VALUE: After Hours (S08 E26): Beyond the Sanctions: Venture capital and private equity investment in Venezuela – Francisco Amador

During their recent episode, Taylor, Carlisle, and Francisco Amador discussed:

• Venezuela’s Economic Reopening Creates a New Investment Opportunity
• Investing in Venezuela: Valuations, Risks and Early Opportunities
• Venezuela’s Capital Markets and the Challenge of Investing
• Jake’s Veggies: Interest Rates, Market Cycles and the Stockdale Paradox
• Can Venezuela Become an Investable Economy Again?
• Private Equity and Venture Capital Opportunities in Venezuela

TRANSCRIPT

[Tobias] And we’re live. I’m Tobias Carlyle. This is Value Up for Hours.

I’m joined as always by my co-host Jake Taylor. Our special guest today, Francisco Amador. You know him as Sleepwell Capital on Twitter.

How are you, Franco? What’s happening?

[Francisco] Doing great. Doing great. Happy to be here.

Happy to finally have a camera on, on a podcast for the first time.

[Tobias] Yeah, it suits you. Tell us, so there’s been a little bit of news. You, you have been a hedge fund guy.

You’re becoming more of a private equity VC guy. You’re Venezuelan originally, returning to Venezuela to do some P and VC. Talk to us a little bit about what the opportunity is.

The journey. Yeah. Yeah.

In Venezuela, how you, how you’re doing.

[Francisco] Sure. Yeah. So obviously, very big change.

I’ve been living in the U.S. for 17 years now. I moved basically when I was 18 to go to college and stayed here. Always working in finance and eventually investing.

Private Equity and Venture Capital Opportunities in Venezuela

So it’s interesting because as a Venezuelan, the past, I mean, probably 10, 20 years, I haven’t really been interested in doing, in doing much over there, obviously with everything that had been going on ever since, you know, Chavez and then Maduro were, were in charge, which is, it’s 27, 28 years by now. I had just like, sort of discarded the, you know, the, the opportunity or the possibility of me ever going, going back and, and moving to the country. So it’s like, I had lost all kind, you know, all hope.

Right. But then January 3rd happened, which we all saw in the news where president Trump decided to capture, I guess, former, former president, Nicolás Maduro. And that, well, that changed obviously a lot of things, including the, the prospects of the, of, of the country.

So right now it’s sort of a complicated situation that is definitely very much in, in, in flux, but, you know, in, in broad strokes, we are currently going, undergoing a transition overseen by the U.S. government, where the, one of the closest persons to, to Maduro, who’s called Del C. Rodriguez was basically handpicked by the Trump administration to lead the, the transition. So she’s the interim president by all intents and purposes.

Now, and while a lot of people, especially in Venezuela, were not happy to, to, to find out that this was going to be how, how things were going to work, we’re going to play out. I think because of all the, all the mess and the destruction that the, that the Chavista regime from, from almost 30 years of running the country under socialist and, and very much corrupt and inept policies, there’s just a lot of cleaning up to do, right? And it’s, it probably made sense to have someone from the inside who’s cooperating to help during this, this cleaning up process.

So there’s, there’s been a lot of reforms that have started to take place, a lot of changes in the different sort of government departments, et cetera. There’s been negotiations that have started with the, the opposition party and, and, and the current regime. But a lot of this takes time, right?

So I think from me personally, as a, as an investment standpoint and as a career opportunity standpoint, it was really the first time where I saw what was going on and, and said, you know, there’s, there’s probably a very big opportunity to do something here and, and get involved. Probably it’s still a little bit early in terms of, you know, when I think the, the big part of the institutional capital is going to start coming back to the, to the country and foreign investment, et cetera. But I think also from a risk return standpoint, it’s pretty attractive because if you’re early and you’re right, you probably stand to make some very interesting investments, right?

So that’s, that’s kind of how I, how I saw the, the, the, the situation. It’s funny, cause I, I mean, I’ve, I’ve always considered myself a value investor, but this was probably the first real macro call I’ve had in my, in my whole career. And, and I mean, in, in some ways, obviously I’m Venezuelan, so I feel like I understand the situation and, and the prospects of what, what potentially is going to happen in the next couple of years.

But I felt confident enough where the, the political and the economic situation were sort of at a very important inflexion point. And I mean, if we want to look at this from sort of a classic capital returns, capital cycle framework, like you, you had a country that was shut out from the, from the international markets for, you know, 20 plus years, and now it’s basically being, being reopened slowly. So again, if you think about it from, from that standpoint, like you’re, you stand to sort of pick the bottom, hopefully and, and sort of ride the wave that’s, that’s upcoming from, from here.

And just as an data point to, to, to sort of bring the point home, I mean, GDP was down, we’re talking peak to trough anywhere from 70 to 80%. So just sort of that, you, you, you can imagine the country has a tonne of upside from just, you know, the, the economic growth that, that can be unlocked in the next five to 10 years.

[Tobias] Do you feel like the change is going to bring in that sort of opening up of the economy and that you think that this is a transition period that you are going to go into a more market-based capitalist sort of business environment?

Venezuela’s Economic Reopening Creates a New Investment Opportunity

[Francisco] Yeah, I think so. And there’s actually been some pretty, maybe I wouldn’t say substantial, but there’s been some early encouraging evidence that that’s already taking place, right? So we’ve, we’re currently undergoing oil sector reforms, which is, you know, it’s the priority number one, because as some of you may, may, may know, Venezuela is well known for having the largest oil reserves in the world.

And one of the first things the Trump administration did and basically pushed the, the, the interim government to do was to, to reform the, the oil and gas sectors. So we’ve slowly started to see sort of the smaller independent energy companies starting to come back to, to Venezuela. The big ones are sort of the, the integrated oil companies are still negotiating, but, you know, in, in that sector, in that sector, things are starting to, to, to move already in the, in the ground.

And, and then there’s, there’s been other sort of smaller deals that we’ve, that we’ve seen that were basically unimaginable a year, a year ago, right? There was, for example, a, a large Colombian sort of CPG holding company, it’s called Nutresa. They decided to, to invest in, in one of the, the big, big, the biggest ice cream brand in Venezuela, which is very, very popular.

So that, that was a big headline at the moment, because it’s sort of the first time that a large Colombian company decided to sort of go back to, to, to Venezuela, right? Something that really hadn’t happened in a, in a, in a while. And then more related to the, to the venture capital side of, of, of things, you know, one of the, I guess, or technically the largest tech company, which is really a BNPL company, raised a hundred million.

They just announced that a month ago. And that was also a very big, important headline because it’s, again, more evidence that, that the appetite and the, and the, and the capital, you know, appetite for, for Venezuela is starting to come back slowly.

[Tobias] Do you, do you feel like the, there’s broad based support for, for the changes? Was it the Chavista regime was sort of totalitarian, preventing these sort of things from happening? It didn’t have any sort of broader support?

[Francisco] Yeah, no, definitely. I think the, I mean, if you look at any sort of, of polls, the, the support for, for the, the, the Chavista regime is, is probably, you know, certainly less than 20%, probably less than 10. So you’re talking about 80 to 90% of the country really wanting, you know, big changes in terms of the political situation.

So from that standpoint, and what, what had happened in the last, probably two elections, but, but more, more specifically and more sort of in your face in the last one was that basically the government rigged them. And, and, and in that, that last election, the opposition basically found a way to prove that they had the votes, but it was, you know, the, the, the government controlled everything from the National Electoral Council to the Supreme Court to the Congress. So there was really nothing, nothing to do.

And again, all of this right now is, is being, is, is, is being sort of changed into, into a more democratic face.

[Tobias] What are your expectations about the sort of investment opportunities that you can find in Venezuela?

[Francisco] I mean, it’s, it’s, it’s really so broad based because the, the country had been so starved from capital for, for so long that there’s, there’s a tonne of things to do. A lot of, you know, a lot of companies and, and sort of the more of the legacy companies like, you know, we can talk about a manufacturing plan or, or, or things like that. A lot of that stuff is, is almost obsolete in many, in many cases.

So there’s, there’s going to be a lot of, of, of capex that needs to, that needs to take place. And this is super prevalent in the, in the oil and gas sector too. Right.

So I think you have to be selective in terms of, of more than the sectors, it comes down to the companies that you, that you’re looking for. Because we can get into the specific risks of, of, of companies that are, would be sort of more idiosyncratic. But in, I would say in terms of sectors, there’s so much stuff to do with, you know, consumer in the consumer space, retail space, tourism, agriculture, obviously oil and gas.

It’s not just building data centres. Yeah, exactly. But even, even like in financial services, right?

Like the banking sector is completely dormant. The credit as a percentage of GDP is around three to 4%. If you look at any other country in Latin America, it’s between 40, 60, even 70%.

So, you know, getting exposure to, to things like that normalising, I think are, is a very interesting theme to try to, to try to play this, this normalisation and reopening.

[Tobias] What do you think all of you are posting at Sleepwell? How’s that going to assist in the opportunity identification? Like what are you looking for?

[Francisco] In terms of like leveraging, leveraging Twitter, you mean?

[Tobias] Ah, just, just in terms of the, the, the knowledge that you have.

[Francisco] Oh, in my experience. Yeah.

[Tobias] Yeah.

[Francisco] No, that’s, it’s, it’s, it’s very interesting actually, because, and, and I’ve been sort of learning on the go these past, because I’ve, I’ve only been at this most recent role for, for maybe three months now, but I’ve, I’ve had to become a lot more open-minded and flexible in terms of the sectors that I, that I typically, that I typically look at. I mean, first, because it’s, you know, the, you can’t really control the deal flow and the sourcing that you’re going to, that you’re going to be looking at. And, and, and yeah, second, I just, I mean, it’s not like the stock market where you say, I love these three industries and I’m going to spend my, my entire, the next, I don’t know, the next three months looking at, at these specific set of, set of companies.

So I think from a, from a investment standpoint, it’s, the rules are, are very much the same in terms of, you know, business models, disruption and innovation and competitive, you know, competitive modes, competitive landscape. Like I think all the, all those things still apply, but you also have to adjust a lot of your, your sort of preset views to the specific country, because a lot of industries, for example, that would be, you know, very bad businesses in the U S or in Europe might, might be actually pretty good businesses in Venezuela. Right.

So that’s, that’s kind of been the, one of the biggest adjustments I’ve, I’ve had to come to terms with. But, but again, all the same principles apply that there’s a reason why those businesses would be, would be more, more valuable or have, you know, higher margins or higher returns on, on capital. And many times, I mean, it comes down to scarcity value or less competition, some regulatory thing, whatever.

[Tobias] How do you feel about the possibility of it’s sort of all reversing? Is there, is it the fact that it’s just happened means that it’s fresh in everybody’s minds and everybody’s going to be running as far away from it as they possibly can? Or is it like that fact that it’s happened?

It’s that lurking spectre of the possibility of more socialism?

[Francisco] You mean going back to where we were?

[Jake] Yeah. A strong man comes in and makes over again.

[Francisco] Well, yeah. I mean, it’s, it’s hard to exactly handicap what the probability of something like that is. I, I will, I will say, I think it’s pretty low.

And the reason being that, you know, this in some ways, the fact that the U S is, is involved here and not just involved, they’re higher. Because if this were sort of done internally, you could always have the chance of like a military coup or something happening and everything reversing. But for that to happen, I think it would need to, it will need to mean that the U S sort of decides to one day wake up and say, we don’t want anything to do with this.

We’re getting out. Which I think once they’re in, I mean, it’s just, it kind of becomes a part of the political agenda. And it’s not, and I think they’ve, they’ve learned a lot of lessons in, in sort of mishandling some of these situations in, I don’t know, Afghanistan and other countries where, you know, they’re, they’re probably, they’re probably not just going to like wash their hands and say, we’re out of here.

We don’t care what happens. Right.

[Jake] We still have troops in Germany from World War II, don’t we? Yeah.

[Francisco] So, I mean, that’s my, that’s my view. Obviously these are the risks that are still inherent and, and, and, you know, you have to be very much cognisant of, of that. But I guess I will say I’m, I’m, I am comfortable with that, with taking that risk.

[Tobias] Have you seen any valuations yet? Do you know sort of what you’re dealing with in terms of, is it, is it crazy cheap?

[Jake] One times earnings.

Investing in Venezuela: Valuations, Risks and Early Opportunities

[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.

[Tobias] When you perform diligence, how do you establish ownership? Like what are the, what are the records like for government records for who owns what?

[Francisco] Yeah.

[Tobias] Property rates. Yeah.

[Francisco] Yeah. So I think the, before talking about that, probably the, the most important filter always is, is going to be who we are investing in or who we are buying from. So the first, and the reason is, and I’m sure some of you have, have like seen this in, in, in the news reports or whatnot, but you know, Venezuela is a sanctioned country, which also means that a lot of people are in the OFAC list and SDNs and all this stuff.

So there’s the, the, the, the, the, the number one risk we always want to avoid completely is, is reputational risk. And obviously being within also the, the absolute, you know, law in terms of not getting involved with the wrong people. Right.

So once we clear that, that hurdle and just to clarify, the Venezuelan sanctions doesn’t mean you can’t invest in Venezuela. It means you can’t deal with the government directly, which has also changed a little bit because now that they’re allowing, allowing FDI to, to go into the oil sector, there’s, there’s been exceptions that have started to, to, to take place. But I just wanted to clarify that because it is a big misconception.

Like any American can buy a Venezuelan company. That’s, that’s not an issue. But then, but then to your, to your question, when it comes to the, to the ownership, I mean, you, you, you can find the historical, the historical records of, of who owns, you know, when it comes to property, for example, like all of that is, is information you can, you can obtain.

But I think importantly, importantly, when we, when we, when we acquire companies, first of all, we always, we always want to buy a US legal entity, which is not always the case that it exists. So in many cases we’ll have to, we’ll have to create it and, and sort of do a, an asset purchase and then transfer the, transfer the assets to the, to the US entity, which then will own a local Venezuelan corporation, which then owns the, the underlying assets. Right.

But those are things in terms of, of, of structuring and legal that are super important. And, and, and always, and also like it’s, it’s one of the additional local complexities that you have to really understand to, to not get tripped up because you, because, you know, other investors could be doing it differently. We think they’re, they’re taking a massive risk, but we just, that’s not the way we operate.

[Tobias] Is there a stock exchange? Is there a Caracas stock exchange? Is it, did it shut down?

Is it reopened?

Venezuela’s Capital Markets and the Challenge of Investing

[Francisco] What’s the situation? Yeah, it exists. It trades very little.

I think it’s, so volumes have, have increased obviously, cause you know, interest has increased a lot in the, in the past eight months or so, but there’s still, it’s not, it’s not really open to, to international investors. I mean, I think you could technically go to Venezuela and I don’t know, try to open a bank account somehow and then get access through some broker to the, but it’s not like interactive brokers will, will, will, will offer it. But yeah, there’s like, I think there was like maybe 30, 40 publicly traded companies.

A lot of them are, some of them better known multinationals, the banks, et cetera. But again, it trades very, very little.

[Tobias] Yeah. It’s kind of fascinating. There’s no sort of established capital markets there then for raising substantial amounts of capital or for exiting or anything like that.

[Francisco] Oh no. Yeah. And I think there’s maybe two public companies that have some exposure to Venezuela, but they’re very, it’s very quirky.

One of them has like a legal claim on, on some mining asset. And it’s basically a, I don’t know if it’s actually a company or like a shell that, that holds that, that, that claim. I think that one’s gold, gold reserve.

And then there’s another one that used to be two businesses and one of them had a interest in a, in an oil field, which now is getting spun off or something. So, but, but there’s not really like any way to like cleanly get exposure to, to, to Venezuela markets through public equities.

[Tobias] It sounds like a pretty exciting opportunity. Like you’re at the very beginning of potentially a huge transition from a socialist economy to a, to a capitalist one. The last one that I can think of is like Russia or something like that.

[Jake] Poland or maybe Estonia or something.

[Francisco] I prefer, I prefer the Poland example. I read, I just read, read notice, my friend. And there’s, that’s a great, it’s insane that, that.

[Jake] Hopefully you’re not dealing with all of that. No, no, no.

[Francisco] I can, I didn’t, I, fortunately I can report we’ve, yeah, it’s been nothing like that. Although the early days of that were, were certainly very exciting and, and I hope we get to see some privatisations too, cause those can be exciting. Yeah.

But yeah, it’s super, yeah, it’s, it’s quite a, I think it’s quite a historic time and I’ve been, I’ve also been super, you know, the, the, the more I’ve talked to more and more people that are looking into Venezuela or, or other Venezuelans that live abroad. I think what, what gives me, what makes me most optimistic is I’ve, I’ve been very surprised by the amount of Venezuelans that want to move back. So I, I do think we’re going to see, to, to give you some idea there, there was, so Venezuela has 28 million people, approximately 8 million people left.

There’s estimates even as as 10. So, I mean, you, you could probably see a scenario where 2 million of those come back in like a year or two. And that’s, and that’s basically, you can, you can look at a lot of like historical parallels of, of countries that went through similar situations and then opened up.

And that’s basically, it’s, it’s kind of like 25% of the mass immigration coming, coming back. It’s pretty, it’s pretty normal. Yeah.

[Tobias] It’s extraordinary. Let me do a quick shout out around the horn and JT, you got some veggies for us? Yes, sir.

Boise, Gothenburg, Sweden, Toronto, Tallahassee, Petit Ticvah, Israel, Lausanne, Switzerland, Madison, what’s up? Hairy Flange, Belgium. Is that a real place?

Sunny Glasgow, Avatar, London, UK, San Diego, La Porte, Texas, Seattle, two times, San Diego, Bellevue, back from Boise, Istanbul, true story. Amazing. JT, take it away.

Interest Rates, Market Cycles and the Stockdale Paradox

[Jake] All right. So we open in New York, 1899 and the Equitable Life Assurance Society, owes policy holder returns decades out. And so it’s polling all the smartest financiers in America.

One simple question, where will interest rates be 20 years from now? So they’re asking in the year 1920, where will interest rates be? 69 men answer this poll.

And these are, again, these are all leading financiers. 69 men say the same thing. No one sees rates going up ever.

People at that time called railroad bonds, the really the prime ones, Rembrandts of the investment world. And their grade A assets, they were yielding 3% forever. They were bulletproof.

And 20 years later, those same Rembrandts, we were yielding 5.5%. And you lost about 40% of your capital. Now, these guys were not fools. Every man they asked had spent his working life inside basically falling prices and falling yields.

And to them, inflation was basically extinct at that point. It was a solved problem from another age. We’ve already moved past that.

The uncomfortable truth was though, is that the expert unanimity isn’t really information about the future. It’s more information about the regime that trained those experts. So before we go any further, what do you guys think is sort of our 69 for 69 expert equivalent today that everyone would agree on that might end up being proved false?

[Tobias] I think most people think rates are getting cut. I think it’s the same situation.

[Jake] Okay. Francisco, what do you think?

[Francisco] You know, I think it’s interesting if you look at the S&P, people think it’s bulletproof. I will say, if you ask anyone, I mean, it’s done so well for so long. We haven’t had a lost decade since what, like the 70s or something?

I’m talking more of the US stock market, not just the S&P, right? But I mean, I’m very bullish on the US, but I think people forget that it does happen sometimes that markets will just get overvalued and then, you know, whatever the economy turns or whatever. And then you get a period of 10 years where the stock market does nothing or maybe even turns negative.

So that’s another interesting one.

[Tobias] Yeah. Maybe mag seven.

[Francisco] Yeah.

[Jake] Yeah. I’ll throw out a few just for fun. The Fed has our back.

Every dip should be bought. Yeah. Multiples only go up.

Margins only go up.

[Tobias] Well, that’s been true.

[Jake] How about value is dead, which Toby knows.

[Tobias] Also true.

[Jake] He knows from Twitter because someone who’s up 400% on Nvidia and is about to buy a boat is going to make sure to tell him every day. So anyway, all of those to me sound a lot like, you know, 69 for 69. But, you know, I should preface this a little bit with the details of this segment and 1899 poll came from a recent grants interest rate observer, which I’ve been a longtime reader.

But, you know, Jim’s argument is basically that since 1870, American long bond yields have moved one direction at a time, and it’s a 20 to 40 years for each leg up and down. So three, three declines to two finished climbs and a third climb that may have started in 2020. So I’m going to give just a little brief vignettes of each of these legs as like little history lessons just for fun for all of us.

So that again, that 1870 to 1899 period, falling rates, America deflated back onto a gold standard on purpose after the Civil War. You know, rails bottomed at 3%, like we said. And, you know, there’s this actually the great monetary fight of that day was William Jennings Bryant demanding more money, not less.

And deflation was the villain of the of the times.

[Tobias] It’s the villain now too.

[Jake] Well, it’s okay, I guess. 1899 to 1920, rising rates, gold poured out of the Klondike and was which was effectively like quantitative easing conducted by geologists. And then you had a world war.

So prices crept kind of slowly for 20 years there. And then they galloped 15 to 18% from 1970 to 1920 per year. Now, 1920 to 1946, we’re back to falling again, you have the Great Depression, and then you have the Fed pegging rates low.

And a whole generation learned that yields basically only fall and and the government keeps it that way. 1946 to 1981. All right, we’re back to rising again.

It took seven years just to get back to a three handle in during this plot this scenario. You know, then it was guns and butter to oil shocks, 16 years of 7% inflation per year and a 15% long bond by 1981. bonds picked up a nickname at that point, certificates of guaranteed confiscation.

So that the Dow crossed 995 in February of 1966, and it closed at 777 in August of 1982. So 16 and a half years later, and this was when business week was business week was running that the death of equities story. So all right, terrible, right?

1981 to 2020. Falling rates, again, the greatest pro market in the history of lending, perhaps 15% down to basically one zero. And at the finish, we had nearly $18 trillion of bonds worldwide that were yielding less than nothing.

They were negative rates. That’s kind of our 1899 poll run again, but sort of backwards, like that’s seven, that’s several trillion votes for rates that can never rise again, right? So every career in finance today was basically formed inside of that 40 year run from 81 to 2020.

And every crisis for 40 years has really been answered with lower rates. And that’s, you know, the Fed has got our back comes from. And grants makes the argument that that 2020 was was really the low point.

And, you know, I don’t tell me if you remember arguing with Bill about this, even when we did early in the show of like Zerp and NERP, like rates were never going to go up again. Like that was that was the drumbeat the entire time that we were talking about it. And just recently, the long bond hit 531, so 5.31%, the highest in 19 years, basically since before Lehman. And the last two climbs took a decade to put up their first hundred basis point increase. So it’s been they usually happen pretty slow. This one did it in a matter of months, basically.

So we’re already like in a faster regime change than than either of the previous ones that we discussed. So what do we do with all this? You know, we need we kind of need a way to hold for the long time, long term to benefit from the wonders of capitalism.

But we also need to recognise that we may we may endure a very long, very ugly middle. And we need to figure out how to do this without breaking. And for that, we’re going to introduce a Vietnam era Navy pilot.

So it’s Stanford 1962. And this guy named James Stockdale is a 38 year old fighter pilot that the Navy sent to graduate school. And a philosophy professor hands him a book by Epictetus.

And this guy, you know, from way back in the day was born a slave. And so he had a very special appreciation for the idea that some things are up to you, but most things aren’t. And you just kind of have to take what you get.

September 9, 1965, Stockdale’s plane catapults off of a carrier, and he flies for yet another mission over northern Vietnam. And his plane is hit by flack, you know, blows up, he ejects 30 seconds, he’s drifting under the parachute. And he says to himself verbatim, five years down there, at least, I’m leaving behind the world of technology and entering the world of Epictetus, five years, at least, and it actually ended up being seven and a half years of torture, isolation, unthinkable abuse.

And 30 years later, Jim Collins asked Stockdale how he thought how he how did he get through this. And he said, I quote, I never lost faith in the end of the story. Never doubted that I get out and make it the defining event of my life.

Then Collins asked well, who didn’t make it out? Oh, that’s easy, the optimists, the ones who said, we’ll be out by Christmas, and Christmas would come and Christmas would go. And then Easter, then Thanksgiving, and then Christmas again, and they died of a broken heart.

And what that’s now called Stockdale’s paradox, which is the idea that you have to keep the faith that you will prevail in the end, while also keeping a discipline to confront that the very most brutal facts that are your current reality. So let’s see if we can tie this all together. You know, we’ve got 69 finance experts in 1899, are kind of setting a ceiling there that rates are never going to go above.

Anything higher is basically unthinkable. And the Vietnam optimists set a date like we’ll be out by Christmas. Stockdale really set more of a floor for himself.

Okay, it’s going to be five years, at least, and even his floor was short by by half at that point. But so maybe here’s ours, maybe we’re six years into a new leg. And the floor is that higher rates for at least maybe the rest of this decade, and we should expect to be wrong the way that Stockdale was probably wrong, it’s going to be even longer than that, maybe.

But the brutal fact is that rising rate regime really punishes long duration claims, and anything whose economics were built around cheap money. So long bonds, grow stocks at 40 times earnings, leverage buyouts that are underwritten on really cheap refinancing, and really just expanding exit multiples. You know, those banking on last regimes, fact patterns, returning are likely to suffer.

But you know, there’s very, there’s reason to keep the faith like through the last climb, the worst stretch for bonds on record, stocks still made 5% a year real, and even better cheap be glamour by probably another 5%, depending on whose data set that you look at through that grind. And whoever was still standing at the end in 1982 got 15% treasuries, they got stocks at single digit multiples. You know, this, this was, you know, kind of Buffett’s would joking around about being an oversexed man in a whorehouse.

So like, but that’s, I don’t know why he didn’t just say kid in a candy store. But alright, so one last thing from the Stockdale story to wrap this up. It’s February 1973, he makes his first phone call home, and his wife hasn’t heard his voice since 1965.

And one of his kids happens to be taping this. And he says, Well, I can’t bend one leg and I can’t raise one arm. But I think the walk kind of gives me a sense of style.

And his wife just laughs. And you know, his positive attitude survived a hell that you know, we can barely comprehend. And he endured this very brutal path, and he had the scars to prove it.

But he kept the faith that that would be a happy ending after all. So if we do see rising rates, basically, maybe the rest of our careers, those of us who survive are likely to walk with a limp. But let’s hope that we can smile and be proud of our newfound sense of style.

[Tobias] Amazing, JT.

[Jake] Thanks.

[Tobias] Do you think that like rates are already up pretty materially from what was the bottom 2020?

[Jake] 2019. Yeah, 2020, 2019 rates were that was when you had $18 trillion in negative.

[Tobias] And now we’re back to where we were in 2007.

[Jake] By the way, zero negative today.

[Tobias] No negative globally, no negative. No. Wow.

And all the rates across all of the developed markets seem to be spiking. We’ve seen Japan, the highest it’s been in 30 years, the US the highest it’s been since 2027. Why haven’t we seen any of that stock market volatility?

[Jake] I don’t know. Somebody’s offsides though, right? Either the bond market is dumb or the stock market is dumb.

Somebody’s got the wrong take. I’m not sure who.

[Francisco] What do you think?

[Jake] Well, in fairness, margins today for the S&P 500 are completely bonkers. I think Q2 came in, it’s going to be like 17% or something. That boggles the mind.

Now, two points of that 17 are just purely anthropic markup flowing through the income statement for the big tech companies. So the quality of the earnings are a little bit more of a question mark. That’s what I read.

Wow. On the internet, so it must be true.

[Tobias] What are rates like in Venezuela? Is there sovereign debt?

[Francisco] Yeah, there is. It’s in default. So there’s technically not even a yield.

But are they dollar denominated?

[Jake] Is that the problem? Yeah, they are.

[Francisco] At least most of the sovereign debt is dollar denominated. And a lot of it is from PDVSA, which is the government oil company. But in local terms, it’s a little weird because Venezuela has the bolivar, which is the local currency, but it’s almost like a de facto dollarised economy because a lot of stuff is indexed to the dollar at this point.

A lot of contracts are made in dollars. If you own some office space and rent that out to someone, you’re going to rent it out in dollars too. And there’s very little lending, as I said, the credit is almost non-existent these days.

So most people, if they’re going to take out a loan, it’s probably going to be dollar terms and you’re just taking country risk. So you can be anywhere from like 12% to 20% in dollar terms, which is not bad if you’re willing to take the risk. But yeah, if you take that in terms of bolivars, it’s going to be wild because you have triple digit inflation and whatnot.

The government actually regulates how much interest you can charge and it’s not even profitable for the banks to lend out money. And that’s also why there’s not that much lending. Capital ratios are very, very high too.

So it’s all sorts of stuff that slowly will hopefully start to normalise.

[Jake] Is there a big black market that exists in money and goods and services that actually probably once it comes on to the books, like you might see huge GDP jumps? Yeah.

[Francisco] In FX terms, there are basically two markets. There’s the official central bank rate. And then there’s a parallel market, sometimes known as the black market.

The spread used to be really, really high, as high as 100%. But these days it’s closed a lot in large part because the expectation of foreign investment in dollars actually starting to come in back into the country. So now it’s usually between 15% and 30%.

[Tobias] How long do you estimate that it would take to modernise the economy or bring it back into an investable proposition?

Can Venezuela Become an Investable Economy Again?

[Francisco] Well, I think there’s probably two questions in there. Because making it investable doesn’t necessarily mean you want to have it totally modernised. I think there’s going to be a point where the big catalyst most people are looking for are elections.

So I think once you have democratic elections and the consensus view becomes that this is a democracy and things are going to get better, I think that’s when it probably becomes investable in the minds of a lot of people. In terms of actually modernising the country and fixing a lot of the stuff that got messed up in the past 20 years.

[Jake] Is all the infrastructure underinvested in basically? Yeah.

[Francisco] And to be clear, I don’t want to give the wrong impression because a lot of people think of Venezuela and you think of Afghanistan or some country that was at war. It’s not the case at all. You’d be surprised how beautiful and actual infrastructure like highway system and all that.

Remember, Venezuela used to be one of the richest countries, certainly in Latin America in the 70s, 80s and even in the early 90s. So a lot of stuff got built. So it’s a lot more about replacement and maintenance capex and things like that.

But it’s not like you have to build highways or airports or things. So that’s why my answer is probably something in the five year. You could probably do a lot of stuff in five years.

But there’s stuff that needs to be done in the electric grid and oil and gas, obviously. Airports and ports probably have to be expanded. Some highways probably need to get fixed and stuff like that.

And same with manufacturing plants and all that. But the stuff on the private sector is probably just going to happen a lot more naturally from just people seeing the return expectations come back.

[Tobias] What about like rule of law and contract enforcement and that sort of stuff? Because to me, that’s the thing that makes it investable.

[Francisco] Yeah, certainly. So I think that goes very much along with what I was saying about the elections. If you look at what’s currently being, the reforms that are currently being worked on or sort of taking place, a big one is around the Supreme Court.

So that’s got to be fixed to a point where people are comfortable investing in a country where there’s an independent body and a legal system that you can trust on. I mean, it’s not going to get to a US level or anything close to that. But at least for Latin American standards, give enough comfort to investors where you know.

Because Venezuela used to be known for expropriating assets, especially Chavez. In the probably 2006 to 2012 years, they expropriated, nationalised a lot of stuff, a lot of stuff that got taken away without even paying anything for it. This is where a lot of these claims that I was talking about come from as well.

So yeah, definitely a huge part of these reforms that are taking place are sort of reinstating these very basic bodies of the government, the equivalent of Congress, which is the National Assembly, all of that stuff that used to be controlled by an authoritarian regime. Now, it’s going to take some time as well for that.

[Tobias] How do you reverse that? How do you privatise that? Is there compensation or is that all still to be worked on?

[Francisco] Privatise what, sorry?

[Tobias] Well, the assets that were appropriated, nationalised.

[Francisco] Yeah, I think there’s going to be, there’s different ways. I mean, you could take the public, for example, and then maybe the government keeps a stake. I don’t know if that, I mean, it could be a combination of the U.S. stock exchange or U.S. stock exchanges or locally. You could have a bidding process, for example, like the airport concession, for example, that’s being, the airports are being run by the government. It’s completely to disaster, right? There’s, it looks like almost like it’s been abandoned for years.

There’s like no retail. It’s very, yeah. So there’s a lot of stuff that could be done in something like an airport.

And you just, you present sort of a standardised bidding process where a bunch of operators will come in and put in offers to take over that concession. And the oil sector is already being privatised. That’s the reforms we were talking about.

But essentially, oil companies will be taking over specific wells, specific oil producing platforms. And you pay a royalty to the government oil company, but you’ll have private companies basically putting out a lot more oil than Venezuela used to have a year ago. I think it was, the lowest it got to was like 700,000 barrels of oil per day.

And they used to produce as much as 3 million or more. So when some investors do the math, you can go back to it.

[Jake] What’s your general sense of the temperature of like how quick or open are people actually to like go more unfettered capitalism? Like, so is there like, you know, the milieu in Argentina level of like, we’re going to take pain, but we know we’re going somewhere better than where we are, or is it more incrementalism would you expect?

[Francisco] You mean in terms of like the policies that are going to take place?

[Jake] Right. How much do you really let the invisible hand steer? Yeah.

Even when it means some painful outcomes for people that can be pretty vocal about it versus, you know, like, oh, let’s just like unlock this a little bit. And now we’ll try this a little bit. And is it going to be like ripping a bandaid off or is it more incremental?

[Francisco] Yeah, it’s a good question. I’m not sure I have like a very good answer for it. I will say from like the Venezuelan population standpoint, I think at this point they just hate socialists.

And so it’s almost natural for the country to go to like the polar opposite and go to like a very right wing approach. That’s not to say it’s going to be the most appropriate approach, but obviously just generally speaking, I think the capitalist approach is going to be hugely beneficial for the country. That’s not to say that, you know, some tough decisions will be made in the meantime.

Like if the, for example, if the economy gets fully dollarised, that’s one of the big decisions that has to take place in the next, probably in the next 18 months. Like that comes with a lot of trade-offs, right? So that’s just one example.

But, you know, in general, I think it’s probably going to be more like very right wing orientated. And also with, you know, the administration that’s basically managing the whole thing in the background in place, it’s just going to be a reflection, as long as they’re still involved, you know, it’s going to be very much a reflection of the policies that they want to implement too, right? It’s not even going to be a decision of the own Venezuelan government until there’s elections.

And then we’ll see how things progress and what the relationship is with the US. But generally speaking, the candidate that is most likely to win in an election, her name is Maria Corina Machado. She’s basically right wing, right?

[Tobias] So- Was she in the last regime? Was she prominent in the last regime?

[Francisco] So she was going to run in the last elections. Basically she got banned from running. So she had someone basically who was eligible to run basically in place for her, but obviously just working very closely with her.

And he’s the one that they basically robbed the elections from. His name is Edmundo Gonzalez. And so she’s been very prevalent.

And she’s been sort of the face of the opposition in the past, probably like seven or eight years, I will say.

[Tobias] How did Chavez come to power? What were they trying to correct for when Chavez came to power?

[Francisco] Yeah. So, I mean, Venezuela has a long history of political instability, both from, you know, different kinds of dictatorships and democracies and very bad, just very, very bad policy, but pretty much always from like a right wing standpoint. So up until Chavez, there wasn’t really anyone that had been ruling before that had some like socialist or communist tendencies, right?

And I think what Chavez really exploited was that he really, you know, Venezuela as most countries in Latin America obviously has always had a lot of inequality, right? So the majority of the population probably sits below the middle class and has felt or had felt back then that they were completely being ignored by the previous governments, which just wanted to sort of enrich themselves in their own ways. And most of those governments also had their corrupt practises and whatnot, but it was a free market and capitalism was pretty prevalent, et cetera, right?

So what he exploited was giving hope to most of these, the majority of the population. I mean, he won with an insane amount of the votes in 98. It was something like 70% or something crazy like that.

And it was a very, very populist campaign. But interestingly, he was smart enough to speak to that segment of the population, but during his campaign, he was also presenting himself as friendly to the enterprise, which obviously changed very quickly once he took power and became a lot more extreme in his communist and socialist policies. And in the beginning, people loved him because Venezuela was very rich from all the oil production, and he implemented all these socialist projects that he called missions, and he built, you know, huge buildings for people that were either homeless or had nowhere comfortable to live in.

He gave away a lot of money to this part of the population, but eventually that ran out, and that’s when things really started to turn.

[Tobias] And when you go back to Venezuela to invest, what sort of size opportunities are you looking at? How many are you trying to put together into a fund? What sort of exposure are you trying to create?

[Francisco] Yeah, so it’s interesting because I think, going back to the sourcing, one of the most difficult things is going to be to deploy capital into the right assets at the right price, right? So I think having sort of a thematic strategy, you know, I’m going to buy consumer companies in Venezuela, like that’s probably not the best strategy because you just don’t know what you’re going to come across, right? So we took very much a flexible approach in terms of being able to invest in real estate, which is really the DNA of the firm.

That’s what they started doing, was buying commercial, residential, real estate, even things like malls, etc. But right now with what’s going on, we think having the ability to buy private companies in a more traditional private equity style, as well as venture capital, I think is key. So in terms of how that’s going to look like from a portfolio construction standpoint, if we want to call it that, again, it’s hard to say because it just depends on the opportunity set.

But yeah, and I mean, we’re talking, you know, there’s not that many opportunities when you go above, like if you want to deploy, I don’t know, $50 million into something in Venezuela, the amount of opportunities is very, very little, right? So there’s also kind of a sweet spot in terms of the opportunities that you want to be looking at from a size standpoint. But yeah, I think that flexibility and being nimble, I think it’s very, very important.

And I think we can take the liberty at this point of being able to say that we’re comfortable doing something like that. Because I don’t think a new entrant, for example, somebody just raising a fund now and trying to do something like that, could be able to pull it off as successfully because of a lot of the complexities we’ve been talking about, right? And it’s just, yeah, Venezuela is very, very complicated to operate in.

[Tobias] It sounds like an absolutely fascinating opportunity, Frank. Tell us a little bit about how folks can get in contact with you or follow along with what you’re doing.

[Francisco] Yeah, I mean, so I’m very active on Twitter. So I think that’s probably the best way. I mean, I’m happy to share my email if you want to put them in the show notes after.

And there was an article also I put out on Substack, if you want to follow me on Substack. The most recent article basically went through my process of going from a hedge fund investor to doing private investing in Venezuela.

[Tobias] We’ve lost him right at the very end.

[Jake] Got to put another quarter in the machine.

[Tobias] JT, any final words?

[Jake] No, just thanks, Francisco, for coming on. It’s good to see you.

[Tobias] Hey, he’s back. Hey, Francisco, thanks so much.

[Francisco] That cut out for a second.

[Tobias] You did. You disappeared for a moment, but that’s okay. We got most of it.

Francisco Amador, Sleepwell Capital, and now Archos. Good luck, and we’ll have you back on the