Aqua Capital on the value-chain: ‘You can’t put all your eggs in one basket’

As Aqua Capital looks to complete deployment of its $173m Brazil-focused debut fund, founding partner Sebastian Popik says upstream agribusinesses are faring well, but liquidity has moved up on the firm's agenda.

Despite the recession, devalued currency and an ongoing political scandal clouding Brazil’s once sunny investment climate, the country’s agri exports have continued to rise. Aqua Capital’s founding partner Sebastian Popik tells Agri Investor how the Brazil-based agri fund has weathered the storm and how recent volatility has shaped its strategy, as it looks to make the final acquisitions from its $173 million debut fund.

How has the economic environment affected profitability of your plays in Brazil?

Businesses that are [further] downstream in exposure are suffering more [from] the lack of demand. There’s diminishing purchasing power from companies and individuals. On the downstream side you have to strengthen capital structures with a little more equity. Nevertheless we still find that even the companies that are most challenged because of lower demand can benefit in this climate by virtue of having great teams, plans and capital. On the flipside our upstream and midstream portfolio has benefited from the weaker currency and those are doing extraordinarily well.

Have you adjusted your focus further up the value chain?

We’ve always been focused more on the upstream, strategically structured side of the agribusiness sector. I think that emphasis is greater now, because that’s the part of the economy that’s gained in competitiveness, and the downstream has suffered. It makes sense strategically and tactically to be there right now. But that’s always a focus of our business.

You can’t put all your eggs in one basket, of course. So even if you’re focused upstream, you’re going to be making upstream plays that don’t necessarily work in tandem. Not only do you have to do careful portfolio construction, but also on the operating company level you have to have balanced business models. For example, we do food service and domestic food, that’s down. But we also do agribusiness logistics, and that’s doing extremely well. It helps to have these hedged, balanced business models.

With the Brazilian real losing value in global markets, is production for export the key to building value?

The export market is strong now. But you also don’t want to neglect the domestic market because crises are temporary. They’re not eternal things. Our tilapia business, for example has grown by increasing its exports. We’re making more money exporting than selling domestically. But you want to be careful about taking care of your customers at home.

How has the economic downturn affected debt financing in Brazil?

Valuations and terms have obviously been effected, but liquidity is also a concern now. You can’t assume that you’re going to roll over debt anymore. You’re still going to try to roll it over and you’re going to succeed with a bunch of it. But it’s not a given, so you have to look at liquidity a lot more.

Has operating locally helped you execute deals that might have been more difficult if you were coming in as an outsider?

We’ve been able to carve out a differentiated reputation locally in a very particular strategy. I think people need to be able to pick up the phone and stop by your office in relatively short time; [it means] you jump in and [get] in these companies relatively soon. When you’re professionalising family-owned or partner-owned businesses that accept a change-of-control situation, you have to be trusted […] and reliable as a partner.