Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Martín Escobari
[00:00:00] S0: So Brazil. [00:00:00] S1: Brazil, N of 1, Brazil. So I look at the most exciting jobs in Brazil and at the time the 3G founders had a private equity shop, which at the time, was the largest private equity shop in the emerging markets. This is 1997, and one of the partners has recently graduated from the same school, was coming to town to interview Brazilians to hire one person. So I was like, this is destiny. This isn't for me. So I reached out to Alex Behring, who is now running 3G and has become a great friend, and I introduced myself, it's Bolivia and super smart. I really want to make it in Brazil. I hear what you're doing at dinner. I'd love to come by if you'll have me. And Alex was super smart and tough. He's like, "Martin, we're only hiring one person and it's not going to be a guy from Bolivia that doesn't speak Portuguese. So no, you can't come to my dinner." I was like, bummer. So that night I show up to the dinner, I introduced myself as Martin, and I say, "Don't worry, I'm not even going to eat. I just want to listen to you because I find you interesting." And I think he was taken back by my boldness. They did interview me and they did hire me, but they made one condition. I had to take some Portuguese lessons before I showed up three months later and I said, I'm happy to do it as long as you pay for them. [00:00:00] S0: Yeah. [00:00:00] S1: And that's how I met my wife. [00:00:00] S0: She was your teacher?
· Patrick O'Shaughnessy, Martín Escobari
[00:00:00] S0: She was your teacher? [00:00:00] S1: She was my teacher. I mean she was technically a teacher. The way it really worked is I called my Brazilian friends and I said, "Can you find a very smart, very attractive Brazilian PhD master somewhere in the Boston area? And I have someone that will pay her to talk to me." So I'm still married 25 years later. [00:00:00] S0: What an amazing origin story. What have you learned from Alex and from his team?
· Martín Escobari
[00:00:00] S1: The founders of 3G, the original three founders are incredible people through my work with in the beginning of my career. I once wrote a book. This is 2003, the company I have co-founded was going through trouble. I took some time off and I wanted to answer the question of how does one make money in countries with so much turbulence? Brazil in the 90s and in the first decade of the century was incredibly turbulent, crisis after crisis after crisis, very hard to make, to create wealth, to build companies with ... so it's like navigating through the fog. You move very slowly and there's things that can come at you from different ways. I partnered with this professor, this mentor of mine from Harvard College and he was teaching at Harvard Business School down in Seoul. And what we did was a paired company analysis. Look at 10 very successful companies in Brazil that had made tremendous wealth creation in the crazy 90s, but look at their actions in contrast to 10 much less successful companies during the same period of time. And the test was, these were pairs of companies that looked similar in size and value at the beginning of the 90s, but by the end of the 90s, one was at least 5X more valuable than the other. So that was the control group and that's how we studied and when one of the companies is the beer company, Brahma, Jorge Paulo Lemann and Marcel Telles and Beto Sicupira had bought in 1989, that was competing against the other beer company called Antarctica that was owned by the Germans and a foundation, who in 1989 was a better, more profitable, more valuable company. But by a decade later when these two merged, the Brahma shareholders kept 95% of the equity value. So it was 10X by the creation relative to the comparison twin. How do they do it? They're great spear fishermen. You don't chase the fish, you wait. You decide where you're going to anchor. You drop down with no equipment other than the spear and you hold your breath for one minute, for two minutes. You let little fish go by because you're not there to hunt little fish. You're waiting for the big fish. And then when you're almost running out of oxygen, you got two or three seconds to get the big fish and then go up as you're both feeding this sort of lack of oxygen, he feeling a spear through his chest, but it's an exercise of waiting.
· Martín Escobari, Patrick O'Shaughnessy
Why do they say these are great spear fishermen? The step number one of spear fishing is deciding whether you're going to anchor. In looking to buy their beer company, they started to think about it five years before. They were owners of the number one investment bank in Brazil, Banco Garantia. They were making tons of money out of volatility and inflation because in high inflation period, you can make a lot of money if you are smart with math and finance, but they knew inflation would end one day and they said, "We want to buy a company that will benefit from a low inflation rising consumption." Beer is one such company, but they waited five years for this company to come for sale and it came for sale two weeks before an election when the Swiss owners got scared that a socialist was going to become president, build a first time government, and it was from the workers' party. And they called them and they said, "Can you do a deal in a week? We'd like to get out of town. We don't want to take the risk of a socialist president." And Jorge had been waiting for that big fish- [00:00:00] S0: Five years.
· Patrick O'Shaughnessy, Martín Escobari
[00:00:00] S0: Five years. [00:00:00] S1: Ever, five years, closed the deal in a week and then he waited 10 years until Antarctica was in trouble when a big devaluation and closed the deal in three months. And then he waited another seven years to do a deal with Interbrew. And then the biggest of all deals waited a following decade to do a deal with Anheuser-Busch. And basically over this period, 80 million dollars initial investment in Brahma became a 60 billion dollar plus, excluding dividends, but they're great fishermen and they wait for the big fish. And as a concept, that is something I've learned from them, which is every four or five years there's a once-in-a-generational opportunity that you have to be ready and be willing to move quickly to capture. And if you do, you can create this proportional value for your company, for your investors, for your employees. [00:00:00] S0: Do you have a story of your own that is the closest to a great spearfishing outing? [00:00:00] S1: As an entrepreneur ... I wasn't an entrepreneur. I was set out by these three guys to go and find great entrepreneurial companies and invest 500 million dollars in 20 companies. You got 18 months, go. In month three- [00:00:00] S0: That was your mission. That was specific ... Yeah.
· Martín Escobari
[00:00:00] S1: That was my mission, that mission number went out of business school. Now that I was speaking Portuguese, I could go and ... And by month three, I remember talking to a buddy of mine, because we were benchmarking different models and buddy of mine had taken a job in the US company that went public in the dot com era. Clearly a bubble, being valued at 20 times revenue, which sounds quaint by today's standards, by 1998 standards. And I said, "Dennis, it's a bubble. How does it feel to be in a bubble?" And he said to me ... He grabbed my hand and he said, "Martín, it feels better than being outside the bubble." And I was like, "He's absolutely right. I have to go into this bubble. I'm in the wrong side of the table." So very quickly left the fund and within, I think three months, we had raised 80 million dollars to launch submarino.com, which was the E-commerce, amazon.com merged with Alibaba to take on Brazil. And that happened very, very quickly. A second time after we sold my business, during the GFC, I was working for another fund briefly and looking to buy the sort of a fixed income exchange in Brazil. It's a dominant platform, 80% EBITDA margin business, a lot of competition. And then all of a sudden the GFC happened and everyone dropped out, everyone. And I was like, no double down. And we were able to buy a market dominant high margin business, that's six times EBITDA and we did it in two months. And people were like, "What do you mean you're doing something with the GFC?" And I said, "If we're not willing to buy a dominant platform at six times EBITDA, we should shut down. It means the world is ending and we should ..." The world is not ending. A dominant platform will always be worth more than six times EBITDA. And it's been ... every three or four years, there's one such unique distortion that you have to move very quickly. That's perhaps one of the learnings of being an entrepreneur in the dot com. I'm a rare investor that has been an operator. It's not just I have been an operator. What the dot com taught me ... And I just realized this recently, you can do seven years of work in one year.