value and opportunity

To be honest, when Waren Buffet last year announced his intention to team up with the Private Equity company 3G in order to buy Heinz, I didn’t know anything about those Brazlian guys behind that company. Especially, the “Mastermind” Jorge Paolo Lemann who is now the 28th richest guy in the world with a net worth of around 25 bn USD was amlmost completely unknown to me.

During the Berkshire AGM, someone (I don’t know who it was, maybe Buffet ?) mentioned that they are selling 250 hard copies of the book which describes how those Brazilian guys got so succesful. However when I went to the bookstore, the copies were already sold out.

So as a kind of additional research when I looked at GP Investments, I downloaded the available Kindle verison of the book.

Jorge Paolo Lemann started his business carreer as a classical banker/trader. Relatively soon, he was able to buy a small brokerage which he renamed to “Garantia”. Over 20 years or so, Garantia was one of the most succesful investment banks in Brazil. The book lacks a little bit in detailed description what they actually did at Garantia, however it seemed to have been a mixture of investment bank and hedge fund, generating huge profits especially in those times when the Brazilian currency was in trouble.

One of Lemann’s key strategies was that he tried to hire “hungry” people and motivated them via huge bonuses which were distributed based on actual results and not, as with many other Brazilian companies based on seniority etc. So to a certain extent, Garantia seemed to have been not unsimilar to a typical “wolf of Wallstreet” boiler room where young and aggressive traders could get rich very quickly.

However the main differentiator of Garantia was the fact that Lemann didn’t pay out the bonuses but required his employees to use the bonus in order to buy shares in Garantia from the founders. So the most susccesful employees also became very quickly major shareholders and partners. In theory and practice, this aligned the interests very well. Lemann is cited several times that he wanted his employees to remain “cash hungry” which doesn’t work well when you pay high cash bonuses.

Relatively early, he also became interested in investing in “real” companies. The first succesful attempt was the Brazilian Retailer Lojas Amricanas. Especially when more and more cash piled up at Garantia, he didn’t want to pay out huge dividends, but used the cash to buy the then struggling Brazilian brewer Brahma for an amount of 60 mn USD. The story about that transaction sounds quite funny. The didn’t do a real due dilligence and only found out afterwards that the company had a 250 mn USD pension hole. Without knowing anything about breweries, they managed to turn around the company pretty quickly.

While being occupied with Brahma, Lemann seemed to have lost interest in banking. While he was still on the board, Garantia almost went belly up and was finally sold for 675 mn USD to Credit Suisse, however the Brahma shares were spinned off before that to the partners. In the book, at thwo instances he seems to have complained about his younger partners that they paid out themselves too much cash instead of adhering to his beloved partnership model.

Going forward, Brahma managed to acquire their biggest rival in Brazil, Antarctica. Further “rolling up” the beer industry, they “merged” with Belgian Interbrew and then finally, in 2008 made the all debt financed acquisition of Anheuser Bush for a whopping 50 bn USD, creating the largest brewing group in the world.

Overall, by only reading the book, it was hard for me to understand if Lemann and his close associates (Telles, Sicupira) are really genius and visionary business men and investors or if they are just aggresive “financiers” who got lucky.

In the time when they build up Garantia for instance, a lot of financial institutions in Brazil prospered, sometimes through questionable ways of information gathering. Also the essential Brahma and Antarctica merger, creating a dominating Brewery in Brazil with 70% market share would have not worked that well in a country with a tougher anti-monopoly regulation.

At least they were more cautious than another former Brazilian superstar, Eike Batista, who stayed in Brazil with his investments and almost lost it all in the last 2 years or so.

For me, the most crucial part of the “Lemann” story is his view on how to align Management and owners. Its seems that in the long term, the owner/manager model where managery invest their salaries back into the company is able to generate exceptional value compared to a “cash bonus/option” model for management.

Interestingly, there was a story earlier this year the Brito, the Brazilian AB Imbev CEO seems to have “gamed” his targets in order to earn a massive bonus. This would not be in line with Lemann’s philosophy. Still it doesn’t seem to have impacted the stock price of AB Inbev which has trippled over the last 5 years.

Overall, the book is written OK, not exceptional like Michael Lewis but still interesting to read. I think it is worth a read especially if one is interested in the Brazilian market and its history and in the alignment of management and shareholders. It is clearly not an “how to invest” book.

Other sources:
Bloomberg story on Lemann & 3G