The future of Brazilian capital

One short flight later and we landed in Rio de Janeiro, iconic postcard child of Brazil, painted in pastel colors and white buildings. As we pull up to our beachfront hotel in Copacabana, the beach permeates the air: locals and foreigners flock to enjoy agua de coco by the water on the black-and-white tiled boardwalk. In some ways the beach is the great equalizer: we, as well-off tourists, enjoy the enormous crashing waves as much as residents from all walks of life in this beautiful and unequal society we’ve been so fortunate to explore over the past week.

Our study group strikes a pose on a film set on Globo’s campus.

As we kicked off our company visits, the theme of a self-contained market resurfaced. At Grupo Soma, a multi-brand retail giant in the country, we learned how they are slowly testing expanding outside Brazil in three American cities before deciding to globalize the brand. Globo, the monolithic media conglomerate that reaches 100M viewers daily, is focused almost exclusively on viewership in Brazil.

By now, almost every company has mentioned that Brazilian capital markets are underdeveloped and it is holding back the economy. Individual business owners make decisions not to invest and growth is impaired. The representatives at private equity firm Patria Investimentos cited a lack of local investors and long-term savings as major reasons for this underdevelopment. Moreover, the level of international financing is low. Liquidity is further constrained by historically high interest rates in Brazil that are meant to curb inflation but practically imply that when there are savings, people would rather park their money with the government and enjoy risk-free returns of up to 14%. This all makes sense and is relatively uncontroversial in theory, but in practice, it is expectedly complicated.

Roller coaster rates show a recent historical low of ~6%.

Nevertheless, the low desire for long-term investments has another if not bigger cause: the looming specter of ballooning pension liabilities. While the current system has been in place for decades, the sheer volume of liabilities is hitting a terrifying crescendo: R$300B in 2018, equivalent to 4% of GDP. Combining a young retirement age with a large young population, pension liabilities represent a time bomb in Brazil’s government finances.

Over the week, an underlying tension has become clear to us: the business community we’ve spoken with almost unequivocally supports some sort of pension reform, while many Brazilians most hit by potential change vehemently oppose it. Jair Bolsonaro, Brazil’s current and frighteningly controversial president, has managed to play both sides of the game by making campaign promises to leave pensions alone yet pushing forward reform once in office. The financial services firms we met (Patria Investimentos, Redpoint Eventures, and BNDES) all expressed skepticism about whether reform would pass but agreed that investment capital would be unlocked on a massive scale if it did.

In this scenario, available investment capital would increase in tandem with risk-taking and long-term investing. Brazilians can no longer enjoy a 14% return on savings and short-term lending. They will need to buy risk in other ways moving forward. Increasing willingness to take financial risk almost certainly would energize the start-up ecosystem and the growth of the small-to-medium business sector. Brazil’s massive national development bank, BNDES, believes an important role they play in the economy is counter-cyclical credit availability assurance, especially for small-to-medium business; this role would only increase in importance with a national rise in investment. From the business perspective, this is quite a rosy picture of what may happen if pension reform succeeds.

I get the sense that we are encountering an economy—and country—on a precipice. The option to maintain the status quo is running out. Pension reform is moving through the legislature as both support and opposition reach a fever pitch. Indeed, as we left the BNDES corporate offices in Rio’s downtown business district, we were handed flyers to join a protest against pension reform and other austerity measures. While pension reform may unleash more money to flow through the economy, what is the social cost of these reforms? We unfortunately haven’t gotten a good understanding this week from the business community about the socioeconomic impact on the country. Yet between the ongoing protests and the notorious difficulty of pushing these reforms through, it’s obvious that pension reform won’t be unequivocally good. The country seems paralyzed at this decision moment. Will paralysis continue until crisis precipitates change?

Protesters march against pension reform on March 22, during our study tour.

Yet even in an environment of uncertainty, we met with large companies that recently have taken major risks in order to stay market leaders. Havaianas is taking the plunge to expand internationally – considered a bold move for a largely Brazilian brand – and has an internal disruption engine called “Big Bets”. Cielo is repositioning itself into wraparound IT services from simply payment processing to increase their value prop for clientele. Suzano, Brazil’s dominant pulp and paper company, completely reimagined the way they move their products in-country. They integrated distribution functions to become more agile with customers and gain immense pricing power. After a number of brand acquisitions, Grupo Soma overhauled their supply chain to decrease process volatility and implemented a digital transformation to connect all their brands on a single back-end platform and customers on the front-end. These market leaders have demonstrated substantial risk appetite and willingness to change in order to keep potentially undifferentiated products attractive.

It’s inspiring to see companies this size employing a founder’s mentality. Moreover, it says good things about the economy and these companies’ internal organization that they’ve been able to implement change swiftly and effectively. Yet many of these companies we met are heavy hitters, enjoying the accompanying incumbent advantage and free cash flow that makes transformational change possible. The real test of the Brazilian economy will be when SMEs are able to take big risks like this. Will it happen before, during, or after reform? Only time will tell.

Serendipidade Paulistana

A CBS student decides how much meat he can handle at the opening dinner.

On Sunday, the GIP team arrived in São Paulo: Brazil’s economic powerhouse boasting a 20M population and a cosmopolitan vibe to rival New York’s. We were immediately welcomed with an all-you-can-eat meat festival (churrascaria) and rounds of caipirinhas exploding with lime. After dancing the night away to the Brazilian beats of samba and funk, we woke up bright and early the next day to begin our company visits in the city. We spanned diverse industries, ranging from finance and footwear to the emergent startup ecosystem. As we listened to presenters and volleyed them with questions, we noticed certain themes about the business landscape in Brazil…

Brazil is a continental country with a vast internal market.

First, Brazil seems to be a self-contained market. Domestic factors such as consumption mostly shape monetary conditions. This partly explains why Brazil was relatively insulated from the global financial crisis in 2008; in fact, their economy was strongest around 2010 only to later fall into recession in 2015. Moreover, while the importance of foreign trade to the Brazilian economy is growing, it is still relatively small compared to the entire economy. In 2018, exports were $239B USD and imports $181B USD versus $2T USD GDP. Where it’s large, it’s mostly in primary products. Finally, many Brazilians never travel out, very few Brazilians speak English, and the country doesn’t share a primary language with the rest of Latin America. Combined with the enormous size of the country (209M), the remaining room for economic development and ensuing market potential, it’s not hard to imagine why the economy is relatively inward-looking.


Professor Singh shows off his wares at the Havaianas store with a cheerful employee.

Companies stay local in Brazil. One impact is that with the large companies we’ve visited, globalizing has either not been on the table or is a complex challenge approached very carefully. Cielo is Brazil’s leading payment processing company (processing 10% of Brazil’s GDP annually) yet faces rapidly eroding market share due to loss of previously held concessions. As they fight to remain the leading player, they’ve chosen to innovate on their core business model rather than consider expanding into other countries. For Havaianas, the iconic Brazilian flip-flop company, domestic sales represented 98% of total, which is remarkable since Havaianas started selling in 1962. But why would they, since 73% of Brazilians touch Havaianas at least once a year? The wildly successful globalization of the brand is a major source of pride for Brazil, since they are one of very few Brazilian companies that has successfully globalized, and Havaianas brand seeks to embody the Brazilian spirit and values. Havaianas accomplished this by moving piecemeal country-by-country and establishing regional offices to accomplish something new.

Another impact seems to manifest in the distribution of sizes and types of businesses we see in Brazil. Many industries exhibit an oligopolistic structure historically dominated by a few large Brazilian companies. While the formal (and informal) MSME market is enormous, the market for start-ups is small and treacherous especially as they try scaling into mid-size companies. We learned from Redpoint Eventures, a formidable player in the nascent venture capital scene here, that lack of available financing is the biggest challenge for scaling: even more so than navigating the Kafka-esque systems required to launch a business. There is a lack of local investors with a VC-level appetite for risk. Even when there is foreign interest in investing, the available check size doesn’t match the real stage of development of the company in a Brazilian context. This makes it very difficult for start-ups to flourish and scale into mid-size companies with potential to disrupt large incumbents. More optimistically however, those start-ups that do survive the brutal incorporation and financing process at the beginning tend to emerge bullet-proof and extremely cash-generative. We were excited to learn how Redpoint Eventures took matters into their own hands by partnering with Itaú, a major bank in the country, to build an incubator and nurture the emerging start-up ecosystem in Brazil.

A sign at Cubo encouraging us all to take a chance on something.

Which brings us to another theme: serendipidade, or serendipity/luck/chance. When we visited Cubo, Redpoint & Itaú’s incubator, we all wondered why a bank and a VC firm would partner to launch such project without taking equity in the businesses there. Among other reasons, they simply want the multiplicative effect of bringing innovators under one roof. Cubo provides entrepreneurs the chance to meet someone and do something. Just like the simple production error that spawned a thousand SKUs at Havaianas, Cubo believes that the unexpected combinations of interactions there will spur growth of the Brazilian start-up ecosystem.


I hope that Brazil will continue to open up and invite more serendipidade through increased exposure and international exchange. There is a trend: exports have actually doubled since 2005 and imports have nearly tripled. While I was writing this post, Brazil eliminated US visa requirements. In my opinion, the more random combinations, the better. There is even some serendipidade in our own Chazen trip to Brazil. Who knows how the connections we’ve made and the learnings we’ll export back to our own countries will manifest in the future?

GIP Brazil: the experience is in our hands

On a cold March Wednesday night last week, our class met for the last time as a group before we all flew south for winter. Instead of Professor Medini Singh, the class was led by our TA and a program director from the Chazen Institute. Chazen calls these sessions “Pre-Departure Meetings”. They take place shortly before a group departs for their in-country visit. Not only do they provide a crucial information download about logistics and day-to-day realities of life on the ground, but they also require that students come together to author a social contract among themselves.  I helped lead one of these sessions when I organized a Chazen study tour to Indonesia this past January, so I am newly and deeply admiring of the people who led our Brazil GIP session.

“Roberto Burle Marx’s Copacabana Beach Boardwalk in Rio de Janeiro Brazil.” (from ModernDesign.org)

To kick off the social contract process, our TA challenged us to define what kind of expectations we have of each other. How can we co-create an experience that is pleasant for all of us? What are our individual and group goals for the trip? We came up with the following three principles:

  1. Understanding the local culture: by being participative and asking good questions to everyone we meet
  2. Understanding the political and economic context: by engaging with company visits before, during, and after the visit itself
  3. Always being inclusive: demonstrating an open-minded, welcoming attitude, as well as looking out for each other  

Professor Medini Singh said it best when he reminded us later in the session that “what we get out of this experience is in our hands.” I can’t emphasize this strongly enough: study tours with the Chazen Institute at Columbia Business School are incredibly powerful components of a global education. Our GIP class and CBS in general are both internationally very diverse. To dig into the trajectory and complexities of a country that we’ve been studying and discussing for weeks together is a beautifully unique and valuable opportunity to learn about the world.

And there is no better place than Columbia Business School for this. In our professor’s words: “…given our different perspectives, even our background, in the same meeting we see different things. What is our reflection of what has happened? I’m always interested. And that’s where most of my learning comes from.” I could not be more excited to spend a week unraveling the web of a country so beautiful and complicated as Brazil with Professor Singh and my diverse cohort of thoughtful and respectful classmates.

Até a próxima!

-Diana McKeage