Rio Gains on Sao Paulo as Funds Seek ‘Sexy’ Beaches

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Rio Gains on Sao Paulo as Funds Seek Beaches
Rio de Janeiro lured at least two dozen hedge funds in the past decade. Photographer: Vanderlei Almeida/AFP/Getty Images

Gartmore Investment Management Ltd.’s Christopher Palmer needed only a day in Rio de Janeiro to scout for investment opportunities while visiting Brazil six years ago. Now half a week in the city isn’t enough.

A half a century after losing its status as Brazil’s capital, Rio is becoming an engine of Latin America’s largest economy. The city lured at least two dozen hedge funds in the past decade as well as the nation’s leading oil producers, the 2014 World Cup and the 2016 summer Olympics.

Governor Sergio Cabral forecasts the state of Rio will need as much as $90 billion in investment through 2013 for the expansion of the shipbuilding, iron, steel and nuclear power industries, led by projects from billionaire Eike Batista. Oil producers and mining companies helped double state exports in the first five months of the year, a growth rate three times faster than the nation as a whole.

“It’s in the midst of a major transformation,” said Palmer, Gartmore’s head of global developing markets overseeing about $5 billion in London. “Rio has come back into the fold because of the Olympics and the development of the oil and gas industry.”

The lights of Rio’s landmark Christ the Redeemer statue were turned back on last month after being covered with scaffolding for four months in a 7-million-reais ($3.92 million) renovation. On June 30, the government inaugurated a 65-meter (213 feet) elevator to connect residents of a cluster of hillside shantytowns, known as favelas, to the city’s newest subway stop as part of a campaign to improve security and transportation for the poor.

‘Virtuous Cycle’

“It’s becoming a virtuous cycle,” said Carlos Langoni, a former central bank president and finance chief of the organizing committee for the 2014 World Cup soccer games. “They’ve pacified favelas you would’ve thought were impossible to occupy. Real estate prices have surged, Rio’s seeing more royalties from oil production and it finally has good politicians.”

Industrial production in the region of Rio rose 1.9 percent in the year through March, compared with a decline of 0.3 nationwide, according to the national statistics agency.

Exports in the state more than doubled to $7.9 billion this year through May, compared with the same period a year ago, according to the Trade Ministry. Exports nationwide increased 30 percent, the data show.

Higher production has helped the unemployment rate in Rio state drop to 5.9 percent in April from 10.5 percent in the same month in 2002, according to the country’s statistics agency. The jobless rate was 7.7 percent in Sao Paulo state in April and 7.3 percent for Brazil, the data show.

Batista’s Workforce

Batista’s EBX Group Ltda., the holding company for his five Rio-based companies, increased its workforce fivefold since 2006 to 2,000 employees. State-run oil producer Petroleo Brasileiro SA, Brazil’s biggest company, has hired 22,000 employees in the past six years, mostly in Rio, and plans to add 6,000 more by 2013 as part of a $224 billion investment plan, the biggest in the global oil industry, according to the company’s press department.

Rio property values have risen as much as 47 percent in a year, according to statistics from the real estate union. Homicides have fallen 31 percent in May from a year earlier to a record low of 363. Vehicle theft is down 30 percent and robberies of pedestrians fell 12 percent, according to data from Rio’s institute of public safety.

Oil Cash

Economic strides may not be enough for Rio to supplant Sao Paulo as a corporate center, Langoni said. Four hundred kilometers (250 miles) to the southwest, Sao Paulo is the nation’s hub for the banking, automobile and agriculture industries. And its 902.8 billion reais in gross domestic product is three times bigger than the state of Rio’s.

The influx of cash from oil royalties may also come to a halt. In a bill approved by the senate, Brazilian regions that don’t produce oil would get a bigger share of revenue to the detriment of Rio, Brazil’s biggest oil producing state. Non-oil- producers may see royalties increase by as much as 26 percentage points, according to the bill.

Brazil’s three biggest banks by market value -- Itau Unibanco Holding SA, Banco Bradesco SA and Banco Santander Brasil SA -- have headquarters in Sao Paulo, the nation’s largest city.

Banks Favor Sao Paulo

Banco BTG Pactual SA, based in Rio, added 29 employees to operations in Sao Paulo, more than double the number hired in Rio since billionaire Andre Esteves bought back the investment bank from UBS AG in September 2009. The bank’s Rio operations have 578 employees, while Sao Paulo has 358, according an e-mail from the company’s press department.

While Rio may not be luring banks, the city is becoming synonymous with the nation’s hedge fund industry.

Ipanema, whose beach was named the “world’s sexiest” by the Travel Channel in 2008, and Leblon have lured more than a dozen hedge funds. Of the more than 70 independent asset management firms in Brazil, about 60 percent are based in Rio, half of which are less than 10 years old, according to Economatica data compiled by Rio-based hedge fund Leblon Equities Gestao de Recursos Ltda.

Arminio Fraga, former central bank director and one-time fund manager for billionaire George Soros’s Soros Fund Management LLC, said he started his hedge fund in Leblon eight years ago because its economic universities provide a talented pool of traders and he can also work and live near the beach.

Fraga’s Base

“My business doesn’t depend on being in Sao Paulo or New York,” said Fraga, a 52-year-old Carioca, as people from Rio are known. “I live near the office and I work a lot, so I waste little time and have a great quality of life.”

Fraga’s Gavea Investimentos Ltda. employs 110 people and has $5.8 billion under management.

Gilberto Sayao, former co-owner of Rio-based investment bank Banco Pactual SA, set up his private equity and hedge fund last year in Leblon to make infrastructure investments. The firm has about $2.4 billion under management.

Rio’s revival can be traced to the 2006 election of Governor Cabral, said Andre Urani, an economics professor at the city’s federal university and author of “Trails to Rio,” a book about the city’s ascent from what he calls a “lost generation” of economic development. Urani said he isn’t affiliated with any political party.

Cabral’s ‘Partnership’

“The priority has been cleaning up the house,” Cabral wrote in an e-mail response to questions. “Rio is no longer the ugly duckling of the republic. We developed a new partnership politics in our state. I have no doubt that the changes made in our government will keep showing results in the medium and long term.”

For decades before Cabral, Rio politicians shunned private enterprise and drug-related violence led entrepreneurs and educated Cariocas to flee to Sao Paulo, Urani said. Rio’s sinking importance in Brazil finance was exemplified in 2002 when the Sao Paulo derivatives bourse bought the Rio stock exchange, the nation’s oldest.

“The city had lost its identity: It was no longer the capital, the industries left, the financial sector left and a lot of the state-owned companies left once they were privatized,” Urani said in a telephone interview. “The most important thing Cabral did above all was the inauguration of a new politics, molding together various parts of the government with the private sector.”

Clean-up Campaign

Rio is also luring more commerce after its mayor, Eduardo Paes, began a so-called shock and order initiative last year. The city took back 10 favelas in 27 central neighborhoods from control of drug-dealers since December 2008 and set up small police departments, called UPPs, according to the state’s security secretariat.

The clean-up continues as Rio prepares for the Olympics. The Christ the Redeemer statue, the 30-meter tall monument perched on top of Corcovado mountain that was built in 1931, had 300 liters (79.3 gallons) of rain water drained from each of its outstretched arms.

Rio inaugurated an entrance to a subway stop last month that will use four elevators to transport about 20,000 residents up and down the hill to their homes that tower over Rio’s Ipanema and Copacabana neighborhoods. Last year, police forces invaded the favela, retaking control from drug traffickers.

Property Market

Economic advances and lower crime are benefitting the real estate market. A two-bedroom apartment in Copacabana and Ipanema rose 47 percent and 18 percent, respectively, in one year through May, according to Secovi-Rio, the state’s real estate union.

In Ipanema, a two-bedroom apartment costs an average of 672,438 reais ($381,439), while in Copacabana it sells for 471,723 reais ($267,584), the data shows.

“There are waiting lists and, basically, if you want to buy something there you’re going to pay a very high price or no one is going to sell it,” said Marcus Vinicius, director of Julio Bogoricin, a real-estate agency that focuses on luxury real estate in these neighborhoods.

Among the most important developments to benefit the region has been the rise of Batista, 52, whose fortune the past year more than tripled to $27 billion, making him the eighth-richest person, according to Forbes magazine.

Batista’s LLX Logistica SA, part of the EBX group, plans to build the Acu port, a Manhattan-sized complex on Rio’s coast that will require as much as $50 billion in investment, Batista told reporters in New York on March 31. The project will include a thermoelectric power plant, cement facility and auto producers.

Batista’s Focus

“We couldn’t realistically base our companies in any other city because this is where the qualified employees are in the sectors we operate,” said Paulo Gouvea, who has worked with Batista for more than a decade and is the head of corporate finance at EBX. “Rio is becoming an interesting mixture of Boston with Houston.”

Palmer of Gartmore said visiting Batista was one of the main reasons for his trip to Rio in January.

“Eike has his finger on the pulse of what is changing the country,” said Palmer after breakfast at the Copacabana Palace hotel on Rio’s beachfront.

Jim O’Neill, the chief global economist for Goldman Sachs Group Inc., said he’s also noticed the change in Rio. On his last trip to South America in February, O’Neill skipped Sao Paulo and headed to Rio.

He indulged in its world-renowned Carnival and participated in a panel discussion for the opening of Brazil’s first research center for the so-called BRICs, the largest emerging markets of Brazil, Russia, India and China. The research will be done by PUC-Rio, the Catholic university that has supplied finance ministers and central bankers in Brazil for decades.

“It is a city regaining interest,” said O’Neill, who coined the BRIC term in 2001. The city is “more alive and has more energy,” he said.

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