“Sorry if I look tired,” says Maximo Lima, founding partner of Hemisfério Sul Investimentos (HSI), as he sits down with PERE at his firm’s offices in São Paulo.
It is 8 o’clock on a Friday morning in early November, and Lima has spent the week flying around his native country of Brazil. He started in the northeastern city of Salvador, where HSI currently has a logistics project on the go, then flew south to Belo Horizonte to look at a number of industrial opportunities, and subsequently jetted back northeast to Recife, which has the potential for investment in a variety of property sectors.
He returned home to São Paulo to do this interview, but is hopping on another plane tonight to the south coast of Bahia, where he will spend the weekend with his family at their beach house. Then on Sunday night, he’s off again, this time west to Manaus, where HSI currently owns 6 million square feet of land that it is in the process of subdividing into potential residential, hotel and office development sites.
In many ways, Lima’s recent flight itinerary resembles his firm’s investment approach: shifting in and out of markets before others are able to catch up. HSI is perhaps best known for executing the largest-ever real estate exit in Brazil, with the sale of its entire industrial portfolio – encompassing some 22 million square feet of space – to Global Logistic Properties (GLP) in 2012. The transaction also solidified the firm’s reputation as an early mover in Brazilian real estate: as one of the first managers to invest in the country’s industrial property sector, it was exiting at a time when others were making their entry.
Even with industry heavyweights such as The Blackstone Group and Brookfield Asset Management also investing in Brazilian real estate, HSI stands out. When PERE mentioned a recent source-building trip in Brazil to industry sources, two of them asked the same first question: “Did you meet with Max?”
HSI also is one of the few, if not only, Brazil-focused private equity real estate firms that has seen its latest fund oversubscribed amid the country’s worst economic slump in 25 years. PERE understands that at press time, the firm had raised $430 million for its HSI Real Estate Fund V, and was expected to close at its hard cap of $750 million by the beginning of the second quarter. The fund, which was launched last May, had demand of more than $1 billion.
A loyal following
Fund V, in fact, is the firm’s third fund in a row to be oversubscribed and attract interest of more than $1 billion. Lima, 39, says that HSI decided against raising a larger fund because of the recent devaluation of the Brazilian real. “Given that the currency has moved quite a bit, $700 million of equity has suddenly become a lot of Brazilian reais to invest,” he says. “The country in dollar terms is very, very cheap right now.”
He also stresses the importance of sizing a fund to the current opportunity in the market: “I like to wear a shirt that’s my size, let’s just put it that way. When you feel pressured, you do stupid things, and I don’t want to feel pressured.”
Lima notes that with Brazil in turmoil, he was uncertain how successful the capital raise for Fund V would be. “We had expected people to show interest because there’s always opportunity in crisis, but that’s always easier said than done because everybody’s afraid to pull the trigger,” he says.
According to Lima, the firm has a significant number of repeat investors – typically representing 70 percent to 80 percent of a fund’s limited partners. Among them are the Washington State Investment Board and Singapore’s sovereign wealth fund, GIC Private Limited – both of which were early investors in Brazil.
“We’ve had a very loyal following,” he says. “Honestly, if we wanted it to be 100 percent, we probably could, but we like to bring in a few new relationships, because over time, who knows? People change interests.”
Historically, HSI’s limited partner base has comprised 70 percent investors from the US, 15 percent from Asia and 15 percent from Europe and the Middle East. With Fund V, however, the manager made an effort to broaden its investor base in both Europe and Asia and added new LPs from Germany and Switzerland. However, the firm turned away some investors that were not in those geographies while capping the commitments of its existing LPs.
Indeed, what HSI has done better than many of its competitors is aligning itself with long-term institutional investors in Brazilian real estate, says Ken Wainer, founding partner at VBI Real Estate, a São Paulo-based real estate fund manager.
“The most important thing in this business to have money when nobody else does,” says Wainer. “The smartest thing they did was have investors that truly understand emerging markets. It’s going to be a gold mine in Brazil in the next two or three years. But inexperienced emerging markets investors don’t see this, they see weakening currencies, they see volatility. They want to sit on the sidelines and only come back when there’s signs of recovery. But when there’s signs of recovery, that’s when everything’s overpriced and there’s too much capital.”
While some firms have bemoaned the challenging fundraising environment for Brazilian real estate, Lima counters: “There’s definitely money for Brazil. The money’s there, there’s definitely people who are interested in the country, but the money has gotten a lot more selective.” First-time fund managers will be hard-pressed to attract capital, and even more seasoned firms will have a hard time raising money if their investors still haven’t seen realized returns, he says.
“We’re probably one of the few shops that have really gone full cycle with a number of funds, taking the money, investing it, divesting it effectively, giving investors returns,” says Lima. “So in a time like this, it gives people a lot more confidence to invest with someone that they know can deploy and return that capital than with people that have just deployed the capital and are living in the world of projected returns.”
Transparency with investors is also paramount. “We tell them exactly what we think is going on with our portfolio, be it good or bad,” he says. “You’re not trying to massage your numbers because you’re trying to fundraise. As a matter of fact, before we went on this fundraise, we adjusted return expectations on several of our funds quite strongly.”
Selling the country
Lima has come a long way since joining the firm where he has spent the bulk of his career. After attending the University of Chicago and working at the New York-based investment bank Wasserstein Perella, Lima returned to Brazil in 2000 to take a job at a boutique investment firm, where he participated in some of the first real estate securitizations in Brazil.
In 2003, he became one of the founding partners of GP Investimentos Imobiliarios (II), the newly formed real estate business sponsored by Brazilian private equity firm GP Investimentos, along with Luciano Lewandowski, who led the venture, and Lewandowski’s longtime partner, Jorge Nunez. The three partners together owned 30 percent of GP II, while GP Investimentos held the remaining shares.
In 2005, the three partners bought out GP Investimentos’ shares in a management buyout when the private equity firm went public, and subsequently renamed the firm Prosperitas Investimentos. It also began marketing its first fund, Prosperitas Real Estate Partners (PREP) I.
“Raising money for Brazil in 2005 was surprisingly much harder than it is today, even though we’re in a mess right now, because in 2005, we were effectively not on anybody’s radar as an institutional investment destination,” he says. “The level of ignorance was tremendous about the country, and so it was very much a story of, first you have to sell the country before you begin to sell real estate.”
In fact, it took Prosperitas 12 months before the firm landed an anchor investor for the fund. The firm then hired Park Hill Real Estate – becoming the placement agent’s first real estate client outside of Blackstone – to bring in other investors. “In a way, fundraising does have a bit of a snowball effect, because once you bring in a number of good names, one thing leads to another and it becomes a little bit easier,” he says.
Prosperitas went on to raise two additional funds, the $600 million PREP II, and the $750 million PREP III. In 2012, however, the firm went through a management shakeup, with the departures of Lewandowski and Nunez. While Nunez intends to retire after both PREP II and III become fully divested over the next several years, Lewandowski left to pursue opportunities outside of real estate.
The split between Lima and Lewandowski was not amicable. Speaking to PERE, the two men gave differing accounts of the circumstances behind Lewandowski’s exit from the firm. In brief, Lewandowski says he left voluntarily; Lima says otherwise.
According to multiple people familiar with the matter, Lewandowski was instrumental in getting the firm off the ground because of his high-level connections – his brother Ricardo, for example, is the current president of the Supreme Federal Court of Brazil.
But Lima – who is 17 years younger than Lewandowski – is said to have had a greater affinity with investors, particularly those in North America. Two of HSI’s competitors have noted the years that Lima spent in the US facilitated his ability to communicate and connect with institutions in the region. “It is very easy for North American LPs to relate to him,” says one fund manager.
Lewandowski subsequently founded Agribusiness Investimentos, a private equity firm focused on agriculture-related investments in Brazil, and joined the board of GLP. Recently, he and his current partners renamed the company AGBI Real Assets and created a new real estate arm, with plans to launch an urban property fund this year.
As for Lima, he renamed the firm Hemisfério Sul Investimentos and has since brought on five new partners through a combination of internal promotions and external hires.
Ultimately, the management reshuffling did not keep investors away, says Lima. “We sorted out our own mess internally, and then we brought a well-resolved situation to our limited partners,” he says.
Nonetheless, the timing was awkward, as the firm was informing investors about the departures at the same time it was marketing its fourth real estate fund, HSI Real Estate Fund IV. In the end, the firm still raised $650 million for the vehicle, with demand of $1 billion.
“It was, in a way, one of my proudest moments, in the sense that I felt that investors did trust me throughout all these changes, this turbulent period,” says Lima. “They were still willing to back me, and they continue to work with me.”
Horseman of the Apocalypse
Fund IV, however, is the firm’s worst vintage to date. “It is the fund that took the hardest currency hit,” says Lima. However, he asserts that HSI will still be able to return to investors all of their capital along with a respectable return.
Lima adds that after fully committing Fund IV in 2013, the firm hit the pause button. HSI made an abrupt shift in its investment strategy – from actively acquiring assets to selling as many properties as it could – in anticipation of the country taking a turn for the worse.
Lima refers to that time as the worst in the firm’s history. “It was a very tough period, when I went back to investors and said, ‘Look, guys, you might not appreciate some of the decisions that I’m going to make today, but trust me, you will appreciate them soon enough,’” he says.
In a contrarian move, HSI scaled back on platforms that were experiencing robust growth, particularly in the hotel and self-storage sectors. Lima told the heads of those businesses to stop investing – for the next two years. Instead, the firm would focus on managing its portfolio and divesting its holdings, he recalls.
The strategy shift, however, was met with skepticism, both inside and outside of the firm, he says: “You saw the deterioration happening, and you’re sitting there, watching it in slow motion and the people around you think the party is still happening. It’s like, the music stopped, guys.” Lima notes that when he attended conferences, people called him the “Horseman of the Apocalypse.”
Still, he admits that he himself had doubts at times. “You know you’re building a J-curve against yourself because you’re not putting that capital out,” Lima says. “I’m going to lose the management fee for the year as I build up my J-curve, but I’m going to be able to buy things a year from now so much cheaper than today. But at the time you’re doing it, it creates a ton of anxiety – am I doing the right thing? What if I’m wrong?”
The bulk of HSI’s dispositions took place over the past two years, with some assets sold at high returns and others simply sold quickly. “I think if you look at all the decisions we took in selling between 2012 and 2014, I don’t think there’s one that I regret, every single one, even the sales that didn’t generate the best returns ever,” he says. “Had I held onto these things, I’d be a lot worse off today.”
These days, HSI is selling very little and instead is shifting into acquisition mode. “A lot of people are saying, there’s not a lot of distressed real estate in Brazil,” he says. “I would probably agree with that, there isn’t. But there are a lot of distressed companies that have real estate. So it’s a question of, where do you look? If you’re looking for real estate, you’re looking in the wrong place.”
The place to be looking, according to Lima, is companies with complicated balance sheets. He says that his firm has approached such firms and asked if they had anything to sell. “Often you find that they do, they’re pretty desperate to sell, and a lot of times, they didn’t even think of selling their real estate,” says Lima.
The current economic crisis that has unfolded in Brazil is different from any other that has preceded it, he adds. “The fundamental difference is that we came in fairly levered, and that was a new thing for Brazil,” says Lima.
And whereas leverage in the US is extremely cheap, with very long maturities and delayed amortizations, debt in Brazil is typically very short-term, very expensive and amortizes every month. “It takes a lot less for people to become distressed here as far as the amount of leverage, given the cost of it and the characteristics of the leverage than it does in other places,” says Lima. With the prime rate now at 14 percent, the cost of funding for many firms has doubled, which has forced many companies to shed assets – including those in real estate.
Fund V marks a departure from the firm’s prior funds – which have invested in office, retail, industrial and residential real estate – in that it lacks a well-defined allocation strategy to specific property sectors. “I’m going to put it where I find the best opportunities,” says Lima. “This is a market where if you do your homework, you should just buy cheap. So I’m fairly agnostic about which subsector of real estate I’m buying in, as long as I perceive that what I’m buying has a deep value.”
Last month, HSI closed on its first transaction on behalf of Fund V, the acquisition of a 387,000 square foot, prime office building in São Paulo. The asset had been owned by a wealthy Brazilian family that had bought into multiple projects simultaneously and were forced to deliver them into a tough leasing market.
Having identified a large pipeline, the firm does not expect to execute on most of the deals in the immediate future. “The bid-ask at the beginning of  was enormous, and we knew that was the case,” he says. “So we stuck to what our offers were, and the sellers are moving constantly our way. I think give it another four to six months, and they’ll be exactly where we’re bidding.”
In his view, many prospective sellers are reaching a breaking point, and either will have to sell some assets to keep their businesses afloat, or risk losing everything to the bank. “The barbarians are at the gate, basically,” he says. “We’re starting to see people get panicky.”
For Lima, the ideal time to deploy capital would likely be in the second quarter of this year. “I do think things are going to get considerably worse before they get better,” he says. “We’re going to have another tough year.”
It is also a year that is bound to hold a lot more air travel for Lima too.
Hemisfério Sul Investimentos
Headquarters: São Paulo, Brazil
Key executives: Maximo Lima, David Ariaz, Celina Vaz, Felipe Gaiad, Jefferson Tagliapietra and Thiago Costa
Number of employees: 45
Total assets under management: $2.7 billion
Total equity raised: $3.3 billion
One of HSI’s more recent high-profile deals was the sale of Eco Sapucaí, an office building in Rio de Janeiro, to GIC in 2014. The 925,700 square foot prime office development project, now completed, was the sovereign wealth fund’s first wholly-owned investment in Latin America.
The transaction raised a few eyebrows, as HSI delivered an empty building to GIC in an office market that was suffering from a glut of supply and mounting vacancies approaching 20 percent. In selling a vacant property, Lima explains: “The leasing market in Rio is going to take some time, so I’m going to be sitting on that building, having the carrying costs of that building.”
Multiple firms had passed on buying the Eco Sapucaí development site because of what some considered to be its “secondary location” within Rio de Janeiro, according to one prospective buyer. When HSI ended up buying the site in June 2011 on behalf of Fund III, others wondered how the firm was going to be able to lease up the building, given its more peripheral location in the city.
As it turns out, the firm didn’t need to worry, as it found a buyer in GIC, its longtime backer with a decades-long investment horizon.
HSI “did a good deal” for itself and its Fund III investors, the prospective buyer says. “But God knows what GIC was thinking.”
Lima dismisses talk that GIC made a bad investment. “I produced one of the cheapest buildings in the city of Rio, because I bought my land very inexpensively,” he says. “So I had the room to do what no one else did, I had the room to sell it at an attractive price and still make money.”
At press time, GIC was reportedly nearing a deal to lease the building to the Rio de Janeiro state government.