Brazil Distress: A Short-Lived Opportunity

VBI Real Estate is looking to provide gap financing for distressed developers in Brazil, but one of the firm’s founding principals, Ken Wainer, believes the opportunity could last as little as two years.

VBI is focusing on providing gap financing for both recapitalizations and growth capital to mostly residential-for-sale developers. In the past two quarters, the firm has invested, in forms including preferred equity and mezzanine financing, and expects to continue the strategy over the next 12 to 24 months.

Real estate investment managers have turned their attention back to Brazil, after lenders abandoned the country and real estate market liquidity became constrained.

Wainer says many companies and developers are struggling to finance projects and to source working and growth capital.

However, he says, the scale of developer distress in Brazil could fall sharply within two years.

“I think Brazil could reflate quickly,” he told PrivcapRE in a phone interview. “I don’t think that will be 2015, but it wouldn’t take much for it to happen in 2016. It’s early, but investors are turning their attention back to Brazil.”

VBI Real Estate, which raised $500M in 2011 for its Brazil Real Estate Opportunities Fund (BREOF) II, may now seek a smaller amount of equity to target the opportunity.

Wainer says firms providing gap financing needed to have the ability to step into the developer’s role, if necessary. Not all developers will perform, due to financial pressures and generally poor management sector-wide.”

VBI is generally looking to invest in “very good developers that have, for some reason, a problem with working capital.

“And the start of any investment is to understand how good the developer is and what’s the cause and the solution to this working-capital problem,” he said, during a November 17 video interview on PrivcapRE.

“Thereafter, we look down right away at the asset level. So we’re looking at a specific project. We’re trying to find a way to structure our position in the capital structure so that the developer has some skin in the game, but so that there’s a lot more value going forward that keeps them motivated.”

Investors have fled Brazil as it battles recession and rising interest rates, inflation, and budget deficits. But Wainer says that as the country begins to move away from consumer-driven growth and towards investment-driven growth, and as it promotes greater investment in infrastructure and the labor force and enforces regulations to provide private-sector security, it will attract a large volume of capital for infrastructure investment.