like figure out what, what their company, what they think their company is worth. And it’s, there’s a, there’s a running joke where, where people will, will say, you know, my company is worth 30 million and you ask them why, and then he’s going to say, because there’s three shareholders and we each want 10 million.

Like, and that’s literally, that’s literally the, the, the napkin math they will use. So yeah, it’s very typical to, to come across, you know, transactions where you either have to do a lot of like handholding and, and, and explain how things work in the, in the financial and investing world, because they just haven’t really had a lot of exposure to, to, to, to, you know, situations like this. And that also, you know, means that a lot of, a lot of transactions are going to fall through because it’s just, you’re never going to, you’re never going to come to, to, to an agreement.

Right. So it’s, it’s, it’s, it’s also why sourcing is, it’s so important because you need to have really, really good deal flow to be selective enough to, to really find the best opportunities. Because ideally I’d want a partner who really understands, you know, capital allocation and, and, and, you know, basic finance and all, and all of that, right.

Valuation, et cetera. How do you source? So most of it is, is just a proprietary network to be, to be honest.

Obviously there’s, you know, there’s brokers, investment bankers, there’s all the typical, you know, players that will bring transactions to, to, to, to the, to, you know, to any funds, but it’s very rare for the fund to get involved with something that’s being sort of mass marketed. So it’s mostly tapping into, you know, your, your, your own, your own network, which is, is also one of the biggest advantages of, of, of, of ARCOs in, in large part, because, and I don’t think I mentioned this before, and I probably should have, but one of the, one of the consequences of, of Venezuela being in the, in the political economic situation that they were in for, for so long is that there were no institutional funds in the country. And the reason I decided to, to join ARCOs is because they were the only fund that had been investing there since they’ve been since 20, 2019. Which is, it’s a long time, if you think sort of in Venezuela terms, I mean, like seven plus years in investing in, in, in this regime and all sorts of different political and socioeconomic situations is, is, is a big first mover advantage to have, especially with the situation that Venezuela finds itself now.

So having built that, you know, historical track record and sort of on the ground presence, et cetera, like, like that, that’s a benefit that by now, you know, companies, business owners, et cetera, will, will know that, that we are out there and we are willing to look at things, right? So that, that’s also a, a big advantage.