Cartesian Capital Group thinks that U.S. banks are too distressed to risk its money there. So it looked elsewhere, from Ukrainian financial firms to Asian commercial banks. It finally wound up doing its first bank deal in Brazil earlier this year, leading a group that invested about $210 million into Banco Daycoval SA.
“We spent a lot of time studying every corner of the financial market,” said Managing Partner Peter Yu. Yu, like much of his team, hails from AIG Capital Partners, and got a lot of experience investing around the world during his time there.
Yu said Daycoval is healthier than many of its U.S. peers, with a 24% capital ratio and an average return on equity of 20%. He thinks the bank has strong growth prospects too, given its location in one of South America’s largest economies.
But Cartesian also structured downside protection on this deal that rivals anything the private equity firms investing in banks in the U.S. have been able to come up with.
Cartesian’s investment takes the form of a certificate of deposit that yields a 15% return. In addition, Daycoval issued warrants for common and preferred shares. The warrants are exercisable after the second year into the investment at a price equal to Daycoval’s book value as of Dec. 31, 2008, Yu said.
If the deal goes well and the bank’s book value increases, the investors would redeem the CD – plus all the interest accrued – and exercise the warrants. If the investment doesn’t go as well, the investors would hold onto the CD and redeem it at the end of the investment period.
“In a volatile market, there is almost nothing better than a five-year at-the-money option,” Yu said.
Photo: Sao Paulo Skyline Brazil by Francisco Anzola, BY 2.0, via wikimedia