Member: Equity International
Executive: Brian Finerty, CIO
News Coverage: Search LAVCA

LAVCA spoke with Brian Finerty, CIO of Equity International about the opportunity for real estate investment in Latin America, including the attractiveness of alternative asset classes such as telecom infrastructure, for-rent residential, healthcare, and self-storage and how recent volatility in contrarian markets like Argentina have generated more opportunities to acquire assets at distressed levels. When asked about the impact of political risk on private real estate investing in the region: 

Latin America enjoys superior population and GDP growth relative to that in many developed markets, several of the large countries in the region have implemented orthodox economic reforms, opened themselves to trade, and reduced external debt as a percentage of reserves. Political risk is an ever-present consideration, especially in 2018 with so many significant elections. But, Brexit, the US elections in 2016, and other occurrences in developed markets are a reminder that political risk is everywhere in the world. If anything, the political environment in the US makes us more rather than less positive on Latin America over the long-term. In the short-term, there could be disruption, but that spells opportunity for us.

LAVCA: Please provide some background on Equity International. What can you tell us about the fund’s strategy – average investment size, and target sectors?

Brian Finerty: Equity International (EI) was founded in 1999 by Sam Zell to partner with strong operating companies outside of the United States, capitalizing on compelling private equity real estate opportunities. Headquartered in Chicago, Illinois, the firm has invested in over 30 portfolio companies spanning Latin America, Asia, the Middle East, and Europe.

Historically, our focus has been on the main segments of real estate such as the residential, office, retail, hospitality and industrial sectors. We have since expanded our scope to include opportunities in the broader real estate sector and opportunities with hard assets and long-term durable income streams such as self-storage, student housing, for-rent residential, telecom infrastructure, parking infrastructure, and asset-backed healthcare.  Our average investment size is approximately US$50 million to US$75 million with the ability to deploy additional capital through co-investment opportunities for existing limited partners and third-party investors. EI has achieved nearly US$3 billion in total monetizations via public markets, private entity-level sales, and asset sales. The company currently manages approximately US$1.4 billion of assets.

LAVCA: What is Equity International’s global footprint? In what countries/regions is the firm active?

Brian Finerty: EI is active globally with a primary focus in Latin America and Asia. EI’s current investments include operating companies in Brazil, Mexico, the Andean Region, Argentina, Japan, and India.

LAVCA: How long has Equity International been investing in Latin America? What qualities make the region attractive for your strategy? How does the opportunity in Latin America compare to other markets?

Brian Finerty: EI has been investing in Latin America since the company’s inception in the late 1990s, targeting scalable companies and assets benefiting from the favorable demographic trends of our core markets. EI focuses on regions characterized by favorable macroeconomic trends such as urbanization, growth of the middle class, and an increasing working age population. Strong economic growth, capital inefficiencies, and limited competition can allow for compelling investment opportunities. Valuation also drives part of Latin America’s attractiveness. The EV/EBITDA multiple for the S&P Latin America 40 Index stands around 7.0x versus its ten-year average of 7.3x. At the same time, the EV/EBITDA multiple for the Dow Jones US Total Stock Market index is 11.6x versus its ten-year average of 10.0x. Compared to the investment environment in Emerging Markets four years ago, frameworks are in place today to help investors become more comfortable with pricing the risk in terms of commodities, currencies, and political reforms. Volatility in these markets in the short term create opportunities for long term investments.

EI focuses on regions characterized by favorable macroeconomic trends such as urbanization, growth of the middle class, and an increasing working age population. Strong economic growth, capital inefficiencies, and limited competition can allow for compelling investment opportunities. Valuation also drives part of Latin America’s attractiveness…

 

…Volatility in these markets in the short term create opportunities for long term investments.

LAVCA: What is your general impression of the appetite of institutional investors for access to Latin American real estate? Are your LPs mainly US-based or international? Do you have any Latin American LPs?

Brian Finerty: Given strong returns in the US and developed markets, the appetite for exposure to Latin America and other Emerging Markets has been muted.  However, many investors believe that returns in the US and other developed markets may be difficult to replicate and that risk is increasing as yield compression begins to abate or reverse.  Certain investors see Emerging Markets and Latin American exposure as a helpful diversification of their investment portfolios and a region that can provide outsized growth over the long-term. We have often found that capital raising versus deployment of capital is procyclical. Contrarian investing has been one of Sam’s investment philosophies—“when everyone is going right, look left.” Equity International is an attractive partner for institutional investors who pursue similar strategies with a deeper understanding of underlying fundamentals in Latin American markets, with the goal of pricing and mitigating risk.

EI’s limited partners are mostly US-based institutional investors, but also represent various geographies around the world, including Latin America.

LAVCA: Tell us about the alternative asset classes you invest in, in Latin America? What have you found attractive about niche sectors like healthcare, parking infrastructure, self-storage, telecommunications infrastructure, student housing, etc.?

Brian Finerty: EI is a student of history based on our 20 years of experience in Emerging Markets, our strong relationships and network in our target markets, and the wider Zell Organization’s deep knowledge of real estate in developed markets. We observed US and developed market performance, global capital flows and investment trends toward alternative asset classes in the past. Emerging Markets tend to lag behind developed markets, but are slowly replicating the history of development in certain sectors compared to mature markets, offering interesting opportunities in alternative asset classes such as telecom infrastructure, for-rent residential, healthcare, and self-storage. However, we are very careful when entering new asset classes and utilize knowledge gained with partnerships to reduce the likelihood of missteps when embarking on pioneering in new sectors.

LAVCA: Last year you closed your first investment in telecommunications infrastructure with the Andean Tower Partners deal. Why is now a good time to invest in telecommunications infrastructure? Is this a sub-sector you are targeting more actively?

Brian Finerty: Demand for mobile and internet service in the Andean Region has overwhelmed supply as the penetration of smartphones continues to increase. Migration from voice only to voice and data has generated substantial demand for bandwidth, boosting the need not only for coverage, but for increased density by telecommunications infrastructure. EI’s investment in Andean Tower Partners provided a unique opportunity to partner with a strong local team with proven execution capability and scale the platform through development, acquisitions, lease-up of its portfolio, and other technology deployment. EI continues to monitor the telecommunications infrastructure sector in Latin America for adjacent opportunities, such as data centers, and also pursuing other opportunities in the sector on a global basis.

EI continues to monitor the telecommunications infrastructure sector in Latin America for adjacent opportunities, such as data centers, and also pursuing other opportunities in the sector on a global basis.

LAVCA: You recently invested in ARG Realty Group in Argentina. Tell us about this deal. What is the investment thesis for investing in Argentina and what qualities make this market attractive right now?

Brian Finerty: In March 2018, EI closed an investment in ARG Realty Group, a commercial real estate company based in Buenos Aires, Argentina. The company now represents one of the largest real estate platforms in Argentina and will focus on income producing real estate properties. A one million square foot class A office and retail real estate portfolio was acquired as part of the transaction. Limited investment in Argentine commercial real estate over the past 15 years generated a significant undersupply of quality assets. Bolstered by macro reforms by the Macri administration important in the process of normalizing the economy, multinationals are starting to return to Argentina, creating an increase in demand. Given the recent volatility in Argentina, we’ve found more opportunities to acquire assets at distressed levels. We think that the short term volatility will continue to provide these opportunities, but long term fundamentals and reforms continue to give us confidence in the macro thesis.

Given the recent volatility in Argentina, we’ve found more opportunities to acquire assets at distressed levels. We think that the short term volatility will continue to provide these opportunities, but long term fundamentals and reforms continue to give us confidence in the macro thesis.

LAVCA: What other Latin American markets are interesting and why? 

Brian Finerty: The view of Emerging Markets investing roughly 10 years ago was that the rising tide of commodity prices raised all boats. It was far more common to believe all that was necessary for success in EM was simply taking the risk of making an investment. Today, investors have a deeper understanding that every country is very different in terms of their political landscape and economic reforms, reactions to global trade discussions, and changes to commodities over time. Investment strategy has evolved and capital markets have changed accordingly. For example, in Brazil, the influx of sizable institutional capital is taking a direct approach to investments, changing the investment environment. Despite the fact that Brazil is coming out of the worst recession in the country’s history, investors continue to struggle to find attractive prices where the risk to reward ratio is favorable. As such, we are focused on sectors off the beaten path such as non-traditional real estate and infrastructure, where we do see our capital as highly valuable. The administration is focused on righting the economy policy-wise and buffer risks. Elections and trade discussions in Mexico are also creating volatility, establishing a dynamic of paralysis where capital appears unwilling to make an investment in the region. This volatility creates opportunities for investment.

LAVCA: What is the timeline and strategy for exiting your investments? Who are potential buyers?

Brian Finerty: Every day that you are not a seller, you are a buyer. We constantly assess value of our investments comparing a go-forward return opportunity to exit today. In most cases, given volatility of the markets in which we invest, we position ourselves to hold in the short to medium term. We think about structuring our investments to create the most liquidity with as many options as possible. Potential exit strategies include sale via public markets or to strategic buyers and financial groups, and asset sales.

Every day that you are not a seller, you are a buyer.

LAVCA: What are the opportunities and risks of investing in real estate in Latin America? Has the political environment in the US influenced your plans in these markets? How/why?

Brian Finerty: Latin America enjoys superior population and GDP growth relative to that in many developed markets, several of the large countries in the region have implemented orthodox economic reforms, opened themselves to trade, and reduced external debt as a percentage of reserves. Political risk is an ever-present consideration, especially in 2018 with so many significant elections. But, Brexit, the US elections in 2016, and other occurrences in developed markets are a reminder that political risk is everywhere in the world. If anything, the political environment in the US makes us more rather than less positive on Latin America over the long-term. In the short-term, there could be disruption, but that spells opportunity for us.

If anything, the political environment in the US makes us more rather than less positive on Latin America over the long-term. In the short-term, there could be disruption, but that spells opportunity for us.

LAVCA: Why did you join LAVCA?

Brian Finerty: LAVCA offers a robust community for investment managers, companies, and capital providers to collaborate and discuss the Latin American investment environment. LAVCA’s research and reliable data regarding private equity and venture capital in the region are well recognized as important contributions to the investment community. We are honored to be a member of the organization.