Source: Alternative Emerging Investor
12.12.2013
After an economic boom late last decade, during which it posted growth numbers to rival China’s, Argentina’s investment climate has worsened sharply in recent years. Soaring inflation, a mounting energy crisis, and a stubborn if not arrogant attitude on the part of the country’s president, Cristina Fernandez de Kirchner, toward the global business and investment community has rendered Argentina a pariah.
But there is a growing faction of investors who, having defiantly weathered the current crisis, believe the tide is turning. They see extremely low asset prices set to rise when Argentina’s political and economic situation changes – a likely prospect, they say, particularly in the wake of the elections of October 27, when a weak showing by Kirchner’s party signaled the possibility of a larger shift in the 2015 presidential election. By that time, too, the massive shale gas and oil reserves in northern Patagonia will have been tapped – by Chevron, among others – inaugurating what many believe will be a transformational energy boom.
“To take advantage of these opportunities,” says Miguel Braun, Executive Director of Fundación Pensar, in a recent editorial in the Buenos Aires Herald summarizing the hopes and expectations of many global investors, “the next government of Argentina must reduce inflation, free its exchange rate, eliminate arbitrary government interventions in international trade and re-establish normal relations with the international financial community.”
When these changes are realized, bullish investors in Argentina foresee a windfall for asset owners.
“People may think this sounds crazy, but Argentina is one of the best-calculated bets that one can make in world investment today,” says Scott Mathis, founder and Chairman of Algodon Partners, a New York-based investment firm that owns real estate assets in Argentina in the hospitality and wine sectors. “Because there’s virtually no leverage and no foreign investment, its asset prices are some of the cheapest in the world today.”
Mr. Mathis sees a pent-up supply of businesses that, under more stable circumstances, would have been sold to companies such as Algodon, which is currently preparing to become a public reporting company. He stresses that investors would be wise to enter now, before the tide turns.
“I think asset values are going to turn in a massive, ferocious way, and you’ve got to be in here first, before the rest of the crowd. When the politics turn, the crowd will come rushing in.”
Eternal Recurrence
Mr. Mathis is accustomed to Argentina’s cycles. He entered the market for the first time in the middle of the last decade, attracted by the fallout of the country’s 2001 sovereign debt crisis. He was running several U.S.-focused investment firms at the time – including InvestBio, focused on biotech and DPEC Capital, which distributes private equity online (and which is Algodon’s broker dealer) – but sensed a malaise coming in U.S. asset prices.
Pre-2008, he wanted out. The question was where to go next.
“I’m a contrarian by nature,” he says, “so I said, ‘Let’s go where it’s already blown up.’ My partners and I searched the globe and were attracted by the situation in Argentina, where the crisis had struck only a few years before.”
Merely being a contrarian wasn’t enough. It was important to do thorough due diligence and know the assets inside and out, he says – an approach he’d honed in the U.S. biotech and real estate markets.
He traveled down to Buenos Aires and discovered that the prices for prime assets were extremely low.
“It was what New York or London were like 35 years ago, with beautiful, old buildings way under market value. I saw the potential it could have over time.”
Algodon Mansion
Mr. Mathis returned to his colleagues in New York, but had difficulty convincing them that Argentina warranted their attention. He flew them down to Buenos Aires to see for themselves. In the end they decided to invest, purchasing a prime asset in the city’s Recoleta neighborhood.
It soon became Algodon Mansion, a high-end boutique hotel. Over the last five years, the Mansion has become one of the top boutique hotels in South America, featured in Condé Nast Traveler and the New York Times, among other publications.
Mendoza
Mr. Mathis knew, however, that a single hotel property couldn’t constitute an investment portfolio. So Algodon Partners began looking for more assets in the still-underpriced Argentine market, and found what they wanted near San Rafael in southern Mendoza, known as the Napa Valley of Latin America.
There, the firm purchased a 760-acre vineyard estate with a 9-hole golf course and 70-acre olive orchard, which formed the foundation of Algodon Wine Estates & Champions Club.
“I’d found multiple places in northern Mendoza that I was interested in buying,” Mr. Mathis says, “but when I went to see this one in the south, I saw the beauty of the place, its maturity; and given the price comparison, I understood the value and negotiated to buy the property that week.”
Algodon then bought adjacent properties. It currently owns 2,050 acres and is in negotiations to acquire an additional 2,100. The 9-hole golf course was expanded to 18 and opened in September.
The Best Ambassador
From the beginning, Mr. Mathis says, Algodon saw wine – and specifically Malbec wine – as the best way to enhance the value of Argentina’s magnificent land.
“I’ve always thought that, over time, the land values in Argentina would perform incredibly well again, and I thought the one thing we could do to help activate that land price movement would be to create the best wine in South America. That alone would have enough carry-over power to increase the prices of anything that touches our estate.”
To produce its brand of wine, Algodon Partners brought in venerable vintners, including Anthony Foster, Master of Wine, Mauro Nosenzo, and Marcelo Pelleriti, the first winemaker to receive a 100-point score from Robert Parker. In addition, at Algodon Wine Estates, customers can purchase turnkey vineyards of their own. Algodon produces the wine from these vineyards, while the vineyard owners garner revenue.
Aside from being a great ambassador for the Algodon brand, top-shelf wines also protected Algodon from fluctuations in the wine market and Argentina’s overall business climate, Mr. Mathis says.
“The wine business can actually be a huge opportunity for us, because if there’s any fallout from the current situation, it’s going to hit those companies that are working on paper-thin margins, not us.”
Mr. Mathis sees a global trend of consuming Argentine wine, noting that Malbec has long surpassed being a mere “flavor of the month” and is now a staple of sophisticated wine cellars.
“In the last 20 years, there’s been a lot of investment into the Argentina wine industry, which has helped create that credibility around the world. And the beautiful thing about Argentine wine is that, unlike other forms of investment, it has no borders. There are millions of investors out there who might have a problem with investing in Argentina but have zero problem drinking Argentine wine.”
Poised for Growth
Algodon Partners purchased and developed their assets in Buenos Aires and Mendoza in the middle of the last decade, just in time to enjoy the commodities-fueled upsurge of the Argentine economy. They’ve stood their ground amid the current downturn, serving a still-teeming tourism industry and avoiding conflict with the government by remaining transparent, paying taxes, and helping bring money into the country.
But the firm’s patient attitude also reflects a more mature philosophy. “As I’ve aged, I’ve come to realize that ‘slow and steady wins the race,’” Mr. Mathis says. Now, that philosophy may yield dividends as the finish line draws near for the current status quo.
As in 2006, it’s the low prices – and general pessimism – that attracts Mr. Mathis and Algodon Partners to Argentina.
“The reality is this: Some think it’s safe to invest in New York real estate when it’s at US$3,000 to US$6,000 per square foot, just because it’s New York. But maybe it’s a safer bet in Argentina where there’s no leverage and property prices are 10% what they are in New York.”
He quotes Sir John Templeton: “Invest at the point of maximum pessimism.”
As the tide turns, Algodon will continue to buy properties in Argentina, and it is preparing to become a publicly traded company in the near future, giving global investors exposure to underpriced, high-potential assets.
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