Gaining access to Harvard means the student has to overcome two hurdles. The first is to be accepted by the university, a distinction reserved for only 7% of its applicants. The next is to be able to afford the annual undergraduate fee, which, including credits, meals and accommodations, came to about US$ 80,000 in 2012.
Lemann did not pay much attention to this exclusive aspect and tradition when he arrived in Cambridge in September 1957 to study for an undergraduate diploma. Brazilian students were rare at the university at that time with an average of only one candidate a year, compared with around 100 nowadays. His debut at Harvard was a disaster. The “beach boy” was freezing to death in his first visit to the US and missed the waves, terribly. His homesickness was exacerbated by a newly acquired rebellious streak, that didn’t only compromise his grades, but that nearly undermined his academic career.
At the end of his first year, when he was about to go on holiday, he set off some fireworks in the middle of the main square at Harvard. The joke was a success with the students, but campus authorities, who caught Lemann in the act, were less than impressed, and when he arrived back in Rio some days after the incident, he received a letter from Harvard recommending that he take leave of absence for a year in order to mature.
Lemann, who regarded Harvard as a nuisance, was initially tempted to take advantage of the chance to abandon his studies. But he ultimately returned to Cambridge, as the letter had only “recommended” and not forced him to accept a hiatus.
To escape his boredom but successfully graduate, he decided to complete his studies in three years instead of the usual four. While this would be no easy task, Lemann knew he could devise an efficient system to achieve his goal, and started by inquiring to former students and teachers about the kind of work and time dedication required of classes he was considering. During one of these conversations, he learned that all the previous exams were filed in the library, which would be his next stop.
It did not take him long to notice that teachers had made few changes to the exams from one year to the next. All he needed to do to prepare for the exams was to study those from previous years. His grades drastically improved, and within a short time, Lemann changed from being a problem student to the rector’s favorite, concluding his course when he was 20 – the age he had set for himself.
Commenting at a recent event about how Harvard had changed his way of looking at the world, Lemann said, “I was a surfer and tennis player who had never been out of Rio de Janeiro and suddenly I was there in this place full of great ideas. I had to take a philosophy course in my first year. I began to read Plato, Socrates, things I had never thought of giving a glance. This changed my view of the world... My dreams, which had been to win a tennis championship or surf bigger waves, became larger. People who know me and my companies know that I always say that, ‘having a big dream brings as much work as having a small dream’... The other thing I learned at Harvard, and has become part of my nature, was the importance of choosing people. I was among the best people in the world there. Excellence was all around. This had a great influence on how I started to choose people, which has been one of the main features of my career...
“Harvard also taught me to focus on a way of obtaining results. To finish within my deadline meant I had to create a system involving great focus... I always try and reduce everything to what is essential and this has also helped us a lot in forming our businesses. Most of our companies – and people – have five goals... Doing something simply is always better than doing it in a complicated way.”
Despite his creative brilliance, like any new graduate, Lemann went job hunting. He wanted an opportunity in the Brazilian financial market where he could earn a lot of money, and got a job with a company called Deltec, founded in Rio in 1946, to sell shares on the Latin American market. The owner was an American, Clarence Dauphinot Jr., who was also a member of the Country Club, and hired the young fluent English speaker as a trainee. Lemann’s first boss was Roberto Teixeira da Costa, who was already well-known in the area and would become the first head of the Brazilian Securities and Exchange Commission (CVM) in 1976.
To call what existed at that time the “capital markets” would be almost an exaggeration. There were few clients, and the number of companies that were prepared to disclose their earnings was few and far between. Even in 1966, there were no investment banks operating in Brazil. The Buenos Aires Stock Exchange was bigger than that in Rio while São Paulo’s was even less important. It was, therefore, a market that needed to be created. Deltec had a team of around 300 salesmen to sell shares in a limited number of companies, two of which being Listas Telefônicas and the Brazilian subsidiary of the American carmaker, Willys Overland. The sales force went from door to door, searching for new clients around the country.
“At the end of the 1950s and start of the following decades, there were no domestic specialists to deal with investors and give them information...,” wrote Teixeira da Costa in his book Mercado de capitais – uma trajetória de 50 anos. “Annual reports were extremely concise in terms of providing information that was of real importance for shareholders and were limited to the legal minimum balance sheet and financial statements information. They were unaudited and unclear about the criteria used.”
Seeing the embryonic stage of the Brazilian capital market at close hand, Lemann felt it would be difficult to prosper in those conditions, so he decided to get some experience abroad. His plan was to travel, learn from the best minds and then return to Brazil. Thanks to his father, he had double nationality and decided to try his luck in Switzerland and obtained an internship at Credit Suisse in Geneva.
But what seemed like a unique opportunity turned into a small nightmare. For the first time, he was working for a large institution, with a strict hierarchy and rigorous processes he did not like in the slightest. He felt everything was too slow, rigid and predictable and quit after only seven months.
The time in Switzerland wasn’t all for naught. A master at time management who never quite let go of his dream of success in the ranks of professional tennis, Lemann maintained his sportsman’s lifestyle, and competed in some tournaments in Switzerland, ultimately accepting an invitation to join the national Davis Cup team.
His debut in May 1962 was uninspiring and he lost by three sets to zero. “I never liked grass,” was the excuse he gave in an interview with a sports magazine. But he lived as a professional tennis player for a year and a half and even qualified for two of the four Grand Slam tournaments – Wimbledon in England and Roland Garros in France.
Ultimately, though, when he objectively evaluated his prospects, he didn’t see himself as a top contender, which was severely at odds with his personal goals for success.
“The more I played, the more I realized it would be difficult to get into the ranking of the 10 best players in the world,” he said. “I decided to stop as I would not be a star.”
On his return to Rio in 1963, Lemann was hired by Invesco, a small company that operated mainly in the credit sector and competed with commercial banks. He set up a capital markets area, which very quickly began to upset the traditional stock market traders. At the time, seats on the stock exchange could not be bought, but were held for life and operated according to a system like that of a notary concession. Neither Lemann nor Invesco had inherited anything, but he was not ready to stay on the sidelines in the game of buying and selling shares. The way in, he discovered, was to create a kind of “parallel stock market,” in which the shares were sold over the phone outside the official trading session. This new approach turned into an excellent business for him, as the shadow stock market ended up with the equivalent of 5% of the volume of the Rio exchange, but, as expected, the big brokers did not look kindly on this daring approach.
“The brokerages hated me because they thought I was a threat,” he said. The atmosphere became so tense that when Lemann once visited the Rio Stock Exchange, he was expelled from the building by two security guards at
the request of a group of brokers.
Thanks to his good education and the fame he was gaining on the market, Lemann started writing a column on investments that appeared in the Sunday edition of the Jornal do Brasil newspaper. However, his journalistic career was short when a few months after his debut column, the newspaper director, Alberto Dines, discovered he worked for a brokerage and regarded the situation as a clear conflict of interest.
Working alongside Lemann in Invesco’s capital markets area was José Carlos Ramos da Silva, a smart-talking young man with a degree in economics from the Universidade do Brasil (now UFRJ) who was known on the financial market by the nickname Jaguatirica (Ocelet). Ramos da Silva came from a very different world from Lemann. His father was a Portuguese immigrant who had spent most of his life working in garment stores. His mother had studied accountancy, but had never practiced, instead dedicating herself to raising the family. Ramos da Silva spent his main holidays in Cambuquira, a tranquil spa in Minas Gerais state, but, when it came to financial ambition, Lemann and Ramos da Silva were very alike and this similarity far outweighed class differences.
On the face of it, things were going extremely well. The company was growing, lending increasingly more money, and the parallel stock market it had created was expanding. The problem, as Lemann discovered too late, was that more money was going out than coming in. The result was that Invesco went bust in 1966 as it did not have strict enough credit controls and its management was haphazard. At the age of 27, Lemann went under with it. His stake in the firm – around 2% of the capital – now worthless. (Invesco was eventually taken over by Banco Ipiranga, belonging to the Lutterbach family, which bought another four finance houses to create an investment bank.)
But the sudden death of Invesco taught Lemann two great lessons. The first was that it is as important to look after revenues as expenses – a maxim that became an obsession with him and his partners in the following decades. The second was that a business needed good, well-remunerated people, even in those departments that were unglamorous or did not turn a profit.
“The goalkeeper also has to gain a lot,” he said.
Instead of lamenting the defeat, Lemann considered these lessons in thinking about his next undertaking.
“Society” was always a word on Lemann’s lips. Only once in his career did he launch a new project on his own. Things were no different after the failure of Invesco. He wanted to continue working in the financial market but had no capital and no intention of paying for everything himself. There was only one solution in his mind: find good people who were ready to work on a new business and capitalist partners to finance it.
The first part of the plan was easy. Ramos da Silva, Jaguatirica, had the entrepreneurial spirit that Lemann wanted by his side. The money to pay for the project came from another source: the Ribeiro Coutinho family from Brazil’s Northeast.
The family originally made its fortune from sugar plantations in Pernambuco and Paraíba states and had expanded its business interests over the years. One of its main bets at that time was Banco Aliança, which was located in an imposing building designed by architect Lucio Costa in the center of Rio beside the Candelária church. The head of the family, João Úrsulo, wanted to expand the operations of the Libra brokerage, which was controlled by Aliança and focused at that time on selling bills of exchange. Lemann needed the money and Úrsulo needed someone who would understand this new business. The combination looked perfect.
Lemann and Ramos da Silva began working for Libra in 1967. To make the deal attractive, João Úrsulo offered a 26% stake in the brokerage, split evenly between them. The aim was to begin operating mainly in the new open market where public and private securities were bought and sold. (The activity was so new that the Central Bank did not even set up a trading desk for these assets until 1968.)
The pair quickly got the brokerage moving at full speed and, within a short time, it occupied the entire 11th floor of the bank’s building. One of the staff Lemann and Ramos da Silva hired then was a young talent who had helped the Escritório Levy firm transform itself into one of the largest traders of Central Bank securities. He came from a lower middle class background in Santa Rita do Passa Quatro in upstate São Paulo and began working as an office boy with Bradesco when he was 14 after leaving home, following a row with his father. He had been a poor pupil who had not completed his elementary school and stopped in the sixth grade at that time. He was creative and obstinate at work. His name was Luiz Cezar Fernandes.
“Jorge was totally lost there, working a bit on the stock exchange, a bit on the market... He was overworked,” said Fernandes. “He called me and I went along.”
Paradoxically, the more the brokerage grew, the more dissatisfied Lemann felt. His shareholding, despite Libra’s excellent results, remained the same. To make things worse, under the regulations set by the brokerage’s controlling shareholders, he could not offer any stake in the business to anyone else. This was a “carrot” Lemann believed was the best way of winning over talented youngsters.
He found himself in a dilemma. Since his years of study at Harvard, he had been thinking of running a company with a culture based on meritocracy and a partnership system. The idea of dividing in order to grow captivated people like Ramos da Silva and Fernandes, but the Ribeiro Coutinho family was not interested in entering this game. After three years without any prospect of increasing his stake in the brokerage, Lemann decided it was all or nothing. He told his bosses that he was not happy with the situation and he wanted to buy them out in the belief that the Ribeiro Coutinho clan, owners of various other businesses, would agree. To his surprise, the family made a counter offer and forced Lemann and Ramos da Silva to sell their stakes and leave the firm.
At the age of 31, Lemann was unemployed once again. But this time, he had US$ 200,000 in his pocket, a lot of money in those days, and he had in his head the business model he had been dreaming about – in which the wealth generated would be split with the best employees. His thinking had nothing to do with being a nice guy and everything to do with his purely pragmatic style of multiplying earnings and then dividing them. He would often repeat in the future, always in a loud voice and extending the vowels, as he does: “Good people, working together, make the firm great.”
Looking for the “PSDs” –
Poor, Smart, Deep Desire
to Get Rich
Maintaining a good network of relationships has always been one of Lemann’s concerns, long before the word networking came into fashion. As a rather introspective, quiet person, he had noticed from an early stage that being surrounded by the right people was a tremendous advantage. It is common to hear accounts of how he not only remained silent in meetings, but was so bored at times that he dozed off. After his forced departure from Libra, the time came for him to trust his instincts about people and chemistry and act accordingly.
Lemann had a good idea in mind – to open his own brokerage – and a streamlined team to start by his side – Ramos da Silva and Fernandes – but he needed capital. The money that he and Ramos da Silva had received for the sale of their stake in Libra would be paid in installments, but cash was needed to buy a brokerage’s license. The stock market was experiencing a period of euphoria at that time in 1971 and the prices of permits were sky high.
Bereft of money for the brokerage, Lemann and Ramos da Silva had to be content with a smaller business, a securities distributor. They were negotiating the purchase of a small company called Vésper, which belonged to the Rio-based building company Metropolitana, when they were suddenly interrupted.
“One of Jorge’s clients who was almost a friend arrived one day and asked what we were doing,” said Fernandes. “He said he knew we were buying a lousy distributor and that it was absurd for us to have gone from a brokerage to doing that. He went on and on about it.”
The client in question was Adolfo Gentil, a former Congressman and owner of Banco Operador, based in Rio. Gentile, who came from Ceará stat
e, was rich, a tennis enthusiast and 20 years older than Lemann. He offered to finance the purchase of a brokerage.
To help out, Gentil called his friend Guilherme Arinos Barroso Franco, a descendent of Tapajó e Itacoatiara Indians from the Amazon, who had begun his career as a clerk in Banco do Brasil. He was a law graduate and, at the age of 26, had become a personal consultant to ex-president Getúlio Vargas. A football (soccer) fanatic – he supported his club Botafogo with a passion and had 40 reserved seats at the Maracanã stadium – he later also became known as the father of the former Brazilian Central Bank chairman, Gustavo Franco. His offer meant that the team to finance the purchase of the brokerage was ready.
The solution to finding a target could not have been more prosaic. Gentil put an ad in a newspaper: “Brokerage for sale sought.” The acquisition was concluded in August of that year when the group, banked by Gentil, bought a brokerage called Garantia from speculators for US$ 800,000.
“It was the most ridiculous name in the world and it seemed a bit crooked,” joked Rogério Castro Maia. Maia, from Rio, switched from running an NGO called Ação Comunitária do Brasil in 1981 to the commercial area of the financial institution Lemann had created.
But Lemann and Ramos da Silva had learned their lesson from the Libra experience and negotiated with Gentil until they managed to get a 51% stake split equally between them. Gentil kept 39% and Arinos held the remaining 10%. Soon after the formation of this initial quartet, Gentil would sell a small part of his stake to Fernandes and Hercias Lutterbach who had been among the former owners of the brokerage and still wanted to remain in the business.
DREAM BIG: How the Brazilian Trio behind 3G Capital - Jorge Paulo Lemann, Marcel Telles and Beto Sicupira - acquired Anheuser-Busch, Burger King and Heinz Page 4
