By Michael Altit
This year Brazil is commemorating 40 years since the arrival of the first Korean immigrants in the country. They initially settled in the city of Sao Paulo, and mainly engaged in small business ventures. With an innate understanding of the importance of education as a path to social inclusion, coupled with sheer tenacity and hard work, they were able to ascend both socially and economically. Today, they are present at all levels of Brazilian society as successful politicians, doctors, professors, and businessmen.
Brazil has been traversing an important and unique moment, which started with the consolidation of democracy and control of inflation marked by the introduction of the Brazilian real in 1994. Everything relating to Brazil is super-sized: the national territory (8,514,877 square kilometers), population (192 million), and the sheer diversity and volume of its natural resources. For instance, some specialists have estimated that the country’s newly found pre-salt oil reserves might yield from 70 to 100 billion barrels of oil.
The country’s ability to cruise through the 2009 crisis practically unscathed, and with positive growth, has attracted the attention of businesses and investors around the globe. However, there is still much to be done, taking into account the country’s immense needs in terms of infrastructure, technology, and specialized labor, all of which are essential if the country hopes to maintain the current momentum and truly differentiate itself from other emerging market economies. Moreover, the upcoming 2014 FIFA World Cup and the 2016 Olympic Games will also require further investment.
With a keen eye, Korean ventures have identified opportunities, and could play an even greater role in this process. In this scenario, Korean investments in Brazil continue to accelerate. According to the Brazilian Central Bank (BACEN), the South American giant received more than $1 billion in direct investments from Korea in 2011. This represented only 1.5 percent of total direct investments in Brazil for the year. Nonetheless, this entails an increase of approximately 688 percent vis-a-vis 2009. The overall sentiment is that the investment spree has only just started, and should increase considerably in the near future. For instance, the state of Sao Paulo, Brazil’s industrial and financial locomotive, recently organized a seminar geared towards Korean investors interested in investing in Brazil. As widely divulged in the Brazilian specialized press, approximately 100 participants, from a wide range of business segments (oil and gas, telecommunications, real estate, alternative energy, water and sewage, among others) attended the event. Unlike countries with a long-established presence in Brazil (Japan, Germany and the United States spring to mind), Korean investors have been carefully ― but surely ― learning with great speed and fearless determination, to navigate Brazil’s complex business and legal environments.
Currently, together with Korean titans Hyundai Motor, Doosan, LG and Samsung, there are more than 100 Korean-related ventures already operating in the country, including small- and medium-sized companies. More are expected. The complexities of Brazil’s tax, labor and regulatory legal environment have not deterred them. In developing their investment business strategy, Korean ventures have adopted a multidisciplinary approach. They are fast learners, and are keen to use the latest legal and financial technology available to maximize returns their investments. Strategic decisions are taken only after a thorough investigation of all relevant aspects of the business alternatives available, traditionally followed by on-site visits and face-to-face contact with local partners and service providers.
Some of their major concerns have been more affordable funding, broad access to capital markets and the possibility of simultaneous access to local and international sources of financing, including BNDES ― the Brazilian Federal Development Bank ― and its diverse lines of financing. Instead of straightforward direct investments, typical in similar circumstances, some Korean investors have decided to invest in Brazil using local funds. One of the advantages is better management of profits and losses arising out of the project and a more efficient dividend policy.
Another example is instead of capitalizing the target project with the usual cross-border loans, investors have considered the issuance of debentures, or local securities. These can be purchased by Brazilian and international institutional investors, and, provided some specific conditions are met, they allow the foreign investor to receive interest payments free of withholding tax, thus reducing the final cost of funding for the borrower. This kind of innovative business approach places a lot of pressure on both legal and financial advisors. At the same time, it also affords new opportunities for service providers to render services that effectively create and add value to investment decisions. The process is just beginning. The hunt is on!
Michael Altit is a senior partner at the Brazilian law firm Motta, Fernandes Rocha (www.mfra.com.br). He has a B.A. in law from Sao Paulo University and an L.L.M. from Harvard Law School.