Bringing special situations private equity to Latin America
The government of a large economy loses its investment grade prompting a capital flight. There is an investigation into corruption at the highest political level. It is a crisis, including for those in the investment industry. This was the situation in Brazil in 2015–16, following the downgrading of government bonds to junk status and the “car wash” corruption scandal.
Yet a typical IMD graduate will identify opportunities amid a crisis. In the mid 2010s, Gustavo Buffara was establishing himself as a protagonist of the country’s nascent segment in the private equity industry. With global funds disinvesting, this opened up an opportunity for a private equity fund to specialize in the Latin American market for deals in special situations. He put a case to senior partners at his employer, GP Investments, for a fund with a particular focus on business turnarounds, only to discover that they were preparing a strategic pivot towards the northern hemisphere.
So together with a couple of partners he set up a new enterprise, IG4 Capital. Six years on, they have more than US$1.2 billion assets under management. The first fund of US$100 million delivered a return of nearly four times cash-on-cash. There is a portfolio of five companies in different phases of turnaround. IG4 Capital has opened offices in Santiago, Lima, Madrid, and London and Gustavo will head up a new US office, to be based in Washington DC.
Gustavo Buffara enjoyed his first taste of negotiating a major deal while still in his early 20s. As a young manager in the strategy and M&A unit at Telefonica, he secured the first successful acquisition by the Brazilian branch of the telecoms firm. “I enjoyed the process. I liked the financial modeling, business and regulatory definitions, projections, performing due diligence then convincing our internal committee, then closing the deal.
It was a very exciting experience for me.” This prompted an ambition to work in private equity: “They’re very smart. The bar is extremely high to join this club and to remain there. So this can be intellectually challenging for me and attractive, as well.” “
At Telefonica, most of his colleagues were ex-consultants with MBAs, encouraging his own ambition in that direction. After an important turnaround project in Brazil and a relocation within the company to the global headquarters in Spain, he decided to apply. The small cohort at IMD, and closeness to industry helped by a strong executive program, made the Lausanne-based school his preferred choice.
One surprise was the depth and strength of teaching in the leadership stream, and the focus on matters such as self awareness and group dynamics. After graduating he gained experience at Bain consulting before securing his first post within the world of private equity, and he gleaned much from the culture at Bain which combined the highest performance standards with a comparatively easy-going, friendly ethos.
While at GP Investments he played a leading role in setting up the team and initiating a turnaround of a telecoms infrastructure company. The principal tangible assets were some 5,000 telecommunication towers in need of upgrading and a regulatory challenge. After two years and US$300 million investment, the company received an offer of some US$1 billion, representing a handsome return.
The approach at IG4 Capital is to look for promising companies in a distressed situation. He and his partners will bring in new management, but they are aware that where founders are still involved, they will have a strong sense of emotional ownership and the negotiations need to be handled sensitively, with the deal making economic sense for them as well as for the company. The learning on interpersonal relationships at IMD comes into play if the transaction is to proceed smoothly. He says:
“We’re not vulture funds. We don’t go into legal battles and hostile takeovers. That’s not our style”
The primary focus is on the financial restructuring and business turnaround: “Growth is an upside.” He and his partners spend a lot of time on detailed negotiations before closing the deal. “We pre-pack with the creditors. Usually we renegotiate all the debts from the company. We buy some debts and convert to equity, we have a new payment profile. We always secure control because to turn around the company you cannot have a minority stake.”
IG4 Capital is not just about financial returns. Gustavo and his partners are proud to have achieved B Corporation accreditation, and plan to seek the same status for their portfolio companies. He has recruited a specialist ESG professional to lead initiatives in this area, and progress is tracked by tangible KPIs and reports on progress.
This appeals to younger recruits. Gustavo has detected among the millennial generation a shift in values, prioritizing environmental awareness and worklife balance, in contrast with the more focused approach of his own generation. The work ethic of young graduates might still be high, but there is an eclectic mix to the motivations.
In turn, for Gustavo there has been something more than personal ambition that drives him forward. It is not just about the money; then again, the returns are impressive.