“BRAZIL’S SHIP IS NOT SINKING”

Bill Clinton, ex-president of the United States, during an event in Brasília on November 12th

The Prolifico Report Sep & Oct 2015 30th November

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BRAZIL IS HERE TO STAY

“We believe in Brazil. It's difficult to know where the country is going now, but in the long term, it continues

having an incredible supply of resources and a large population, with a significant middle class”

- Didier Debrosse, CEO of Heineken in Brazil (Valor Econômico, November 9th)

"In 5 years, there is a strong chance that Brazilians will look back and wonder what were they worried about”

- Bill Clinton, former president of the United States of America (Global Post, November 12th)

Over the last two months, the Brazilian government has made significant efforts to improve its influence in congress.

The government has been struggling to get fiscal measures approved, which has forced president Rousseff to rebuild

her cabinet, granting more power to the centrist PMDB coalition party. Rousseff’s goal was to gain more support in

congress by improving relations with coalition allies, which already seems to be paying off. This was reflected by the

approval of legislation that provides incentives for Brazilians to repatriate capital and the approval of the presidential

vetoes on congress’ proposals that could have worsened the fiscal situation.

Another skeleton which has come back to haunt Rousseff was the rejection of the 2014 accounts by the Federal Audit

Court in October, which considers that the government illegally delayed repayments to state-owned banks to make its

accounts in 2014 look better. This has once again raised the call for Rousseff’s impeachment, a process that needs

approval from the lower house speaker in order to be put to a vote, which then needs a 2/3rds majority, which is

considered unlikely for now. However, what seems clear is that impunity in Brazil is a thing of the past, as was

reinforced by the most recent detentions of a senator and Brazil’s most well-known investment banker (CEO of BTG

Pactual), both allegedly involved in the Petrobras scandal. The ruling PT party has lost all credibility / popularity,

meaning that if they last until the next elections (in 3 years time), it should be a win/win election with either of the 2

other main parties getting into power (centrist or centre right party). In the meantime, the existing coalition

government prevents Brazil going too far to the left. Brazil is undergoing significant change and the foundations for a

less corrupt and more transparent future are being built.

Prolifico recently issued a research report, comparing Brazil today with previous crises. The conclusion was that

Brazil’s fundamentals are far stronger than before, including one of the world’s largest US dollar reserves and a middle

class majority of over 60% of the population for the first time in the country’s history (see further information on page

6). Therefore, we believe that the current market sentiment of “despair” creates a very attractive entry opportunity for

investors seeking medium and long term returns. With the BRL currently near its all-time low (undergoing the most

depreciation of any major currency in the world this year vs. the USD), many Brazilian assets are at decade lows in

USD terms.

All the best,

The Prolifico Team

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INSIDE BRAZIL

Marcelo Castro (PMDB)

Brazil’s new Minister of Health

Brazil’s Chamber of Deputies

Container ship loading

Rousseff rebuilds cabinet with an eye on political stability

President Rousseff announced last month the termination of 8

ministries, along with the replacement of 3 ministers and the

reallocation of 7 others. The reform also included a reduction in

expenses, cutting 30 secretaries and 3,000 government jobs, along

with a 10% reduction on the salary of Rousseff and the other

ministers. The government aims to strengthen its coalition, hoping

to improve its position in congress with a view to getting fiscal

measures approved and fending off calls for impeachment. Its main

ally, the centrist PMDB party, received an extra ministry and now

holds 7 cabinet posts.

Fiscal adjustment advances in congress

During the second week of November, the Chamber of Deputies

approved legislation that provides incentives for Brazilian citizens to

repatriate capital. This measure is part of Finance Minister Joaquim

Levy’s program to narrow the budget deficit. Its approval was seen

as a victory for Rousseff’s administration, which has been struggling

to get fiscal measures approved in congress. It was the first

approval of a major budget bill since the cabinet reshuffle in

October, which handed greater power to the government’s main

ally, the PMDB. The bill will now be voted for in the Senate and, if

passed, is expected to increase fiscal revenues by BRL 100bn.

Government revises fiscal target

The government has revised this year’s primary fiscal target to a

deficit of 0.85% of GDP. This is the second revision of the year, after

reducing the target in July to a surplus of 0.15%, down from 1.1% in

January. In a joint statement, the finance and the planning ministers

blamed an “economic contraction extremely atypical and difficult to

predict”. Since the beginning of the year, there have been repeated

revisions on GDP projections, which initially pointed to 0.8% growth

and now to a contraction of 3%. The statement also said that the

corruption investigation into Petrobras, alone, is responsible for a

GDP contraction of 2%.

Current account deficit shrinks

The current account deficit dropped to USD 3.1bn in September,

from USD 7.9bn a year earlier, according to the Central Bank. The

institution forecasts a USD 65bn deficit for this year, down 37%

from last year’s USD 103.6bn deficit. A combination of sharp

currency depreciation and GDP contraction are fueling the positive

move, says the Wall Street Journal. Brazil should end this year with

a surplus of USD 15bn on the trade balance, up from a deficit of USD

4bn last year, according to Alexandre Schwartsman, a former

director of the Brazilian Central Bank.

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BRAZIL EXTRA

Brazil’s Court of Auditors (TCU)

The Carlyle Group headquarters

Rosanna Davison, VW ambassador

Bill Clinton, ex-president of the USA

Audit Court rejects last year’s government accounts

Brazil’s federal budget watchdog, the TCU, ruled in October that

Rousseff’s government violated accounting and financial laws in

2014, by illegally delaying repayments to state-owned banks. With

this, the opposition believes they have legal ground to open an

impeachment process against the president. It is now in the hands

of the lower house speaker, Eduardo Cunha, who makes the

decision whether to reject it or put it to a vote in congress. If he

decides in favour of the latter, the process will only be initiated if

passed by a two-thirds majority in the lower house, which most

analysts believe to be unlikely for now.

Petrobras probe has already retrieved BRL 2.4bn

Companies and individuals accused of bribery in the Petrobras

corruption investigation have so far returned close to BRL 2.4bn to

Brazilian authorities. The amount accounts for 1/3 of the total BRL

7.2bn that was embezzled from the state oil company. The return of

these funds by defendants resulted in 33 plea bargain agreements.

Carlyle Group invests in Brazilian higher education

Kroton has agreed to sell one of its universities to a JV venture

formed by the U.S. private equity firm, Carlyle and the Brazilian

investment firm Vinci Partners. The deal was settled for BRL 1.1bn. It

represents Carlyle’s second investment in Brazil this year and its

first ever in Brazil’s education sector. Carlos Martins, from Vinci

Partners, commented saying “the higher education sector should

continue to expand over the years to come, as penetration in Brazil

still lags that of other countries with the same development level”.

Volkswagen sticks with its BRL10bn investment plan in Brazil

Caught up in the recent scandal, which could result in multibillion

dollar fines, Volkswagen says it remains committed to investing

BRL10bn in Brazil by 2018. Though the group is reviewing its global

investment plans, David Powels, CEO of VW in Brazil, says it doesn’t

intend to reduce investments in the country.

Bill Clinton optimistic about Brazil's economy

Bill Clinton recently attended an industry summit in Brasilia. He said

that he is “optimistic about Brazil”. “It is going through a difficult

time, but this country's capacity to overcome obstacles is

incredible", he said at the event. He stated that, in spite of the

current negative news, “the future is created by long-term

perspectives". Clinton recalled Brazil’s progress over the past 20

years and said that "in 5 years, there is a strong chance that

Brazilians will look back and wonder what were they worried

about”. He completed saying that “the Brazilian ship is not sinking”.

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REAL ESTATE

Rio de Janeiro, Brazil

JHSF development, São Paulo

Self Storage facility

Attractive prices and depreciated BRL bring foreign investors

Feeling the pressure from the US dollar increase and from the

current recession, real estate prices have been appreciating below

inflation this year. According to the FipeZap index, residential real

estate prices had a 5% drop in real terms since the beginning of the

year. Some cities, such as Rio de Janeiro, have also seen drops in

nominal terms. There are some examples of apartments in Leblon

selling at an 18% discount to the asking price. The current status is

attracting foreign investors into Brazilian real estate. The British

luxury real estate brokers, Christie`s and Sotheby`s, have recently

joined the market. Christie’s’ partner in Brazil, Judice Araujo,

reported a 22% increase in demand from foreign investors this year.

New classification criterion for real estate funds

The Brazilian Association of Financial and Capital Markets, ANBIMA,

has recently announced a new classification criterion for Brazilian

REITs. The current existing 260 funds will be divided by considering

type of strategy (level 1) and type of management (level 2), in order

to better differentiate each type of fund. Level 1 is subdivided into 5

categories: development for income (at least 2/3 of equity allocated

to greenfield projects), development to sell (greenfield and/or

retrofit projects), income (assets already operating), securities (at

least 2/3 of equity allocated to securities) and Hybrids (multi-

strategy). Level 2 is subdivided into active or passive management.

São Paulo’s city hall approves unparalleled commercial project

The city hall of São Paulo has recently approved the construction of

a commercial building on Marginal Pinheiros, one of the city’s major

arteries. The development, from JHSF, will consist of a 135 metre

high office tower and a shopping mall, on a 15.000 m2 site located

in the neighbourhood of Vila Olímpia. The peculiarity of this

development is that it will be the first tower in the city to be built

just by the river, since it will be constructed on land between the

river and the road.

Company saves 60% on storage costs using Self Storage

André Sanossian, founder of Frutah, a chain of snack bars from São

Paulo, said to Investimentos e Notícias that his company is saving

60% by using a Self Storage facility, instead of storing internally.

Sanossian said his company has been using Self Storage since 2010

to store inventory for its snack bars, which are located in shopping

malls. He said the cost per m2 in shopping malls is too high in

comparison with Self Storage. Frutah uses a facility in which many

of the customers are small businesses that have opted to outsource

the storage space.

Sources: Financial Times, Wall Street Journal, The New York Times, Bloomberg, Global Post, Valor Econômico, O Globo, Folha de S. Paulo, Estado de S. Paulo, Exame, Veja, Brasil 247, Investimentos e Notícias, UOL and Segs

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BRAZIL – TIME TO BUY?

Prolifico recently issued a special report on Brazil, comparing the country’s current situation with

previous Brazilian crises. The conclusion is that Brazil is in far better shape today than in any of the

recent crises experienced by the country. When compared with the 2002 crisis, which required an IMF

bailout, Brazil is now substantially better prepared to weather a recession. Public debt (chart 3) is now

considerably lower than back then, while international reserves (one of the world’s largest) are now

enough to cover external debt (chart 4). At the same time, Brazil has experienced important socio-

economic progress since then, with an additional 60 million people rising to become middle class, as a

consequence of GDP per capita growth of over 30% during the period. Brazil’s electorate is now for the

first time, a middle class majority (over 60%) and this is changing Brazil forever, as evidenced by the

unprecedented corruption investigation leading to the imprisonment of business leaders and top

politicians. Brazil’s fundamentals are now considerably stronger than before and, for that reason, it

seems that perceived risk has overshot the actual risk and the current situation has been inflamed by

the current political uncertainty. The Brazilian currency has undergone the highest depreciation of any

major currency globally since the beginning of this year (chart 1) and is now near to its lowest level

ever. Equity prices in US dollar terms are at their lowest level since private credit was made more

available in 2005 (chart 2). Brazil’s inflation, one of the main constraints to growth, is forecasted to

start falling next year, allowing for interest rate reductions which will stimulate the economy. At the

same time, congress finally seems to be reaching a consensus and important fiscal measures have been

approved recently in order to help alleviate the fiscal deficit. The current weakness of the BRL is also

boosting the trade balance surplus, forecast to double next year. According to Citibank’s Latin

American Sentiment Index, the probability of positive returns in LatAm markets over the next 12

months is 100%. If you would like to read the full report, please e-mail us at info@prolifico.com.br

Chart 1: Chart 2:

Chart 3: Chart 4:

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PROLIFICO UPDATE

Prolifico has now launched its Pledge Fund to focus on the current

distressed opportunities in the market. It already has a number of

committed investors.

Moby has recently purchased a distressed, fully built 140,000 sq ft

building in the heart of Rio and plans to start operating self storage

there over the next 6 months.

Moby has compiled a pipeline of assets totaling USD 100 million+,

consisting of distressed, as well as ground-up developments. All

assets are ready to purchase, develop and retrofit. Prolifico is

currently conducting talks with a number of interested investors.

ZAK has obtained planning permissions on a site in Rio to develop a

100 room SmartHotel.

ZAK is in ongoing talks to develop a large student housing asset in

Rio.

Currently negotiating on a large senior living facility in Rio, which is

the retrofit of a distressed asset.

Full planning submitted to retrofit an office building into a senior

living home on one of Prolifico’s F&F Fund assets.

Months since inception Asset appreciation

F&F Fund 46 +245% (3.5x)

São Paulo Self Storage Fund 32 +222% (3.2x)

Rio Self Storage Fund 18 +64% (1.6x)

Trancoso Beach Fund 42 +280% (3.8x)

Underlying assets valued as at 31st December 2014 by KPMG Avaliações Patrimoniais Ltda / NAI Miami

Student Housing & Smart Hotels

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KEY ECONOMIC DATA

GDP Q2 2015

(12 months) - 1.2% US Dollar

1 R$ 3.74

2015 4 2016

4

Benchmark Interest

Rate (Selic) 1

14.25% Dollar

variation YTD 3

+40.8% GDP -3,19% -2,04%

Inflation - IPCA

October’15 2

9.92% British Pound

1

Euro 1

R$ 5.63

R$ 3.96 Selic 14,25% 14,13%

IBOVESPA

Year to Date 1

-8.27% Unemployment

(PME) October’15 7.9% US Dollar R$ 3,95 R$ 4,20

IBOVESPA

October’15 +1.8%

International

Reserves 1

US$ 369

billion Inflation 10,38% 6,64%

1.

2.

3.

4.

As of November 27th 2015

twelve month period variation of the price of 1 USD in BRL terms (as of November 27th 2015)

projections for year-end, as of November 27th 2015, according to the focus bulletin of the Central Bank (median of market expectations)

Source: Brazilian Central Bank, IBGE, IPEA, Google Finance and Portal Brasil. (Data as of November 27th 2015 or the most recent available)

Prolifico is an alternative real estate & private equity investment management firm in Brazil. The company invests in high

yielding real estate backed business models that are resilient in all macroeconomic scenarios, such as self storage,

student housing, senior living and data centres. http://www.prolifico.com.br/

LEGAL DISCLAIMER: No representation or warranty, express or implied, is given by Prolifico, their respective advisers or any of their respective partners, directors or employees or any other person as to the accuracy or completeness of the contents of this overview. Neither this overview nor any of the information contained in it shall constitute an offer, invitation or inducement to purchase or acquire any shares or other assets.