The Exchanges

Q So when anyone thinks of Venezuela these days, there's a real question of the political regime and sanctions, and why don't we start there with what's happened and how investable are these businesses in this country as a result?

A So basically Venezuela now is under US sanctions, which limit people's capacity to interact with the Venezuelan government. So you can't buy assets from the Venezuelan government. You can't Finance the Venezuelan government. That's why the bonds, as a U.S. person, you can't buy any of the sovereign or PDVSA, the old company's bonds. You can't partner with the government, but it's limited to that and a list of people who are in the OFAC list, which are mostly government people. So as long as you stay clear from that, all of the private sector, you can go in and invest. You have to be careful. You have to, you know, have your compliance, which obviously is a big concern for us, but it's perfectly legal to do. Those sanctions, the main effect economically that they have is that they limit Venezuela's ability to sell its oil because it's sold by the Venezuelan oil company. And that's why you see, when you look at economic activity the last few years, from selling two and a half million barrels a day, post sanctions, Venezuela went down to 400,000 barrels a day. So an 80% drop in oil production. And obviously that decreased all of the economy with it. So the economy contracted since 2012 until 2020, like 85%. That is the biggest drop in economic activity in any country that is not in a war. And that's the opportunity that we saw. So the recovery of Venezuela is also linked in part t…

AI assessment note: “all of the private sector, you can go in and invest.”

Q The pharmaceutical manufacturing business, what are the nuts and bolts, the basics of how that business works?

A Most of Latin America is not like the pharmaceutical business when you think about it here in the U.S. So it's not R&D creating new, very expensive drugs to treat certain diseases. It's more like a consumer product. So it's the sale of non-patented drugs, a Tylenol of sorts, paracetamol, and the two main categories when you're doing these drugs, it's either you have just a straight generic or you have a branded generic. Branded generic is where the most of the action is because It's basically you create brands, the laboratories, manufacturers are really like brands that people trust. They go to the pharmacy and they buy different products from the same brand. Or you have a brand, like you have Tylenol here in the U.S. for paracetamol. We have some of those brands in Venezuela. So it's brands that people know. So you go to the pharmacy, you have a headache, you know which one to buy, you're going to go for that brand. Or you have a stomachache and you go for the other brand. It's more like a marketing operation with production. Little R&D, not a lot, and working with the doctors and with the patients to show the benefit of the drugs you manufacture. It's more of a consumer play than an R&D, FDA approval play like you have here in the U.S. Still, they're very profitable, 30 to 35% margins, little capex, so they, they generally, they generate a lot of cash flow, which is also very…

AI assessment note: “It's more like a marketing operation with production. Little R&D”

Q You mentioned you almost expect going into any investment in Venezuela, there's going to be risk, there's going to be volatility, there's currency, all different kinds of things. What have you seen happen that didn't go according to your expectations in the last couple of years?

A The main factor that actually we did not anticipate and has been very benevolent to us was the speed of the adoption of the dollar as an anchor currency in the country. We began doing these investments in 2018. It's starting in early 2019, an informal process of pricing local assets in dollars began. Venezuela has always been very much into the dollar because there are exporters of oil, mostly to the U.S. So there's always been dollar currency in the country and people think in dollars and they price in dollars. But what began to happen is that you would go to the supermarket and the prices would be in dollars and that created a lot of stability. And that actually was the beginning of the growth phase in Venezuela. And we did not anticipate how quickly that happened. Within the scope of a year until today, in fact, all of the pricing of all of the assets is dollarized. They may not be listed in dollars, but the underlying amount for pricing everything is in dollars. People transact dollars and they transact the Bolivar, but that has created a stability and has allowed people to provide credit to clients, and that put the wheel of internal trade going, which was stuck without anybody providing credit to anybody because you had a hyper devaluation A hyperinflationary environment that didn't allow for that.

AI assessment note: “The main factor that actually we did not anticipate and has been very benevolent to us”

Q So for a business, what you described growing significantly, high margins, some question of providing capital, what do you end up having to pay when you bought the business?

A The multiples, strangely enough, have been coming down because the companies have all grown. In the midst of the more challenging time, companies were so much smaller than they were originally that you needed to pay a bigger multiple. Now the valuations are sub four times EBITDA. Calux is a portfolio company that we have in pharmaceuticals. We must have bought that like at three and a half times EBITDA. And then we subsequently acquired the assets of Pfizer in Venezuela. And then we subsequently last year acquired local assets Of a company called Vivas Pharmaceuticals, and the multiples were all around there. Much lower than comps, and with the larger size that you were achieving, you could make those into very profitable operations very soon. So it was a very attractive value generation was important, and the casualty generation was important. Now the company can just grow itself and fund itself going forward.

AI assessment note: “We must have bought that like at three and a half times EBITDA.”

Q What is the history of the Cisneros family in Venezuela?

A Look, it's a very interesting history because it's a family that began doing business about a hundred years ago, and the difference with the usual families in Latin America is that the normal family would just focus in a single business, and they would have, let's say, a company for 80, a hundred years. The Cisneros, what they did is that they went into different business, but they had a knowledge of marketing and product positioning and That allowed them to move into multiple industries. So they have been in television and beer, they own the second largest beer company, in retail, in, uh, distribution, technology, and this gives them a very valuable view on how to operate and what's valuable within market. They grew with the country. So when Venezuela was one of the richest countries until the 2000, this was a very dominant family, not only in Venezuela, but elsewhere in Latin America. And the second virtue they have is that they expanded globally. So they invested in Univision here in the U.S. They had a couple of brands, Spalding and Evenflow. There were global brands that they bought outside of Venezuela. They grew in Latin America, in media. So they also have this vision of Not only Latin America, but how it interacts with the rest of the world, U.S. Hispanic market, et cetera. So they're very valuable to us in their relationships, in their local know-how, in understanding…

AI assessment note: “it's a family that began doing business about a hundred years ago”

Q So how did you end up transitioning to the buy side from the banking activity you were doing?

A What we're doing on the principal side is in Venezuela. I had done a lot of my M&A career in Venezuela. Since the mid 2000, we began to see how the economy, actually, 2010 and thereafter, how the economy began contracting. And it was a very unexpected event. It had to do with the end of the cycle of the oil prices in 2011, 2012, and the economy began collapsing. And we knew the value of the assets. We knew the production capacity. We knew what the infrastructure that existed there. And when it became cheaper and cheaper and cheaper, we just thought at certain moment, like, wouldn't this be a great opportunity to buy these assets and hold them? So one of my families that I had been working with for over 15 years is a big family in Venezuela, the Cisneros family. And we began this conversation together on how do we take this opportunity and create a buy side vehicle. That's how that started.

AI assessment note: “we began this conversation together on how do we... create a buy side vehicle.”

Q What's been the impact of the restrictions on Russia's exporting oil reserves on the relationship with Venezuela?

A So Venezuela has the largest oil reserves in the world. It has more oil than Saudi Arabia. It's got like, 20% of the global share of oil. Saudi Arabia has 17. So it's a very wealthy country from a natural resources perspective. It also has gold, minerals. In the Russia-Ukraine war, although it's a terrible thing, has been positive for Venezuela because you need countries who can produce extra oil to get Europe and the US out of Russian oil. The countries who can have that spare capacity and reserves are basically Saudi Arabia, Iran, and Venezuela. And of those three, Venezuela is an easy partner with which to work in expanding the oil production, because as we said earlier, oil production currently is at like at 900,000 barrels a day. They used to produce 3,000,003 and a half million at the peak, so they have a lot of capacity, part of which needs some investment, but it's there and the production capacity is there, or the refineries in the south of the U.S., We're done to refine a Venezuelan oil. So it's a very easy relationship. So basically the war, what it's generating is a demand for Venezuelan oil. OFAC just authorized two European oil operators who operate in Venezuela, ENI and Repsol, to begin exporting back to Europe that had been sanctioned earlier. And they allowed Chevron, the US company who's operating in Venezuela, to have a dialogue with the government about expa…

AI assessment note: “the war, what it's generating is a demand for Venezuelan oil.”

Q And so what do you end up paying relative to the current economics of the business?

A The transactions that we're looking at, I would say they range between three and a half to five times EBITDA, three and a half to four and a half times EBITDA. And these are companies that are growing EBITDA. Last year, you know, portfolio grew like 60%, 70%. This first quarter, it's about 40% growth in EBITDA. So you have companies that are growing EBITDA and you're buying obviously at a huge discount to where the global markets are. So if we buy a pharmaceutical company at three and a half times, you have You know, in pharma trades globally at nine to 12 times, you have a three X multiplier on the multiple, and then you have the five X multiplier on the growth, and that obviously gets you to the expansion of the valuation that we're looking for.

AI assessment note: “they range between three and a half to five times EBITDA”

Q What's changed in the couple of months as Latin America looks at that geopolitical landscape?

A What everybody's talking about are the tariffs. And if you look at what happened in tariffs in Latin America, it was a region with which the U.S. was very benevolent. So they are either in the 10% tariff range or many of the goods that Latin America is exporting into the U.S. are actually exempted from that. Many of the countries in Latin America had free trade agreements with the U.S. Central America had a free trade agreement. Obviously, Mexico did. Chile does. So the impact, if you look around the world, which are the regions who are going to be more impacted, Latin America falls under the category of minimal impact. It's part of the integration that we were speaking earlier.

AI assessment note: “What everybody's talking about are the tariffs.”

Q So now that you've gone into Venezuela and dealt with the particular challenges that country, how do you think about what's next?

A We try to think about what have we learned in Venezuela and what have we learned to do right there? And where do we find opportunities that have similar characteristics to the challenges that we face in Venezuela? What have we learned? One, we can operate in complex environments. Number two, we can transact. We're able to acquire assets in environments that are challenging from families that is normally a challenging transaction to conduct. And doing a roll up, how do you use fragmented markets and create more dominant players? When we look at the rest of Latin America, Central America has been a region that we've been intrigued by. It's not like Venezuela, but it's very fragmented. It's multiple countries. It's hard to operate in the region because of the same. You have separate countries, each with their own regulations, their way of doing things. So doing an operation that's across a region is very challenging operationally. Capital is available, but it's not the place where you would think a lot of capital goes to. Even for the rest of Latin America, Central America is like a lower priority. It's a little bit overlooked, similar to Venezuela, and for us that's a big opportunity. In pharmaceuticals in particular, where partners in our portfolio company have a I mean, it's a very, very, very, very, very separate company that they own that operates across of Central America. T…

AI assessment note: “Central America has been a region that we've been intrigued by”

Q Why don't you walk me through an example?

A The most recent one that we've invested in is pharmaceuticals. So pharmaceuticals in Venezuela is a very fragmented market, like in many other markets, and since we come from a background of doing transactions, having the ability to transact companies is like a barrier to entry. We have been looking at the sector for many years, And we finally found a company that we thought was a good platform to do a roll up. So it's an American playbook that we apply there, buy a platform company, do a roll up, do it organic and inorganic growth, and thus with scale, you get more efficiency and greater competitiveness. So we followed that playbook and we began acquiring a company that was the number six in the market. And in the span of a little bit less than three years, it's become the number two pharmaceutical manufacturer. So that's meant about a tripling or quadrupling of the size of the company in three to four years. Doing that in a sector that's so basic to people's lives is really unusual because normally it's not available. In most of the economies in Latin America where you go, these are like trophy assets that whomever the owner is, normally families, they don't want to trade it. Having the ability to go into a market which is a little bit overlooked or an empty room, as you said in the last podcast, allows us to access those assets. So if you have the capability to transact, You…

AI assessment note: “The most recent one that we've invested in is pharmaceuticals.”

Q How have you thought about exploring opportunities outside of Venezuela within the region?

A We always think about the integration of Venezuela to the rest of Latin America and to the world. I mean, Venezuela was always very integrated, and it's become less so in the last few years. We're always looking at how do we integrate these operations in Venezuela to operations outside of Venezuela, because that would facilitate An exit in the future. That may also mitigate risk of having assets with more diversified geographies. So we look at the rest of the region permanently, and as you know, my career has been all around Latin America, not just Venezuela. We constantly look at other regions to see how we can do collaborations with Venezuela, how we can expand the business that we have there outside of Venezuela, and the capabilities that we've developed there. How do we use those outside, and where do we have similar circumstances than how we had in Venezuela? An overlooked region with necessity of capital, With complex operating environment, et cetera. Central America is a little bit like that, and we're looking very much into that region at the moment.

AI assessment note: “Central America is a little bit like that, and we're looking very much into that region”

Q When you go out and talk to investors today about the empty room of Venezuela or broader in Latin America, what are you hearing people's feedback?

A When we speak to people about Venezuela, eight out of 10 will say, like, after the first few words, like, oh, I don't know. This is a little bit too much. Listen to the story. Listen to the story. The amounts of immediate no's for Venezuela is very high. We learned that we just had to very targeted group of investors. You have to be patient because it's breaking, let's say, the common sense of how people see the opportunity. When we began speaking to investors about Central America, the eight now became two. So we're like, wow, this is amazing. Latin America is always like an educational process to investors because it's not the place where people look most at. And we believe the fundamentals are there And these are interesting opportunities. We have the patience to dialogue with investors, develop investors, develop their comfort, and I think for the first time that we hadn't heard earlier is many investors are saying that Although they would not have looked at emerging markets or at Latin America a few months ago, or maybe a few years ago, now they're open to seeing how they can diversify their portfolio that are, at least the investors that we speak to are mostly focused in the U.S. So there is an openness to looking at Latin America. And I think, again, like we said at the beginning, this multipolar world, Latin America will certainly be together with the U.S., and that wil…

AI assessment note: “When we speak to people about Venezuela, eight out of 10 will say”

Q If you go in this, in the private markets and you've had this contraction, The businesses that survived have to be strong. They're probably seeing the same green shoots you are. Why would they want to sell their business when things are really at this like terrible low point?

A A very good question, Ted. So people who have undergone this, this long process of contraction and are seeing the green shoots, they're concerned if it's families, as we were speaking earlier, that they saved some of their money and they underwent all the spirit of risk. So when they see the upside coming, Although they like to remain as owners, they do not necessarily want to risk their savings and double down in the country. So we are that capital. We are the capital that will take the risk of the growth. We find partners who also believe with us that using capital in Venezuela now creates much more value in the long term. So the delusion of having us as partners now creates more value for the both of us in the long term. We don't want to buy out fully our partners. If it's a survivors, as you were saying, and it's been like a period of natural selection, and these guys are the ones who remained, we want them with us. We want their knowledge. We want their relationships. So we remain with them. What we do is that we take out the passive minorities. There are parts of the families who don't want to be invested any longer, but we try and keep the core of the shareholders with us, and we put money into the company so we grow, and therefore we create value for all.

AI assessment note: “they do not necessarily want to risk their savings and double down in the country”

Q What two people have had the biggest impact on your professional life?

A I would say my father has been a very big influence, but father aside, whom I love. I did martial arts for a long time, and I had an American professor, actually, when I was, like, between 11 and 18 and 20. And he was a big influence, I think, for the more basic things in life, like, uh, being resilient, the value of repetition, and practice, and practice makes perfect. And I always remember one of the things he used to say to me, a Japanese saying, to fall seven times, to rise eight times, life begins now. And I think that's been particularly when we're doing very challenging things like this thing that we're doing in Venezuela is very challenging. Having the capacity to just continue in your path while overcoming the challenges is, I think, a basic trait. I certainly learned that from him. I would say the second person is a good friend, Fidel Legas, a big business person in Latin America who has an entrepreneurial spirit. For doing new things, and inventing new products, and going into new markets. That is very inspiring. He's a banker, and he has operations across Latin America, and the US, and Europe. That desire to continue creating things, and worrying about the people that work for you, and your influence in society, and your country, has been a big influence for me.

AI assessment note: “I had an American professor... I would say the second person is a good friend”

Q What type of valuation do you have to pay for a business like that?

A So we look at either where the companies were during the peak performance or where they should be given where Latin America is. And we want to place ourselves At about a 10th of either of those two values. So we knew that this company could capture more market share and given the growth of the market, it would take us 10 times there, but it's also 10 times on the enterprise value, right? Because currently there's no leverage or very little leverage in Venezuela. So all of it, when we look at the five to 10 times growth really is on the whole of the enterprise. So as debt becomes more available and it's beginning to happen, then obviously the multiplier on the equity can be much higher. But that will happen in due time. Currently, we want to be a 10th of the enterprise of what the peak value was or what the future value could be. So we do all the traditional valuation, PCF, comps, etc. But we also look at asset value. And again, we look at historical and potential value to determine what the right pricing is.

AI assessment note: “we want to place ourselves At about a 10th of either of those two values.”

Q So before we turn to how you're doing this, I'm also curious about the currency. What's happened with the Bolivar and how do you think about investing in that situation?

A The country in that period of contraction had a hyper devaluation and hyperinflation. Okay. So, uh, inflation reached a peak of more than three million percent a year, which is a number difficult to, I still don't understand it. You would look at numbers and company performance. It was just very difficult to read. But then like two years ago, a little bit more, maybe two and a half years ago, people began pricing goods in dollars. Venezuela had always been a very dollarized in the minds of people. Many assets were priced in dollars. Houses mostly. And again, because it had a very historical strong relationship with the U.S. There's a funny thing. Venezuela is the only country in, in South America that plays more baseball than they play soccer. And that's because of the historic linkage with the U.S. So people began two years ago to use the dollar as a means of exchange because the Bolívar was so devalued that even physically, if you wanted to hold enough paper money to go buy something, it was an uncomfortable situation. So people began gradually Pricing things in dollars, trading in dollars, and that started growing, growing, growing. The government eventually made the dollar legal tender, and currently over 60, 70% of transactions in Venezuela are done in dollars. So people have, they can transfer dollars amongst themselves. They have physical dollars. The banks now allow for…

AI assessment note: “The country in that period of contraction had a hyper devaluation and hyperinflation.”

Q How about any things that were tougher than you thought?

A Bad thing. Okay. We were of the view that the U.S. had a strategic interest in accessing Venezuelan oil to keep prices low in the U.S., and the other strategic interest the U.S. had was To solve some of the migration issues that they had in the U.S., and they wanted to return people from Venezuela back to Venezuela. So in the last few months, that route of, let's say, pragmatism to achieve what the U.S. was seeking, more oil and less migrants, was what was driving the policy towards the U.S., and in the last month or two, there's been a shift in that, more towards restriction of the sale of Venezuelan oil to the U.S., In practice, what it's doing is pushing it to China, which is odd, because that would seem counter to the U.S. objectives. That was a development that we didn't anticipate, and although there has been no negative impact to date, we're just monitoring closely what happens. Nevertheless, we believe that because of the refining infrastructure in the southern U.S., which is, you know, has been built for Venezuelan crude, that's a natural relationship that should endure in the future, but there's many geopolitical things that are shifting around, tariffs, etc., That again, we're in a wait and see mode like everybody else is regarding tariff and other geopolitical matters.

AI assessment note: “That was a development that we didn't anticipate”

Q So you spent two years doing the work, identifying the company. When it comes down to buying, how do you negotiate price?

A We have developed a reputation in that market that we can actually provide a lot of support to the companies, be it Helping them out with leverage. There's very little credit in Venezuela because of how the local economy works. We can help them optimize operations. We can help them in doing these roll-ups. We can help them think outside of Venezuela, which is relinking Venezuela to the region is also one of the strategies that we follow for liquidity in the future and to reintegrate the economy to the neighboring countries. Price. We are convinced that we add that value, and I think the market, if you look at the case studies of what we've done in the past few years, that is the case. We look at multiples in Latin America. Obviously we look at the risk premium in Venezuela and the numbers that come out are normally not very interesting. So we need to sell our ability to help the company and the opportunity of having more capital to compete and to grow as a value creator. Most of what's happened in the last few years in Venezuela is that in order to grow, you need capital for working capital. And in Venezuela, the logistics are complicated. So You need more lead time to get your goods into the country. Suppliers worry about the risk of Venezuela, so they ask you to pay earlier. They give you less credit. All of that means more capital to grow. So having that capital is a competi…

AI assessment note: “We look at multiples in Latin America. Obviously we look at the risk premium in Venezuela”

Q So it's pretty easy to see the potential upside should Venezuela make it back to where it was a decade ago. Why don't you walk through the risks?

A There have to be changes in order to get there. So independent of what happens at the political level, the economy cannot remain where it is. It will not remain where it is, and it's just beginning to normalize itself. If things don't change, we're already seeing an important growth in the value of these assets. We do believe, nevertheless, and you're already seeing that in the sanctions on the oil side, sanctions will be softened, and we trust that there will also be a better political process that will allow eventually for the sanctions to be lifted post the election of So, there is a risk that the situation doesn't change, and if the situation doesn't change, basically you're gonna have growth from where you are now, But again, you have bought into the basic companies of the country. It's like if you come to the US and you buy, I don't know, a piece of Kellogg's, a piece of JP Morgan, a piece of Sherwin-Williams, a piece of Verizon. Okay, you're going to have to wait, but you have the assets that are valuable in the long term. The risk here really is on the duration. How long do you have to hold until you recover capital? We're distributing dividends to LPs. We had like a three to four percent dividend yield last year to our investors, and it's in the period Of worst performance ever of these companies in the country. We trust that they're gonna continue generating cash, but…

AI assessment note: “The risk here really is on the duration. How long do you have to hold”

Q What have you learned about investing in Venezuela from your activity the last couple of years?

A Venezuela was traditionally one of the most profitable markets in Latin America in every industry. When we were working in telecoms, margins in telecoms company was like, 40%. The rest of the region was 25. Food was the same, and we still see it to date. So it's always been traditionally a more complicated market to operate in, but more profitable. It was complicated because the currency was traditionally very strong because of the oil experts. But once you learn to operate locally, then you can be very successful. I also enjoy the people very much. I mean, it's a very talented workforce. Many of the Venezuelans had traditions of studying here in the U.S. and in Europe, and it's a very pleasant place to go and work and build business. So we're happy doing what we're doing.

AI assessment note: “once you learn to operate locally, then you can be very successful”

Q From a business perspective, structurally, when you start with a Venezuela-focused fund, how do you then pivot and say, okay, we started in Venezuela, but now we have this management team that can do this in Latin America?

A We're trying to smoothly transition or expand. So we see opportunity in Venezuela going forward, and we would love to do more investing in Venezuela. We still have, actually, we're still investing in Venezuela. So that opportunity, I think, exists. We love that situation. We'll continue there. Nevertheless, if we have these opportunities where we believe that we have an edge, either because we know the markets, we know the local families, we have an operational team. Many of the companies that we're looking at in pharmaceuticals, I've known from Prior work that I've done in pharma in Latin America, putting all the pieces together, it's really not an impossible thing to do. We have the capacity, we have all the pieces, and we have the capacity to put them together, and we want to take advantage of that. I would characterize ourselves as we are opportunistic investors focused on finding situations where we can create a difference and where we can create a lot of value for the risk that we're taking. We have been exploring different spaces. There's a new one that we've found. So we will begin an expansion into that, and then we'll see. Where that takes us in the future.

AI assessment note: “we have an edge, either because we know the markets, we know the local families”