Capital Allocators – Inside the Institutional Investment Industry
Episode: [REPLAY] Rodrigo Bitar – Empty Rooms: Investing in Venezuela (Capital Allocators, EP.268)
Release Date: April 28, 2025
Host: Ted Seides
Guest: Rodrigo Batar, Co-Founder and Managing Partner of 3B1 Partners

Introduction to the Episode

In Episode 268 of Capital Allocators, host Ted Seides engages in a comprehensive conversation with Rodrigo Batar, the co-founder and managing partner of 3B1 Partners. The discussion delves into the often-overlooked investment landscape of Venezuela, exploring both the substantial risks and the significant opportunities present in the country's institutional investment sector.

Rodrigo Batar’s Background and Upbringing

[04:16] Rodrigo Batar:
Rodrigo shares his Latin American roots, being born in Chile and experiencing political turmoil firsthand. His father's involvement in politics and subsequent exile shaped Rodrigo's early life, providing him with a unique perspective on economic and political instability.

Key Insights:

• Grew up in a politically active family, experiencing the Pinochet coup in Chile.
• Lived in Venezuela during one of its most prosperous periods, fostering a deep appreciation for the country.
• Transitioned to the U.S. for higher education and career growth, emphasizing the importance of a global mindset.

From Mergers & Acquisitions to the Buy Side

[07:05] Ted Seides:
Ted inquires about Rodrigo's transition from an M&A banker to the buy side.

[07:13] Rodrigo Batar:
Rodrigo discusses his extensive experience working with large family-owned businesses in Latin America, particularly in Venezuela. He highlights the strategic mindset developed from considering transactions from the owners' perspectives, which naturally led him to the buy side.

Notable Quote:
"Our thought process in any transaction that we did was really from the owner's viewpoint. We really thought as a principle ourselves." – Rodrigo Batar [07:13]

The Importance of Family-Owned Businesses in Latin America

[07:56] Rodrigo Batar:
Rodrigo emphasizes the central role of family-owned businesses in Latin American economies, contrasting them with the more diversified capital markets in the U.S.

Key Points:

• Families hold significant economic power due to limited capital market development.
• Understanding and partnering with these families is crucial for success in the region.

Notable Quote:
"The core of savings and economic power actually lies in families mostly." – Rodrigo Batar [07:56]

Identifying Investment Opportunities in Venezuela

Economic Contraction and Opportunities
[08:30] Rodrigo Batar:
Rodrigo explains how the economic downturn in Venezuela, triggered by plummeting oil prices around 2011-2012, created undervalued investment opportunities. He and his partners saw the potential to acquire quality assets at significantly reduced prices.

Impact of Sanctions
[11:27] Rodrigo Batar:
The discussion covers the effects of U.S. sanctions on Venezuela, limiting interactions with the government but allowing private sector investments. Rodrigo believes that the lifting of these sanctions, contingent on democratic reforms, will spur economic recovery.

Notable Quote:
"The recovery of Venezuela is also linked in part to the lifting of those sanctions." – Rodrigo Batar [13:02]

Currency Dynamics and Dollarization in Venezuela

[16:11] Rodrigo Batar:
Rodrigo outlines Venezuela's shift from hyperinflation and a collapsing Bolivar to a predominately dollarized economy. This transition has stabilized prices and reignited economic activity, making investments more viable.

Key Insights:

• Inflation surged to over 3 million percent annually but has since been reduced to around 100%.
• Dollarization has facilitated the resumption of credit and investment, leading to significant revenue and EBITDA growth in portfolio companies.

Notable Quote:
"Dollarization has allowed for the growth that we're seeing in the country. On average, our portfolio grew like 60% in revenue last year." – Rodrigo Batar [16:11]

Investment Strategy: Private vs. Public Markets

[18:34] Rodrigo Batar:
Rodrigo explains the preference for private market investments in Venezuela due to the low liquidity and volume in public markets. Private investments allow for building substantial positions in well-managed, leading companies.

Key Points:

• Focus on sectors with strong fundamentals: telecommunications, retail, food and beverage, pharmaceuticals, and basic industries.
• Emphasis on dominant market shares, professional management, and cash flow positivity.

Notable Quote:
"We want to have partners who we feel that we have the same perspective and that we would have long term relationships with them." – Rodrigo Batar [21:10]

Case Study: Pharmaceutical Sector Investment

[24:00] Rodrigo Batar:
Rodrigo provides an example of a successful investment in the pharmaceutical sector. Recognizing the drastically reduced per capita consumption of medicines in Venezuela, 3B1 Partners acquired a stake in a leading pharma company at a significant discount, anticipating market recovery and growth.

Valuation Approach
[25:24] Rodrigo Batar:
He discusses the valuation strategy, targeting companies at approximately a tenth of their peak or potential future enterprise value, leveraging expected growth and favorable global multiples.

Notable Quote:
"Our portfolio grew like 60% in revenue last year, 40% again this first quarter." – Rodrigo Batar [26:11]

Risks and Mitigation Strategies

[27:10] Rodrigo Batar:
Rodrigo addresses the primary risks associated with investing in Venezuela, including the uncertainty surrounding the lifting of sanctions and political stability. He emphasizes that while the investment horizon is longer, the fundamental assets remain valuable, and the probability of economic improvement is high.

Key Points:

• Political Risk: Reliant on the U.S. lifting sanctions tied to democratic reforms.
• Economic Risk: Dependence on macroeconomic recovery rather than short-term political changes.
• Duration Risk: Investments may require a longer holding period to realize capital recovery.

Notable Quote:
"The risk here really is on the duration. How long do you have to hold until you recover capital?" – Rodrigo Batar [27:10]

Investor Feedback and Market Perception

[30:01] Rodrigo Batar:
Rodrigo shares that investors recognize the uncorrelated risk profile of Venezuelan investments compared to global markets. Despite concerns over sanctions and political issues, the potential upside due to asset undervaluation and economic recovery is compelling.

Key Insights:

• High dividend yields even during downturns offer immediate returns.
• The unique market conditions provide a strategic entry point not commonly found elsewhere.

Notable Quote:
"People, I think in general agree with that and see the likelihood of a positive outcome." – Rodrigo Batar [30:01]

Lessons Learned and Personal Insights

[31:30] Rodrigo Batar:
Rodrigo reflects on the profitability and challenges of the Venezuelan market. He underscores the importance of local knowledge, strong management teams, and the inherent profitability of Venezuelan businesses despite economic hardships.

[37:16] Rodrigo Batar:
On personal growth, Rodrigo emphasizes the value of thinking bigger and adopting a more global ambition, a lesson he wishes he had embraced earlier in his career.

Notable Quotes:

• "Venezuela was traditionally one of the most profitable markets in Latin America in every industry." – Rodrigo Batar [31:30]
• "Maybe I would say go bigger. It has to do with this Latin American perspective." – Rodrigo Batar [37:16]

Closing Remarks

Ted Seides wraps up the episode by thanking Rodrigo Batar for his insightful discussion on the investment landscape in Venezuela. The conversation highlights the nuanced balance between risk and opportunity in emerging markets, emphasizing the strategic approach required to navigate such environments successfully.

Key Takeaways:

• Venezuela presents unique investment opportunities due to economic undervaluation and the potential for recovery tied to geopolitical changes.
• Family-owned businesses play a pivotal role in the Latin American economy, offering robust investment avenues.
• Private market investments are favored over public markets in Venezuela due to liquidity constraints.
• Dollarization has stabilized Venezuela's economy, creating a more favorable environment for investment.
• Risk management and due diligence are critical, with emphasis on political developments and economic reforms.

For more insights and detailed discussions, visit capitalallocators.com.