GP Investments (GPIIF US) – Your chance to team up with Brazilian Investment Superstars like Uncle Warren did ?

That some Brazilian investors know how to make BIG money is no secret anymore, especially since Warren Buffet teamed up with Brazilian 3G to take over Heinz in a 26 bn USD deal.

What if you could team up with similar Brazilian guys like good old Warren did ? In theory, there is a good chance by buying shares in GP Investments, a listed Brazilian Private Equity company. GP Investments is not any Brazilian Private Equity company, but was the original Private Equity vehicle of “genius” investor Jorge Paolo Lemann. He sold the company in 2003 to his Junior partners and then went on to found 3G.

So in theory, GP Investments is like the “Junior” version of 3G with a LatAm focus and some of the employees of GP have actually been hired by the 3G guys which are all bilionaires now (Lemann is according to Bloomberg now number 28 in the world with a net worth of 24,8 bn USD).

Back to GP Investments:

There is a pretty comprehensive case study on Value Investor’s Club, so no need to replicate everything here.

The basic investment idea is simple:

GP investments trades at a discount to its holdings (in which it invests along its 3rd party private equity funds) plus you get the asset management company for free. On top of that, management is aligned with shareholders and repurchases shares.

Further, two “gold standard” value investment firms have large positions, Third Avenue with 11,65% and “legendary” Sequoia with 11,8%. Finally, GP Investments announced two very succesful exits over the last weeks which made them good money (BR Towers and SASCAR).

The stock price increased a little bit since then, but still, the stock looks very much undervalued and almost a “No brainer” if one is looking for a Brazilian investment opportunity.

What is the asset management business worth ?

My answer: Not much. Look at this table:

Management Fees Salaries, expenses Bonuses Net
2006 15.5 -18.99 -5.2 -8.69
2007 26.2 -38.1 -9.2 -21.1
2008 13.9 -47.9 -3.9 -37.9
2009 16.2 -47.9 -13.4 -45.1
2010 25.0 -48.6 -15.3 -38.9
2011 17.4 -45.4 -7.7 -35.7
2012 22.4 -60.2 -19.3 -57.1
2013 20.5 -74.9 -8.4 -62.8
Total 157.1 -382.0 -82.4 -307.3

Based on the available US GAAP account I created this table showing the assets maganagement fees charged to third party investors against salaries, expenses and bonuses for GP’s employes and operation. We can easily see that the balance has been increasingly negative over the years. Since the IPO, the “Asset Management Business” has cost the shareholders some serious money. Even if we assume that expenses include other general expenses, then to me the value of the Asset Manegement looks rather negative, it looks like that GP shareholders are subsidising 3rd party investors to a significant extent.

Private Equity track record

If you read through GP’s investor presentation, they always stress their great track record since 1993 with a lot of examples of exits where they made a lot of money. However, we never find a “real” track record which shows the real IRR for all assets. For an Asset Manager, the track record is the most important asset, before anything else.

In the following table, I tried to recreate their PE track record based on their published numbers since their IPO 2006 (in USD). I used disclosed US GAAP numbers and then calculated a simplified annual IRR. One remark: Minorities are a big contributor in GP’s P&L. I assumed that all minority results are PE related. In the table, a positive number in the column minorities means that the loss has been shared with minorities and vice versa for profits.

Investments eoy Realized gains, Div increase in value Minorities Total return in % a.m.
2006 173.9          
2007 1165 59.2 279.8 -169.0 170.0 25.39%
2008 1381 11.8 -513.9 304.2 -197.9 -15.55%
2009 1568 229.0 241.5 -284.0 186.5 12.65%
2010 1431 -47.8 -39.0 68.2 -18.6 -1.24%
2011 1173 38.3 -348.0 236.0 -73.7 -5.66%
2012 1279 133.0 -120.3 44.0 56.7 4.62%
2013 998.3 -284.2 191.6 89.6 -3.0 -0.26%
Total   139.3 -308.3 289.0 120.0

It’s not hard to see that the Performance only looks good the first year, after the they went public.Since then, the track record has been very weak. The Bovespa made in the same period a total return in USD of ~0,7% p.a. So yes, they performed slightly better than the Bovespa, but after bonsues and expenses, GP shareholders would have been better off with an index fund. Bad timing plays clearly a certain role here as well, however on the other hand it is hard to understand how the justify paying out more than 80 mn USD in bonuses for such a mediocre perfomance.

A few additional remarks on that from my side:

Debt/leverage

After the IPO, GP took on leverage, both as a bank loan and with an issuance of a perpetual note. Especially the perptual note in USD with 10% might have looked as a good idea when interest rates in Brazil were high and the real gained against the dollar, but now, with the real loosing significantly, this currency bet is of course making things worse. Additionally shareholders have additionally lost money via a “negative carry” on the debt funding compared to their low single digit investment returns.

Stock options / Alignment of interest

Since 2006, more than 50 mn options have been granted to the employees (against around 160 mn shares). Some are pretty far out of the money, but still, combined with the bonuses it doesn’t look like that there is “full alignment” between shareholders and employees. The executed share repurchases look rather small compared to the option grants.

“Diworsification”

In the last few years, GP diversified into infrastructure and real estate. For me, this is a clear sign that they focus on asset gathering rather than on performance. I think their problem is that they cannot raise a new PE fund as their perfomance is most likely substandard and many more competitors are now active in Brazil then when they started. Additionally, on of their recent pruchases, a Swiss based listed fund-of-fund vehicle called “APEN” s also not really consistent with their LatAm focused strategy.

So the big question is:

Is GP Investments a good investment despite the substandard track record ? Will they be able to generate better returns going forward ?

What I am concerned about is the fact that they seem to hang on their loosers and sell winners pretty quickly. Making 100% in 3 years sounds good, but the real money is made with investments that make 5 or 10 times their initial investment. Overall, to me it looks like that the bonuses which are paid independent of overall investment results are the biggest issue. In a “Good” private equity structure, the employees only cash out AFTER the full portfolio has been cashed out and the overall result. In my opinion, this is the only way how to align incentives in such an environment.

Finally, a few words on the “Lemann / 3G” connection: In the book “Dream Big”, which I just finished reading (review follows soon…) and which sketches the carreers of the 3G guys, Lemann is quoted that he left GP Investments because of 2 reasons:

1. GP did chase too many deals, as he wanted to focus only on a few for the very long term
2. He didn’t like the way his younger partners payed themselves big salaries. His credo was always that salaries and bonuses had to be fully reinvested into the company and employees should have a simple life style

So for me at this stage, I will not invest in GP. Despite the interesting and initially compelling story, I am simply not convinced that GP going forward will be a better investment than a Bovespa index fund. Full stop.

9 comments

  • Packer is correct regarding the accounting treatment of the fees.

    One tidbit regarding how private equity calculate their IRRs from my time in the industry. A normal (non-PE) fund calculates its IRR on its holdings including cash. However, PE firms typically make capital calls on their investors when they are about to close on an investment. This means that they don’t calculate the IRR on the basis on cash sitting there but they only count the cash after they make the capital call. From any investor’s point of view, you have to keep the cash at the ready for when the capital call comes. So, that means that as an investor the IRR you enjoy will be less than what the PE Firm reports. That’s the industry norm but it certainly pushes up the returns reported.

    Ps Buffett (a Buffet slipped in there buddy!)

    Keep up the great posts. Have a look at Espirito Santo Financial Group.

  • I think using US GAAP consolidated statement misses the fees paid by non-GP investors in there hedge funds. If you make adjustments for internal fees charged for the management of GP investments (in other words if the GP capital is managed for free) then the AM business is break even. This firm is like other AM firms I have seen in the past at an inflection point where they can manage more assets with the existing infrastructure. Unless both Amit W. @ 3rd Ave and the Sequoia guys were buffaloed (which I think is highly unlikely given there process and record), I think the plan going forward is to restrain expenses and buy back stock where it makes sense along with raising more capital for a new fund. If you look at the failures, some where out of there control Argentine driller and some were in competitive businesses (dairy farm). I would think both 3rd Ave and Sequoia being in the business would not invest in a serial disaster as you have laid out above. Just my 2 cents.

    Packer

    • hi packer,

      thanks for the comment. Honestly, I don’t understand your point why the asset management is break even. Any fees paid for 3rd party assets should show up as asset management fees in US GAAP.

      By the way, 3rd Avenue just fired their Chief investment officer because results were pretty bad lately….

      mmi

      • The reason is the consolidation rules under US GAAP. SInce GP Investments has a controlling interest in the funds, the funds themselves are consolidated into the US GAAP statements. So the view you are seeing is one of an LP in the funds for the private equity part of the business that is why the restated income statement they present in there earnings release and presentations represents economic reality. Footnote 2(b) last paragraph breaks out the 3rd party management fees not included in the income statement. If you look at the company provided statements and you credit the intercompany fees against the total revenues you will get the fees collected from third parties. This is close the sum of management fees plus the Footnote 2(b) revenues. Based upon this, they are at breakeven now. Amit W. the manager that made the decision to purchase GP Investments retired from 3rd Avenue and is pretty sharp value investor. He was not the CIO. There are some videos at Manual of Ideas about his approach which includes finding situations where the accounting is masking the true economics of the situation.

        Packer

        • One more note the asset management fees in the US GAAP financials are from BRZ Investimentos and GP Advisors which include about $5b in third-party AUM generating about $18 m in annual AM fees or 37 bp of fee revenue.

          Packer

        • The AUM figure is closer to US$2b so the AM fees are closer to 90bp which makes more sense.

          Packer

  • Huitzilopochtli

    Very useful. Thanks for your efforts on breaking down the numbers of their “success”

  • From: ericjohntyler@hotmail.com To: comment+egku-6t3do9m_b4wdjs34bg@comment.wordpress.com Subject: GP Investments Returns Date: Thu, 26 Jun 2014 16:46:03 -0300

    I found the chart below on the site. Not sure how to get to it in English. Summing up, gross $ returns (TIR Bruta) are very strong vintage 2005 and before. In 2006 they dramatically increased fund size (comprometimentos inicias) from $250MM to $1.3B, and it seems they began raising new funds nearly every year instead of every several.

    Date: Thu, 26 Jun 2014 14:51:17 +0000 To: ericjohntyler@hotmail.com

  • I found the chart below on the site. Not sure how to get to it in English. Summing up, gross $ returns (TIR Bruta) are very strong vintage 2005 and before. In 2006 they dramatically increased fund size (comprometimentos inicias) from $250MM to $1.3B, and it seems they began raising new funds nearly every year instead of every several.

    Date: Thu, 26 Jun 2014 14:51:17 +0000 To: ericjohntyler@hotmail.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s