Cartesian Capital Group is known for private equity investing in the aftermath of crises. Are you seeing opportunities now?
We do seek pricing inefficiency in dislocations. We were very active in Asia following the 1997 crisis, in Russia after the ruble devaluation, in the airline industry after the tragedies of 9/11, in telecoms following the 2001 bubble and in Latin America in 2003. Consistent with this strategy, in this past year we made investments in financial services, in the automotive sector, and in dry bulk shipping—all sectors suffering notable dislocations.
How do you structure investments in such a volatile investment climate?
We focus on risk management and capturing optionality. In March, we led a $180 million investment in Banco Daycoval, a mid-market bank in Brazil. Daycoval has an ROE of 17 percent. Rather than a traditional equity investment, we made a deposit in the bank. We bought a five-year certificate of deposit yielding 15 percent and received 125 percent coverage in five-year warrants with a strike price of 2008 book value. We have the upside of a quality equity investment with the downside of a CD.
Cartesian has specialized in emerging markets for 13 years. In which emerging markets are you seeing opportunities now?
We have offices around the world and have always maintained a global perspective. The opportunities we create are not determined by specific regions, but rather are driven by long-term continuities and span multiple markets. For example, we helped Globe Specialty Metals expand to four continents and funded the expansion of RPS, a clinical research organization, into a dozen countries. We believe in globalization, and a big part of what we do involves shaping closely-held companies into world leaders.
Backing family groups can be complicated. How do you deal with the difficulties that family-owned businesses can present?
We hold two values paramount: transparency and governance. Both values rely on mutual trust and respect, and relationships with family groups have to be nurtured and cultivated. Our discipline includes not only having the patience to forge deep ties with families, but also the fortitude to walk away from even the best opportunity when we find that our values are not fully shared by these groups.
Earlier this year you launched Cartesian Iris, a catastrophe reinsurance trust. Does this represent a change in strategy?
I think catastrophe reinsurance represents a pure dislocation—a divergence between price and value. For most of the past year, it has been difficult to value companies: the crisis kicked up a global cloud of uncertainty over every country in every sector. Natural catastrophes are one of the few probabilities unaffected by the crisis: The expected value of a catastrophe is known and unchanged. Yet the pricing of these risks is driven by financial markets, by the balance sheets of insurers, and the liquidity of the bond markets. So while the risk of a catastrophe is unchanged, prices have risen to historically high levels. This is a true dislocation, and one, I would add, that generates attractive and uncorrelated returns for investors.
Edited for clarity