VR Global makes a killing in Argentina

Richard Deitz is a veteran when it comes to investing in Argentina. In 2002 the fund even raised a dedicated Argentina Recovery Fund which achieved a net return to investors of 190% in 36 months. Some of the more recent success in Argentina relates to the fund’s investment in Transportadora de Gas del Norte. The stock was up 35% in March and 84% year to day.

In his 2014 December letter, Richard Deitz mentioned Transportadora de Gas del Norte (“TGN”) for the first time. They had purchased a 26% position in the company which is one of Argentina two trunk gas pipeline operators. At the time, the holding was part of their positioning for a political transition in Argentina. VR expected a rationalization of regulated utility tariffs under a new regime as the mismanagement in this area by the Kirchner regime had turned Argentina from a net energy exporter to a net importer. Deitz’ expectation was that a new regime would place rationalization of the sector as a high priority. The team undertook a yearlong study of the utilities in Argentina and concluded that TGN had the most upside.

VR purchased their stake at an implied market capitalization of TGN of c. $120mm, and, including the company’s debt, an implied enterprise value of $245mm. The replacement cost for this core and non-substitutable infrastructure asset topped $2billion.

The thesis has played out as expected. With the new Macri government in place, tariffs were quickly and meaningfully raised early 2016 and a full tariff review process was put in place. In early Q1 2017 the new economic team signaled that fiscal consolidation had become a higher priority, an important component of which is the rationalization of the utility tariffs. This was followed through in March and shares of TGN rallied sharply.

The position showcases one the of the key strengths of Richard Deitz and the VR Capital team: to buy positions at distressed valuations anticipating certain political and economic events to unfold. While VR’s position was relatively small at about 1% of the fund’s NAV (not an atypical position size for this fund), the impact to returns has been meaningful.

Over the period from Jan 1st 2014 and March 31st 2017 TGN shares have appreciated from ARS 1.27 tot ARS 25.25.