From Brazil to the U.S.: Navigating the Cross-Border Investment Landscape
In this episode, Stephan de Sabrit, the Managing Partner of Leste Group, delves into the intricacies of expanding a Latin American investment firm into the North American market.
You’ll discover:
- How the name “Leste” encapsulates their vision of new beginnings and ideas.
- The strategic reasons behind Leste Group’s focus on the lower middle market.
- Unique approaches Leste Group takes to stand out among larger, more established private equity firms.
- The importance of hands-on collaboration with management teams for value creation.
- Insight into the latest trends and opportunities in the U.S. and Latin American investment landscapes.
Mentioned in this episode:
Transcript
Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and national practice leader for mergers and acquisitions for Liberty Company Insurance Brokers. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions, and we’re all about one thing here. That’s a clean exit for owners, founders, and their investors.
Today, I’m joined by Stephan de Sabrit, Managing Partner of the Leste Group. Leste is an alternative investment firm founded in Brazil in 2014. This past March, 2024 Leste expanded its private equity platform into North America, which brings us here today. Stephan, you’re my first Brazilian-founded company to come through here. So welcome to the podcast.
Stephan de Sabrit: Hello Patrick, thank you. Thanks for having me. It’s a pleasure to be here with you.
Patrick: Now, Stephan, before we get into the Leste Group, let’s just start with you. What brought you to this point in your career?
Stephan: Well, Patrick, I’ve always been a very entrepreneurial person, very curious, and I’ve always wanted to be an investor, if you will. Having already founded, this is my third company that I participated in co-founding throughout my career. Always with the cross border, if you think between North America, the United States, and Latin America in general.
Taking advantage of having had the opportunity to always have a connection with the US, mostly Florida, which is a very well-known second home place for some Latin Americans. Being able to be here and use this connection, it’s something that I’ve always wanted to do, and I’m very happy to be here today.
Patrick: Well if we get into Leste Group, well, first, let’s start with this. How did you come up with the name? Because it’s not named de Sabrit Capital. So tell me the story of Leste.
Stephan: So Leste means East in Portuguese, which is our language we speak in Brazil. And you know, the whole idea behind this was that when we started this company down in Brazil, a lot of the companies there had the names of Brazil, of a Brazil location to be very Brazilian-centric.
And in our idea between myself and Emmanuel Harmon, who is my co-founding partner, we always wanted to have something to offer the Latin Americans that had a site elsewhere. You know, good to look elsewhere and further out of just Brazil or Latin America. So East is where the sun rises. So new ideas are born. And every day there’s new hope when the sun rises. So we thought about it, and Leste was the name that we chose.
Patrick: That’s a nice view of the East as new ideas and new beginnings. I’m based on the West Coast, and we keep thinking that we’ve got a special look as we see the sun setting. So I think that is really, really insightful. And now you’ve been in Latin America for 10 years. What brought you specifically to America? And talk about what Leste Group is doing with this platform now in America.
Stephan: So we’ve actually set up shop here nine and a half years ago, doing multiple things, mostly private credit, real estate, and some venture capital. But we started doing private equity, middle market growth here in America because we’ve been doing that in Brazil for this past 10 years, gladly, successfully. We’ve invested in multiple companies, taking some from a very early stage to eventually selling it to, a sovereign wealth fund that wanted to have the second-largest gym chains in Brazil.
The whole environment in Latin America is too volatile, Patrick. The lack of predictability of market, capital markets closing on you. So all of that makes it very, very hard. And we wanted to invest, not only our own capital, but our investor’s capital in a region where you have a lot more opportunities in the sense, where, if you find a good business, you invest in it, and you have good managers, you have you have access to capital markets.
You have access to multiple other opportunities of M&A, things like that. So by being investors and wanting to have, let’s call it a playground where it’s fertile for people like us. We thought that doing that in the US was the right place to be.
Patrick: And are you attracting more investments from Latin America? Or are you trying to also attract investments in America?
Stephan: In America. I mean, we bring more money from out of Latin America to invest in the US, in companies here in America.
Patrick: And then as you’ve been around now for 10 years, with the other areas of focus. With acquisitions, you’re looking at the lower middle market.
Stephan: That is correct.
Patrick: You’ve been around for a while. A lot of companies that have been around as long as you, they tend to go upmarket and look at larger deals. I’m sure you’ve got the bandwidth. Why are you focusing in on the lower middle market? Tell me about that selection.
Stephan: I think that was a little more of the choice. We wanted to stand out, right in regards to the very much, I mean, the larger platforms, the existing platforms that already have teams that have been doing this for years and years with access to a lot of it. So we thought, how do we set ourselves apart from these bigger names with decades of existence and very, very successful business models?
So for example, in our building, here we have HIG. It’s a very well-known, I mean, 50-something billion dollars, and the manager doing the middle market, or now upper middle market, if you will, very successfully. So we said, how do we stand out? How do we compete with these guys?
We said, instead of competing with them, we said, why don’t we look at it through another angle, which is to back to what I was saying initially. How do we use that cross-border knowledge and to be able to make a difference for the company that we’re investing with.
So essentially, what we chose Patrick was Latin American companies that either have never had exposure to the market in the US or has an exposure in the US market but never had the capability to really push it further. Again, just for the lack of knowledge of the local capital markets, or access to other M&A’s and things like that. So we thought, why don’t we look at that angle, and that’s what we’ve done. You don’t have that.
And, you know, we don’t have very large companies with the one or two, very few exceptions, like one of the largest meat processing producer of the world. That happens to be Brazilian. It’s based here in the US as well. But, but, but largely, you don’t have that. So you have to look to the middle market, to look for companies with those size and where we can actually make a difference in it.
Patrick: Now you mean to make a difference, because a lot of times I’ll ask my guests what sets you apart from other firms in your space and you’re competing with, you know, looking for targeted investments. What does Leste bring to the table, to owners and founders of businesses that you’re looking to invest in?
Stephan: Absolutely. Well, I think that the first thing is our culture of being very hands-on. Everything we invest in, we are investing typically, not just in a business, right, more than the business, we’re investing on an entrepreneur or a management team. So they are the experts. So we try to come to the table with a very, not just a hands-on approach, but the first question is, what can we do to help, right? We just came out earlier today.
We had a two-hour session with one of these companies that we have an LOI signed and we were just brainstorming, trying to bring in ideas on how this company can actually extract even more margin from a very an amazing business model that we found. And again, this is a Brazilian entrepreneur that has done it twice already sold its company for a few billion bucks in down in Brazil and starting all over again in the US.
But he chose the Leste Group instead of all other groups here in the US that would back him up, by the business that they already have after only two years. Because he enjoys us. He enjoys these sessions. He sees that we are really passionate about his business as well, and our connection, again, to the banking system.
Thinking always, how can we create? We have a very, very financial mind in the sense, okay, why don’t we create an asset, again, to make that company more valuable to what the market would be looking to in a few years’ time when they’re ready for an IPO.
Patrick: That’s outstanding because that’s consistent with the theory that I’ve seen just in practice in my years in M&A. It’s not one company buying another company. It’s people coming together, and where they’re working together and so forth. I think also what private equity can bring to owners and founders, I think if a strategic is looking at it, I’ve had this conversation a couple of times now where a strategic, they’d like to have that target, but they don’t need it.
It’s like the target, the seller needs the buyer more than themselves. And the buyer may say, we’d love to have you. We may have to compete for you. But it’s not life or death. You know, I think you’re coming in fresh where you’re saying, how can we help? We see value. I’m sure you see value, owner, and founder. How can we come together and create more? So I think it’s just a more collaborative approach.
And I think that’s an advantage you bring. The other thing is just, there are some organizations out there that just, they just want to quietly, just invest, sit back, and let the management team do all the work. It’s like, look, you need capital? Here you go. You’re hands on which I get the feeling that you’re not going to dictate to them necessarily, but you are going to say, how can we get here?
And now, when I talk about the brainstorming session, I love this, because there are many times where you’re sitting there with with the other side, where they’re not used to the outside ideas. They know their business. And you can go over some simple concept or idea you have to increase market share or whatever. Have you experienced that where you’re talking to them and you just see this light bulb go off, where they’re just like, you could do that?
Stephan: Absolutely Patrick. And that’s what makes it so exciting, and that’s why, I mean, we end up many, many times when we’re having these conversations with these groups, they end up picking us, even though we might not have the size, or even the brand if you will, that some other more stable, legacy, bigger groups have.
But I think it’s that very personal touch, if you will, and that light bulb that comes up and says, wow, this conversation with this group, really brought to us an interesting idea, an angle that we were not looking at. So, it’s not, we’re not piggybacking for the ride with the entrepreneur. And just show me the money. Show me profits. It’s how can we help you to generate more and more profit?
And so it’s about value creation, right? I mean, it’s how we see things, and I think that transpires to the other side. They feel it. And again, the companies that we do, we invest in, they all have a very good experience, if you will, with us. Because again, and it’s all about not just that, but when things go not so well, right, Patrick, I think that’s also important. It says when things are going fantastically well. You typically don’t get the.
Patrick: Everything is easy when everybody’s winning.
Stephan: Yeah. It’s easy. But when things go south, you want to be with people that really understand and discuss, and how can we get out of this together. How can we help you? And not just, you know, be there, you know, just being completely unaware of the macro situation and things like that. So, that’s why again. And that the word spreads out. I mean, people speak about that, their experience and that’s how we’ve been getting more and more leads here in our pipeline of stuff.
Patrick: Well I think this is consistent to connect the dots. I mean, you’ve got Leste which is the east, and you’re looking for new ideas. You like the entrepreneurs, because you like working and growing things. And you are not imposing your thesis that has worked on 100 other acquisitions successfully.
And so you’re going to squeeze that round peg into a square hole. You’re going to be collaborative with them and work forward. And again, it’s at your core, which is new ideas. I think that’s outstanding. Stephan, give us a profile of your ideal investment. I mean, who are you looking to serve?
Stephan: So again, I think where we add the most value, I’m not saying that we are only going to be doing these kind of investments, right? I mean, I’m sure there’s a lot of amazing groups here that are listening to you, Patrick, right now, that we would love to, you know, to get to know and meet.
But essentially, these are companies that are generating some good, some good revenue already into 10s of millions, maybe. Maybe already in the hundreds, but have reached, let’s call it a way that they need some a little bit more capital, but definitely a little bit of this strategy, how to strategize in order to really grow, take the next leap and grow and become a much larger company, but without definitely losing its roots.
So again, but these are Latin Americans, typically, that are already have a foot here in the US. They see it with the potential growth, but they don’t have the, maybe they feel afraid of really going and pushing it by themselves.
Patrick: Stephan, I completely agree, because that has the skill set that can get an owner or founder to get their business up to a million dollars in revenue, to go from a million to 10 million is a completely separate skill set. And then you may, you know, jig through force of will and experience, get up to that 10 mil.
But then to move to 50 to 100 million, they need not only the outside capital, they need the outside expertise, know it all. And partnering on that experience, they avoid a lot of pitfalls that could happen. So it’s less risky. You diversify that way. Are there any because you’re based here in Florida, geographic limitations? You’re open to a number of industries. Are you wide open for any industry?
Stephan: We like a lot, we’re very open to multiple industries. We’re not, I mean, we were based in Florida, but we have an office in New York as well. We have investments across the country within the real estate world. So, I mean, another group that we’re already finalizing our due diligence, and we should close initially in January, it’s a company that sells throughout, throughout the entire country.
So, I mean, agnostic, in terms of of sector. It’s all about is this something that it’s, the product itself, or whatever the company does, it’s different. And the management team and ownership is really something that we feel that it’s special, and we can really help them scale.
Patrick: And you’re looking for management teams, owners, and founders, that want to continue on with you. They’re not looking to checkout.
Stephan: Absolutely. I mean, we want people to look at us as, again, their sidekicks. To look at us and say, okay, I can really make this happen with these guys alongside with me.
Patrick: Now, one of the things that’s driven M&A activity in America the last five years, particularly had it so robust, is that a lot of the risk, the financial risk between buyer and seller, has been transferred away from the two parties directly off to an insurance company that uses a product called reps of warranties insurance. I’m just curious, don’t take my word for on that being a factor. But you know, Stephan, in your opinion, good, bad, or indifferent, share with us any experience you’ve had with rep and warranty.
Stephan: I will tell you, Patrick, that if I knew about this before, it would have saved me. I will say some headache. So I think it’s, I think it’s a great thing, even though you meet people once or twice and three times, and I mean multiple times, and you do due diligence in many of these groups and companies that we’re doing, they’re not at that institutional level yet, right?
And it’s not sometimes because of, it’s not their fault, it’s not their fault, it’s just, I mean, it’s, it just happened, right? I mean, sometimes the entrepreneur itself doesn’t even think that it is real. But sometimes, sometimes it is right when you, when you’re coming in with institutional capital such as ourselves, if you think about it, with all the fiduciary duty that we have towards our investors.
I mean, we have to have access to everything and then demand a certain level of governance and things like that. Some people just think that initially, they will take your money because they needed your money or something like this, and not necessarily have given you the full, full picture. So having said that, if we had, you know, a reps and warrants insurance, it would certainly have saved us a buck or two.
Patrick: One of the newest developments in the market for insurance is reps and warranties was originally designed for 100 million dollar value transactions. Where their financials were audited, excessive diligence was done, and all huge reports, and are they all very, very expensive, and with those resources together, is a very, very low risk for underwriters. And so they were able to transfer that out.
So I would say, probably about six years ago, 5% of M&A deals had insurance. Today, 95% of the deals have insurance. What’s the hole in the marketplace right now, the real need is insurance for deals that are priced well under 100 million. And there’s a product called TLPE, transaction liability private enterprise. It is a policy designed for transactions that are valued between 1 million and 30 million in enterprise value.
The very types of companies that do not have the formalized policies and procedures and all the documents there, where you know there could be post-closing, a misunderstanding, where even though the buyer performed diligence, the seller may not have told them something, because it just didn’t occur to the seller. And those are the types of things where, in absent insurance, a lot of deals fall by the wayside because the buyer needs the insurance and they need the remedy, and the seller just gets nervous.
And you would almost be a feeling of guilt, where, when you’ve asked a seller, tell us about your financials. Are they accurate? Yes. Are you sure they’re accurate? Yes. You’re not hiding anything from me? No. And as you keep asking those types of questions that’s on the 1000s of things that are at the diligence you get those multiple questions, some doubt and fear creeps in because it’s just a little kind of guilt with the sellers.
Like, what if I don’t know everything? And it’s going to be at my risk, and all of a sudden you can get some resistance in the agreement. By bringing in a product where you’ve got a third party that says, hey, if there’s a breach, don’t point at each other. Just come to us. Buyer has a source of remedy. Seller has a clean exit.
And in cases where let’s say you are keeping the management team on as you move forward, it can get very, very uncomfortable if all of a sudden there was a breach that nobody knew about. You want to avoid this. At a cost of $15,000 per million dollars in limits, not the size of the deal, it’s how many limits you buy. I think it’s an unbelievably affordable way to get the two sides to collaborate and continue through.
So we’re very, very proud of it. It’s called, again, transaction liability private enterprise. Now, Stephan, as we look forward, we’re just past the election, and we’re looking to 2025 tell us, what trends do you see for the new year, either M&A In general, the Latin American market, or Leste in particular?
Stephan: I mean, we are very excited, Patrick, with the future. I mean, on the Latin American side, again, the political unrest, economic unrest, just continues to be an ongoing thing. So which means you will have more and more companies and groups looking to, where can I expand my business. And one thing leads to another because they read a news they hear about it that you know, the Leste team as a group has been investing in doing these deals here in the US.
So they keep on coming more and more, which is fantastic because it gives us a vast array of opportunities and possibilities for us to actually choose from. And again, I mean, with the American economy going strong. I mean, interest rates coming a little bit down, right from, you know, such a hike that was completely unexpected in terms of speed, right? I mean by everyone. So I think that, you know, capital markets coming back, IPO is coming back.
So all of that just fuels the whole ecosystem, which, you know, it’s exciting because we can see that all these investments that we’re making now will ride that wave of growth in terms of the economy, and potentially being part of an M&A or eventually even IPO in a few years’ time. So I mean, we couldn’t be more excited, Patrick about what the future lies for the Leste Group here.
Patrick: Well I wish you guys all the best. And Stephan, how can our audience members find you?
Stephan: So our website is www.Leste, which is L, E, S, T, E.com. You can always reach out to our contact through the investors@leste.com or you can email me directly at stephan.sabrit@leste.com. I mean, we’re here. We’re open. Very, very much would have happily receive people here, either at our office here in Miami or over a video. So you know, we’re open for business, Patrick.
Patrick: I think I would encourage any of our friends and listeners out there on the East Coast, on the Northeast Coast, now would be a really nice time to make some plans to head down to Miami and sit down with Stephan and his team. Well, Stephan de Sabrit of the Leste Group, it was a pleasure having you on. I look forward to speaking with you again and have a great New Year’s.
Stephan: Well, Patrick, I really appreciate it. Thank you very much for having me on again. Been a pleasure, and I hope that you know we’re bringing some interesting information for your listeners.
