QUARTERLY REPORT2nd QUARTER 2017 IP-Participaccedilotildees
Googlersquos data center in The Dalles Oregon
This document is published exclusively for the purpose of
providing information and conferring transparency to the
management carried out by IP Capital Partners is not the
Offering Memorandums of the IP Global Fund Ltd and IP Fund
SPC (ldquoFundsrdquo) and is not to be considered as an offer for the
sale of Shares of the Funds or of any other security The Funds
are prohibited from making any invitation to the public in The
Cayman Islands to subscribe for any of their Shares Shares
may be subscribed for by exempted or ordinary non-resident
companies or other exempted or non-resident entities
established in The Cayman Islands Shares of the Funds may not
be offered or sold within the United States or to any US Person
The Funds may not be sold redeemed or transferred in Brazil
The offer and sale of Shares of the Funds in certain jurisdictions
may be restricted by law Before subscribing for the Shares each
prospective investor should (i) carefully read and retain the
Offering Memorandums of the Funds and the relevant Annex
in respect of the Class of Shares (ii) consult with hisherits own
counsel and advisors as to all legal tax regulatory financial
and related matters concerning an investment in the Funds
Past performance does not guarantee future results IP Capital
Partners takes no responsibility for the accidental publication of
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on this material Access to this document or use of the services
or information provided herein is prohibited by any person or
entity in any jurisdiction or country where such distribution or
use would be contrary to local law rule or regulation
indEx
IP-Participaccedilotildees 04
Miscellaneous 16
Performance 19IP-Participaccedilotildees Class 20
4
Quarterly Report | Second Quarter 2017
Investors were excited about the Brazilian market With
greater rationality and reforms moving forward the
economy was stabilizing inflation and interest rates
were in free fall and the local index and exchange
rates kept rising Some were convinced that the realrsquos
appreciation against the dollar still had a long way to
go It seemed too good to be true
Profound reforms about to pass with no last-
minute dropouts among ldquoalliedrdquo parties from the
governmentrsquos base Would there be no deadlocks
for endless questioning in the judiciary branch
With several categories certainly upset about losing
privileges would there be no backlash from public
interest groups In other words would the ldquosystemrdquo
really accept these important changes because of
the basic arithmetic and public accountsrsquo logic that
underpins them ndash without any of the mayhem we
have grown accustomed to expect
As skeptical Brazilians while obviously hoping for
the best we were prepared for the worst Based on
historical standards the recent entanglement wasnrsquot
exactly a surprise - just another sad chapter in our
history brought upon by the materialization of widely
known risks
With the local market upheaval we were able to
deploy some of the fundsrsquo cash We slightly increased
our investments in ItauacuteItauacutesa and B3 (result of
the merger between BMampFBovespa and CETIP) In
addition the fundsrsquo foreign currency exposure ndash
which we had increased in favorable moments during
the first months of the year ndash was partially reduced as
the dollar appreciated against the real
Another important change in the first half of 2017
ndash between February and March ndash was the increase
of our stake in Alphabet (the holding company that
controls Google) which we will describe in greater
detail in this report
OutlOOk
The low volatility in the US stock market largely
influenced by still low interest rates and abundant
global liquidity should not be mistaken for low risk
After the appreciation of recent years it is only natural
that the US market should be more vulnerable to
shocks and price corrections
The same liquidity that reduces volatility in the
developed world also attracts funds to emerging
markets cushions shocks like the ones Brazil has
experienced in recent years and helps companies
maintain higher-than-usual leverage among other
indirect consequences At some point this tide will
turn with important consequences for many markets
Having said this it is also true that sitting out on the
truly exceptional businesses tends to cost dearly
What kind of crisis would it take for a conservative
investor to ldquoreach for a bucketrdquo A 25 drawdown
in the SampP500 Maybe 30 Well around two years
ago Alphabetrsquos shares traded at levels around 30
iP-PARTiCiPACcedilOtildeES
5
IP-Participaccedilotildees
lower than today Berkshire Hathaway was 17 below
current levels while Amazon Thermo Fisher and
Danaher were 55 25 and 18 lower respectively
In all these cases the increase in the value of these
companies was such that nowadays at prices of only
two years ago their shares would be trading at very
attractive valuations ndash even more so in a low interest
rate world To mention just one example which we
will discuss in further detail below Alphabet at prices
of two years ago would be trading at only 13x its 2016
earnings1 In practice we would see a drawdown of
this magnitude as a tremendous buying opportunity
rather than a risk of permanent loss Not investing in
such special companies for fear of a price correction is
usually a recipe for regret
Our goal therefore was and continues to be to obtain
superior returns over time searching for a balance
between attractive and conservative investments and
cash available to be deployed at times of pessimism
and crisis - but always making sure that we are not
excessively conservative which would prevent us from
participating in the growth of remarkable companies
AlphAbet2
ldquoOur mission is to organize the worldrsquos information and
make it universally accessible and useful We believe that
the most effective and ultimately the most profitable
way to accomplish our mission is to put the needs of our
users firstrdquo ndash Alphabetrsquos S-1 form
ldquoOur value proposition to marketers of all sizes is
simple mdash Google can help you show the right ads to
the right people at the right momentrdquo ndash Sundar Pichai
Googlersquos CEO
One of our first investments abroad after the creation
of the BDR3 market in 2012 was Google (currently a
subsidiary of Alphabet) The shares appreciated quickly
and we exited the investment at the end of 2013 We
watched from the sidelines for around two and a half
years in which the company continued to grow rapidly
In mid-2016 seeing that the shares had not accompanied
the colossal evolution of the business we began a new
investment which we increased at the beginning of
2017 We currently hold a mid-sized position
Advertising in the Internet age
Approximately 90 of Googlersquos revenue comes from
advertising The company is a pioneer in a secular
trend digital ads in which consumersrsquo attitudes can
be measured
With the mass adoption of the Internet since the
90s the advertising world has gone through its own
revolution Until then advertising was essentially
an exercise of creativity Professionals came up with
high-impact concepts to promote a product created
an ad and distributed it repeatedly on the radio
newspapers and TV Communication channels fought
over who would reach the greatest number of people
1 Multiple adjusted as mentioned further in the report Considers dilution from executive compensation2 In 2015 Google was restructured resulting in the creation of Alphabet the holding company that currently controls it The Google subsidiary comprises the companyrsquos main services such as Search Maps Android Play YouTube Cloud etc while others have been created to pursue longer maturity goals connected for instance to the transport health and robotics markets When disclosing its results Alphabet groups these other initiatives under the name Other Bets Currently Larry Page is CEO of Alphabet Sundar Pichai is CEO of Google and Ruth Porat is CFO of both companies In this report we are focusing our analysis on the business of the Google subsidiary which accounts for 99 of revenue and 100 of profits3 Brazilian Depositary Receipts are certificates representing shares of foreign companies traded in Brazil
6
Quarterly Report | Second Quarter 2017
who received exactly the same message regardless
of their particular interests The campaignrsquos impacts
were measured indirectly and imprecisely usually
based on consumer opinion surveys
On the Internet after a successful period for portals
such as AOL and Yahoo it became clear that the
first model to truly win would be Googlersquos In 2000
the company created AdWords a system in which
advertisers pay to show small ads to users of its search
service The factors that determine where and when an
ad appears are i) the relevance of the ad to the userrsquos
search ii) the amount the advertiser is willing to pay
(in an auction system) iii) the quality of the ad and iv)
the quality of the page to which the ad directs the user
The first point ndash the relevance to the search - in
itself already makes the AdWords system completely
different from traditional media The ad only appears
when the user expresses explicit interest in a particular
subject Another fundamental difference is that the
advertiser only pays when the ad is clicked which
reinforces the connection between the advertiserrsquos
investment and the userrsquos behavior With the evolution
of systems that track usersrsquo online attitudes it became
possible to monitor them until the time of purchase
As a result advertisers have definitive proof that their
investment has paid off
This basic concept is at the heart of the money-making
machine Google has turned into By delivering the
right ad to the right person at the right time every
dollar spent on AdWords produces easily measurable
results The success of AdWords coupled with Googlersquos
leadership in usability and technology solidified
the search enginersquos dominance outstripping rivals
like AltaVista to become the biggest gateway to the
Internet for billions of people
With the ease of assessing user attitudes advertisers
have increasingly adopted ROI measures to determine
the size of their advertising budgets As returns were -
and still are - high Google has captured an explosion
in online ad spending The result can be seen in the
graph below
iP-PARTiCiPACcedilOtildeES
Source Alphabet
GrOss revenue - AlphAbeT in us$ billiOn
ADVERTISING GOOGLE OTHERS OTHER BETS
20042010
20062012
20082014
20052011
20072013
20092015
2016
100
60
90
50
80
40
70
30
1020
032
293
61
379
106
460
166
555
218
660
237
750
903
Over time creative talent has given room to statistics
in advertising agencies Campaigns are designed in
an increasingly scientific manner with thousands of
variations evaluated iteratively
Large advertising conglomerates such as WPP have
updated their business model giving emphasis to
digital agencies some of which are solely dedicated
to the search service
7
IP-Participaccedilotildees
In the last 17 years both AdWords and Google Search have evolved a lot but the core concept has remained the
same In this period Google has absorbed an increasing share of advertising revenues in the world especially
superseding print media The graph below designed by venture capital firm Andreessen Horowitz clearly shows
what happened
Believing in Googlersquos revenue growth means to a
large extent a bet on the continuity of this share gain
There are essentially two elements required to make
this possible
bull The ability to attract users with interesting and
useful services
bull The ability to offer productive tools to advertisers
ndash connecting them to the right users at the
right times ndash in order to capture more of their
advertising budgets
We will analyze these two points below
the ability to attract users
We have reasons to believe that Google has a good
chance to continue attracting the attention of users
with differentiated services ndash beginning with the
critical mass that has already been reached Google
currently has seven assets with more than 1 billion
monthly active users Search Android Maps Chrome
YouTube Play and Gmail Android has over 2 billion
users and YouTube has more than 15 billion users
Besides these services the company has Drive with
800 million users and Photos with 500 million users
growing rapidly
8
Quarterly Report | Second Quarter 2017
iP-PARTiCiPACcedilOtildeES
4 For example Googlersquos work to index the web is the same as Bingrsquos but it can dilute those costs between far more users5 Machine learning is the science of giving computers the ability to learn without being explicitly programmed
The scale the company has achieved gives it
important advantages not only in terms of costs4
but also in terms of its ability to capture data about
users introduce new relevant products and take
advantage of network effects with participants such
as advertisers app creators (Play Store) and content
creators (YouTube in particular)
Googlersquos scale and engineering expertise have so
far protected it from frontal attacks on Search and
its adjacencies The company has also made highly
successful strategic acquisitions such as YouTube
DoubleClick and Android
Android which originally served to protect the
company from Microsoftrsquos possible dominance on the
web via smartphones was quickly and successfully
redirected to compete with the iPhone Today it has
over 80 of the smartphone market and serves as a
Trojan Horse for Google services Even on the iPhone
where Apple applications such as e-mail and maps
come pre-installed Google services are among the
most widely used
The ability to ride the adoption of smartphones has
been one of Googlersquos trump cards While Apple has
been the one to best turn the purchase of these
devices into profit Google is well positioned to
capture revenue from services related to their use
Smartphones have brutally increased the average
daily time people are connected to the Internet
Even with the rise of apps and social networks this
wave has also strongly boosted Googlersquos services In
the US market estimates of search-focused digital
agencies show that spending on AdWords ads for
smartphones has grown at rates above 50 percent in
recent years As the default search service on both
iOS and Android browsers Google Search has gained
even more market share (versus Bing and Yahoo) with
the adoption of smartphones
Time spenT per ADulT user per DAy wiTh DiGiTAl meDiA in The usA
ho
urs
per
day
Source eMarketer
MOBILE DESkTOPLAPTOP OTHER CONNECTED DEVICES
20102012
20082014
20112013
20092015
2016
6
2
5
1
4
3
0
22 23 24 26 25 23 22 22 22
03 0304
0816 23 26 28 31
The increasing processing power improved wireless
connections and larger screen sizes are also factors
that will enable increasingly useful and valuable
services for Google users Add to that the multiplicity
of existing sensors in smartphones and it becomes
easier to know the userrsquos context in order to provide
the most appropriate information or advertisement at
any given time
In order to seize these opportunities Google
invests heavily to remain at the forefront of artificial
intelligence techniques such as machine learning5
It appears to have been successful both in its own
9
IP-Participaccedilotildees
Source Google IO (517)
initiatives and in acquisitions and partnerships with
leaders in the field (such as Fei-Fei Li from Stanford)
One curious and impressive example was the victory
in the game of Go against champions Lee Sedol6 and
ke Jie7 In the practical field the combination of these
techniques with the infinite amount of data collected
by Google is beginning to emerge as a strong
competitive advantage
Results have appeared on various fronts such as voice
recognition accuracy facial recognition and image
contexts in the Photos app automated response
suggestions for e-mail and prediction of user interest
in various services Google has announced that it will
soon be possible to point your smartphone camera at
an object or establishment and receive information
about it
Search and Maps services have been great labs for
these techniques but YouTube may currently be the
most surprising beneficiary More than 400 hours of
video are uploaded to YouTube every minute Service
quality relies heavily on the ability to sort the wheat
from the chaff and recommend what really interests
each user ndash something absolutely impossible to do
with humans on the necessary scale Despite a few
stumbles here and there8 YouTube has learned and
reacted quickly At the beginning of 2016 YouTube
usersrsquo watch time grew at a rate of 60 per year
according to company data In December 2016 it
exceeded the mark of 1 billion hours per day 10 times
more than in 2012 Meanwhile the US TV industry
clocked in at 125 billion hours per day Netflix9 at
116 million hours and Facebook10 videos at
100 million hours
Digital video on demand is gaining ground for several
reasons The first of which is mobility YouTube users
watch on average one hour per day on their cell
phones11 without having to negotiate the use of the
home TV with anybody With improved screens and
connections this type of use only tends to grow Since
it is on demand users can take advantage of small
opportunities to watch throughout the day such as
on the way to work ndash or even in the bathroom As the
library is virtually endless (over 200 million hours of
video on YouTube) the content is extremely diverse
allowing users to search for the niche that most
appeals to them something impossible to accomplish
on TV regardless of the number of cable channels
available Finally since it is digital new content
standards such as 1080p 4k 360deg VR and so on are
6 httpswwwtheatlanticcomtechnologyarchive201603the-invisible-opponent4756117 httpswwwnytimescom20170525technologydaily-report-alphago-wins-againhtml8 httpsdigitalcontentnextorgblog20170331timeline-youtube-brand-safety-debacle9 httpswwwinccomemily-canalyoutube-gets-1-billion-of-videos-watched-a-dayhtml10 httpstechcrunchcom20160127facebook-grows11 httpsyoutubegoogleblogcom201706updates-from-vidcon-more-users-morehtml
10
Quarterly Report | Second Quarter 2017
much easier to adopt ndash while satellite and cable TV
infrastructure is much less flexible All this is wreaking
havoc in the US TV industry with a greater impact on
younger cohorts
The critical mass it has already reached the ability to
capture growth in smartphone usage its leadership
in both data and AI and its privileged position in
on-demand digital video with YouTube are the main
reasons that lead us to believe that Google will
continue to attract increasing attention of users
We will now focus on Googlersquos value proposition
for advertisers
the ability to offer productive tools to advertisers
The Search business (AdWords) still represents
Googlersquos biggest source of revenue The company does
not disclose exact figures but we estimate that this
represents something around 60 of gross revenue
and more than 80 of operating profit Given the
penetration already reached - especially in developed
countries - it does not seem reasonable to suppose
wATch Time TrenDs per week fOr TrADiTiOnAl Tv in The usAby AGe GrOup in The lAsT five yeArs
12-17 18-24 25-34 35-49 50-64 65+
-375
-265
-98
1684
-390
Source Nielsen
that most advertisers are failing to take advantage of
available ROI in their campaigns Thus future revenue
growth will mainly depend on i) the increase in time
spent using Google services (discussed in the previous
section) ii) adjustments to the predominance of ads
vs organic content in Search results and iii) Googlersquos
ability to improve its advertising targeting tools
Google constantly adjusts the way ads appear on
its search results page with some pages recently
creating room for ads by showing fewer unpaid
(organic) results The addition of a third and fourth
paid ads in search results on smartphones in 2015 and
2016 is an example of this trend Another example
was the increased space dedicated to Product Listing
Ads (PLAs) We have also noticed that it is becoming
increasingly harder to distinguish ads from organic
results For instance Google no longer highlights
ads on the results page in yellow Because of this the
company is sometimes accused of squeezing more
dollars from the traffic it already has effectively
forcing companies to pay to appear in search results
The company defends itself by arguing that it always
prioritizes the user experience and constantly tests
the side effects of this kind of change Its algorithms
have always prioritized higher quality ads in the
rankings so many of these ads turn out to be more
useful to users than organic results However it
still raises a yellow flag If Googlersquos growth relies
only on its current traffic it will be squeezed dry at
some point
iP-PARTiCiPACcedilOtildeES
11
Fortunately we see other more structural reasons for
Googlersquos revenue growth and returns to advertisers
As mentioned earlier smartphone ads account for
the lionrsquos share of growth in spending on AdWords
However the average cost per click on smartphone ads
is still roughly half that of desktops As ads are priced
at auctions their final price is associated with the sales
volume they can generate In fact this conversion
of clicks into sales is much lower on smartphones
than on desktops partly because it is harder to fill
out forms with address and credit card data when
making purchases on mobile devices Technologies
such as Android Pay and Apple Pay which facilitate
the customer checkout process should help close this
gap promoting sales boosting ROI making these ads
more valuable and fueling Googlersquos growth
Another way to improve advertiser ROI is to provide
more granular ad targeting Last year Google finally
divided AdWords campaigns into smartphones
tablets and desktops enabling it to determine the
words and prices for each campaign in a more refined
and assertive manner which has also increased
advertiserrsquos returns and consequently their spending
power The feedback from digital agencies is that
other steps in this direction would have the same
effect such as the ability to target different prices for
ads that will appear on different smartphone brands
in different locations or even the possibility of taking
greater advantage of the data that Google already has
on each userrsquos profile
There is also the opportunity to capture more
revenue by connecting the physical world to the
online world with the help of smartphones We have
already mentioned what Google is doing with maps
and smartphone cameras Today a third of Google
searches are made for local interests12 such as shops
and restaurants While the Amazon boogeyman
terrorizes retail Google is seen as an essential ally for
those who want to survive ndash offering branding and
customer capture and conversion services Google
will soon be able to measure the impact not only on
traffic but also on sales in physical stores after users
interact with online ads13 As we have seen in the past
measuring returns is an important step in convincing
advertisers to spend As around 90 of global retail is
not yet on the Internet it becomes clear how valuable
this initiative can be
When the campaign involves banners and videos that
have not immediately generated a purchase but have
influenced the customerrsquos final decision correctly
attributing their impact is crucial to knowing how
much to pay for them One of the common mistakes
is to attribute all the merit to the last click before
the purchase which is why Google created another
recently announced machine learning initiative
Google Attribution which estimates the role of
interactions with each ad in the customer convincing
trajectory leading to the purchase This improves
advertisersrsquo conversion ability (and therefore ROI)
and ads that appeared before the customerrsquos last
12 httpsearchenginelandcomsaying-third-mobile-searches-local-google-brings-new-ads-maps-25027813 httpsadwordsgoogleblogcom201705powering-ads-and-analytics-innovationshtml
IP-Participaccedilotildees
12
Quarterly Report | Second Quarter 2017
14 httpswwwmagnaglobalcomwp-contentuploads201612MAGNA-December-Global-Forecast-Update-Press-Releasepdf
click become more valuable (generating revenue
for Google) This technique will also be useful for
YouTube where ads tend to promote brands rather
than immediately capture purchases as is the case
in AdWords
YouTubersquos success is allowing Google to compete for
the global TV advertising budget of around 186 billion
dollars14 Several steps have been taken to speed up
this process At the end of 2013 Google allowed
Nielsen and comScore to independently measure
user interactions with YouTube ads increasing the
confidence of TV advertisers to invest in the platform
In 2014 it created Google Preferred a selection of
YouTubersquos premium content (1-5) in 13 categories
including beauty food and auto These high-profile
videos were chosen to receive ads from the most
conservative brands (which are used to the world of
TV) In 2016 Magna responsible for buying advertising
space for brands such as Johnson amp Johnson Coca-
Cola and Fiat Chrysler promised to transfer at least
US$ 250 million of its TV spending to Google Preferred
between October 2016 and December 2017 This was
partially motivated by high TV time prices There are
several experiments on ad formats that would be
impossible without the interactivity of the Internet
YouTube has been gradually breaking the inertia of
the relationship between agencies and TV networks
to show that its ads offer good returns As a result we
expect advertising spending on YouTube to grow at a
fast rate possibly outpacing growth in the platformrsquos
watch time
At some point Googlersquos revenue growth will saturate
and keep pace with the growth of the global advertising
market The perception that the digitization of
advertising still has a long runway ahead and that
Google remains one of the leaders in this process
makes us believe that this moment is still far enough to
justify our investment Mobile revenue growth plenty
of opportunity to refine ad targeting the growing
connection between the online and physical worlds
and the evolution of YouTubersquos monetization initiatives
are the main reasons why we believe that Google will
still have a lot to offer to its advertisers and therefore
has ample room for growth
As with every investment there are some problems
Thorny issues related to Alphabet and Google lie on
our radar and demand attention These are all reasons
for the fundrsquos fairly controlled exposure to a business
we consider to be truly exceptional We will briefly go
over some of them
bull Our eternal ignorance Google operates highly
dynamic businesses Although its skills and
competitive advantages may protect it from
most frontal attacks other indirect attacks of a
competitive regulatory technological or even
criminal nature are always possible Some of
them can cause serious damage We are not able
iP-PARTiCiPACcedilOtildeES
13
to judge or even anticipate all these risks and
therefore we adjust the position to our ignorance
bull the price Alphabet shares returned 26 per year
over the last five years Simple math shows that its
price to earnings ratio went from 22x in 2011 to 28x
at the close of 2016 (GAAP criteria unadjusted)
In this period the company has accumulated
US$ 42 billion in net cash and began providing
transparency to its investments in Other Bets its
division for long maturity projects including the
self-driving car We prefer to look at the value of
the business by excluding cash from the market
value and the cost of these investments from
net income (as if they were being capitalized
instead of being recognized as an expense) At
current prices this would indicate an adjusted PE
multiple of 18x for 2018 It means some juggling
but we believe this is a reasonable way to value
the business After the gains recorded since
we resumed purchasing the stock in 2016 we
consider the current price reasonable although
obviously less attractive than a few months ago
We do not expect fast appreciation but we do
expect the continued growth of the business to
be gradually recognized
bull the dilution Google is one of the companies
that most heavily compensates its employees
with equity instruments especially restricted
stock The dilution ranges between 15 and
20 per year which bothers us We take this into
account in our calculations but we would prefer if
the company used this instrument less frequently
while also being more aggressive in buybacks We
welcome CFO Ruth Poratrsquos initiatives to force the
adoption of GAAP criteria (which at least attempt
to account for these costs) in internal discussions
and budgets of Googlersquos team leaders We are
also pleased with the fact that the company has
stopped discussing non-GAAP data with the
market and is now adopting GAAP Paraphrasing
Charlie Munger the granting of restricted stock
represents both spending and dilution for
us shareholders
bull the super-voting shares Larry Page and Sergey
Brin protect their controlling power with no less
than three classes of shares There were two
classes in the IPO one with ten votes per share
(for them) and another with one vote per share
(for everyone else) The third class was created in
2014 with no voting rights as the dilution caused
by restricted stock and share-based acquisitions
had started bothering them Both have sold shares
and are increasingly less active in the companyrsquos
day-to-day life leaving the biggest operational
responsibilities to Sundar Pichai Despite being a
genius Sundar still has to deal with the fact that he
is neither a founder nor a controlling shareholder
something history shows to be a handicap in
difficult decisions We prefer Amazonrsquos model
because Bezos has the same class of shares as we
IP-Participaccedilotildees
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
This document is published exclusively for the purpose of
providing information and conferring transparency to the
management carried out by IP Capital Partners is not the
Offering Memorandums of the IP Global Fund Ltd and IP Fund
SPC (ldquoFundsrdquo) and is not to be considered as an offer for the
sale of Shares of the Funds or of any other security The Funds
are prohibited from making any invitation to the public in The
Cayman Islands to subscribe for any of their Shares Shares
may be subscribed for by exempted or ordinary non-resident
companies or other exempted or non-resident entities
established in The Cayman Islands Shares of the Funds may not
be offered or sold within the United States or to any US Person
The Funds may not be sold redeemed or transferred in Brazil
The offer and sale of Shares of the Funds in certain jurisdictions
may be restricted by law Before subscribing for the Shares each
prospective investor should (i) carefully read and retain the
Offering Memorandums of the Funds and the relevant Annex
in respect of the Class of Shares (ii) consult with hisherits own
counsel and advisors as to all legal tax regulatory financial
and related matters concerning an investment in the Funds
Past performance does not guarantee future results IP Capital
Partners takes no responsibility for the accidental publication of
incorrect information nor for investment decisions taken based
on this material Access to this document or use of the services
or information provided herein is prohibited by any person or
entity in any jurisdiction or country where such distribution or
use would be contrary to local law rule or regulation
indEx
IP-Participaccedilotildees 04
Miscellaneous 16
Performance 19IP-Participaccedilotildees Class 20
4
Quarterly Report | Second Quarter 2017
Investors were excited about the Brazilian market With
greater rationality and reforms moving forward the
economy was stabilizing inflation and interest rates
were in free fall and the local index and exchange
rates kept rising Some were convinced that the realrsquos
appreciation against the dollar still had a long way to
go It seemed too good to be true
Profound reforms about to pass with no last-
minute dropouts among ldquoalliedrdquo parties from the
governmentrsquos base Would there be no deadlocks
for endless questioning in the judiciary branch
With several categories certainly upset about losing
privileges would there be no backlash from public
interest groups In other words would the ldquosystemrdquo
really accept these important changes because of
the basic arithmetic and public accountsrsquo logic that
underpins them ndash without any of the mayhem we
have grown accustomed to expect
As skeptical Brazilians while obviously hoping for
the best we were prepared for the worst Based on
historical standards the recent entanglement wasnrsquot
exactly a surprise - just another sad chapter in our
history brought upon by the materialization of widely
known risks
With the local market upheaval we were able to
deploy some of the fundsrsquo cash We slightly increased
our investments in ItauacuteItauacutesa and B3 (result of
the merger between BMampFBovespa and CETIP) In
addition the fundsrsquo foreign currency exposure ndash
which we had increased in favorable moments during
the first months of the year ndash was partially reduced as
the dollar appreciated against the real
Another important change in the first half of 2017
ndash between February and March ndash was the increase
of our stake in Alphabet (the holding company that
controls Google) which we will describe in greater
detail in this report
OutlOOk
The low volatility in the US stock market largely
influenced by still low interest rates and abundant
global liquidity should not be mistaken for low risk
After the appreciation of recent years it is only natural
that the US market should be more vulnerable to
shocks and price corrections
The same liquidity that reduces volatility in the
developed world also attracts funds to emerging
markets cushions shocks like the ones Brazil has
experienced in recent years and helps companies
maintain higher-than-usual leverage among other
indirect consequences At some point this tide will
turn with important consequences for many markets
Having said this it is also true that sitting out on the
truly exceptional businesses tends to cost dearly
What kind of crisis would it take for a conservative
investor to ldquoreach for a bucketrdquo A 25 drawdown
in the SampP500 Maybe 30 Well around two years
ago Alphabetrsquos shares traded at levels around 30
iP-PARTiCiPACcedilOtildeES
5
IP-Participaccedilotildees
lower than today Berkshire Hathaway was 17 below
current levels while Amazon Thermo Fisher and
Danaher were 55 25 and 18 lower respectively
In all these cases the increase in the value of these
companies was such that nowadays at prices of only
two years ago their shares would be trading at very
attractive valuations ndash even more so in a low interest
rate world To mention just one example which we
will discuss in further detail below Alphabet at prices
of two years ago would be trading at only 13x its 2016
earnings1 In practice we would see a drawdown of
this magnitude as a tremendous buying opportunity
rather than a risk of permanent loss Not investing in
such special companies for fear of a price correction is
usually a recipe for regret
Our goal therefore was and continues to be to obtain
superior returns over time searching for a balance
between attractive and conservative investments and
cash available to be deployed at times of pessimism
and crisis - but always making sure that we are not
excessively conservative which would prevent us from
participating in the growth of remarkable companies
AlphAbet2
ldquoOur mission is to organize the worldrsquos information and
make it universally accessible and useful We believe that
the most effective and ultimately the most profitable
way to accomplish our mission is to put the needs of our
users firstrdquo ndash Alphabetrsquos S-1 form
ldquoOur value proposition to marketers of all sizes is
simple mdash Google can help you show the right ads to
the right people at the right momentrdquo ndash Sundar Pichai
Googlersquos CEO
One of our first investments abroad after the creation
of the BDR3 market in 2012 was Google (currently a
subsidiary of Alphabet) The shares appreciated quickly
and we exited the investment at the end of 2013 We
watched from the sidelines for around two and a half
years in which the company continued to grow rapidly
In mid-2016 seeing that the shares had not accompanied
the colossal evolution of the business we began a new
investment which we increased at the beginning of
2017 We currently hold a mid-sized position
Advertising in the Internet age
Approximately 90 of Googlersquos revenue comes from
advertising The company is a pioneer in a secular
trend digital ads in which consumersrsquo attitudes can
be measured
With the mass adoption of the Internet since the
90s the advertising world has gone through its own
revolution Until then advertising was essentially
an exercise of creativity Professionals came up with
high-impact concepts to promote a product created
an ad and distributed it repeatedly on the radio
newspapers and TV Communication channels fought
over who would reach the greatest number of people
1 Multiple adjusted as mentioned further in the report Considers dilution from executive compensation2 In 2015 Google was restructured resulting in the creation of Alphabet the holding company that currently controls it The Google subsidiary comprises the companyrsquos main services such as Search Maps Android Play YouTube Cloud etc while others have been created to pursue longer maturity goals connected for instance to the transport health and robotics markets When disclosing its results Alphabet groups these other initiatives under the name Other Bets Currently Larry Page is CEO of Alphabet Sundar Pichai is CEO of Google and Ruth Porat is CFO of both companies In this report we are focusing our analysis on the business of the Google subsidiary which accounts for 99 of revenue and 100 of profits3 Brazilian Depositary Receipts are certificates representing shares of foreign companies traded in Brazil
6
Quarterly Report | Second Quarter 2017
who received exactly the same message regardless
of their particular interests The campaignrsquos impacts
were measured indirectly and imprecisely usually
based on consumer opinion surveys
On the Internet after a successful period for portals
such as AOL and Yahoo it became clear that the
first model to truly win would be Googlersquos In 2000
the company created AdWords a system in which
advertisers pay to show small ads to users of its search
service The factors that determine where and when an
ad appears are i) the relevance of the ad to the userrsquos
search ii) the amount the advertiser is willing to pay
(in an auction system) iii) the quality of the ad and iv)
the quality of the page to which the ad directs the user
The first point ndash the relevance to the search - in
itself already makes the AdWords system completely
different from traditional media The ad only appears
when the user expresses explicit interest in a particular
subject Another fundamental difference is that the
advertiser only pays when the ad is clicked which
reinforces the connection between the advertiserrsquos
investment and the userrsquos behavior With the evolution
of systems that track usersrsquo online attitudes it became
possible to monitor them until the time of purchase
As a result advertisers have definitive proof that their
investment has paid off
This basic concept is at the heart of the money-making
machine Google has turned into By delivering the
right ad to the right person at the right time every
dollar spent on AdWords produces easily measurable
results The success of AdWords coupled with Googlersquos
leadership in usability and technology solidified
the search enginersquos dominance outstripping rivals
like AltaVista to become the biggest gateway to the
Internet for billions of people
With the ease of assessing user attitudes advertisers
have increasingly adopted ROI measures to determine
the size of their advertising budgets As returns were -
and still are - high Google has captured an explosion
in online ad spending The result can be seen in the
graph below
iP-PARTiCiPACcedilOtildeES
Source Alphabet
GrOss revenue - AlphAbeT in us$ billiOn
ADVERTISING GOOGLE OTHERS OTHER BETS
20042010
20062012
20082014
20052011
20072013
20092015
2016
100
60
90
50
80
40
70
30
1020
032
293
61
379
106
460
166
555
218
660
237
750
903
Over time creative talent has given room to statistics
in advertising agencies Campaigns are designed in
an increasingly scientific manner with thousands of
variations evaluated iteratively
Large advertising conglomerates such as WPP have
updated their business model giving emphasis to
digital agencies some of which are solely dedicated
to the search service
7
IP-Participaccedilotildees
In the last 17 years both AdWords and Google Search have evolved a lot but the core concept has remained the
same In this period Google has absorbed an increasing share of advertising revenues in the world especially
superseding print media The graph below designed by venture capital firm Andreessen Horowitz clearly shows
what happened
Believing in Googlersquos revenue growth means to a
large extent a bet on the continuity of this share gain
There are essentially two elements required to make
this possible
bull The ability to attract users with interesting and
useful services
bull The ability to offer productive tools to advertisers
ndash connecting them to the right users at the
right times ndash in order to capture more of their
advertising budgets
We will analyze these two points below
the ability to attract users
We have reasons to believe that Google has a good
chance to continue attracting the attention of users
with differentiated services ndash beginning with the
critical mass that has already been reached Google
currently has seven assets with more than 1 billion
monthly active users Search Android Maps Chrome
YouTube Play and Gmail Android has over 2 billion
users and YouTube has more than 15 billion users
Besides these services the company has Drive with
800 million users and Photos with 500 million users
growing rapidly
8
Quarterly Report | Second Quarter 2017
iP-PARTiCiPACcedilOtildeES
4 For example Googlersquos work to index the web is the same as Bingrsquos but it can dilute those costs between far more users5 Machine learning is the science of giving computers the ability to learn without being explicitly programmed
The scale the company has achieved gives it
important advantages not only in terms of costs4
but also in terms of its ability to capture data about
users introduce new relevant products and take
advantage of network effects with participants such
as advertisers app creators (Play Store) and content
creators (YouTube in particular)
Googlersquos scale and engineering expertise have so
far protected it from frontal attacks on Search and
its adjacencies The company has also made highly
successful strategic acquisitions such as YouTube
DoubleClick and Android
Android which originally served to protect the
company from Microsoftrsquos possible dominance on the
web via smartphones was quickly and successfully
redirected to compete with the iPhone Today it has
over 80 of the smartphone market and serves as a
Trojan Horse for Google services Even on the iPhone
where Apple applications such as e-mail and maps
come pre-installed Google services are among the
most widely used
The ability to ride the adoption of smartphones has
been one of Googlersquos trump cards While Apple has
been the one to best turn the purchase of these
devices into profit Google is well positioned to
capture revenue from services related to their use
Smartphones have brutally increased the average
daily time people are connected to the Internet
Even with the rise of apps and social networks this
wave has also strongly boosted Googlersquos services In
the US market estimates of search-focused digital
agencies show that spending on AdWords ads for
smartphones has grown at rates above 50 percent in
recent years As the default search service on both
iOS and Android browsers Google Search has gained
even more market share (versus Bing and Yahoo) with
the adoption of smartphones
Time spenT per ADulT user per DAy wiTh DiGiTAl meDiA in The usA
ho
urs
per
day
Source eMarketer
MOBILE DESkTOPLAPTOP OTHER CONNECTED DEVICES
20102012
20082014
20112013
20092015
2016
6
2
5
1
4
3
0
22 23 24 26 25 23 22 22 22
03 0304
0816 23 26 28 31
The increasing processing power improved wireless
connections and larger screen sizes are also factors
that will enable increasingly useful and valuable
services for Google users Add to that the multiplicity
of existing sensors in smartphones and it becomes
easier to know the userrsquos context in order to provide
the most appropriate information or advertisement at
any given time
In order to seize these opportunities Google
invests heavily to remain at the forefront of artificial
intelligence techniques such as machine learning5
It appears to have been successful both in its own
9
IP-Participaccedilotildees
Source Google IO (517)
initiatives and in acquisitions and partnerships with
leaders in the field (such as Fei-Fei Li from Stanford)
One curious and impressive example was the victory
in the game of Go against champions Lee Sedol6 and
ke Jie7 In the practical field the combination of these
techniques with the infinite amount of data collected
by Google is beginning to emerge as a strong
competitive advantage
Results have appeared on various fronts such as voice
recognition accuracy facial recognition and image
contexts in the Photos app automated response
suggestions for e-mail and prediction of user interest
in various services Google has announced that it will
soon be possible to point your smartphone camera at
an object or establishment and receive information
about it
Search and Maps services have been great labs for
these techniques but YouTube may currently be the
most surprising beneficiary More than 400 hours of
video are uploaded to YouTube every minute Service
quality relies heavily on the ability to sort the wheat
from the chaff and recommend what really interests
each user ndash something absolutely impossible to do
with humans on the necessary scale Despite a few
stumbles here and there8 YouTube has learned and
reacted quickly At the beginning of 2016 YouTube
usersrsquo watch time grew at a rate of 60 per year
according to company data In December 2016 it
exceeded the mark of 1 billion hours per day 10 times
more than in 2012 Meanwhile the US TV industry
clocked in at 125 billion hours per day Netflix9 at
116 million hours and Facebook10 videos at
100 million hours
Digital video on demand is gaining ground for several
reasons The first of which is mobility YouTube users
watch on average one hour per day on their cell
phones11 without having to negotiate the use of the
home TV with anybody With improved screens and
connections this type of use only tends to grow Since
it is on demand users can take advantage of small
opportunities to watch throughout the day such as
on the way to work ndash or even in the bathroom As the
library is virtually endless (over 200 million hours of
video on YouTube) the content is extremely diverse
allowing users to search for the niche that most
appeals to them something impossible to accomplish
on TV regardless of the number of cable channels
available Finally since it is digital new content
standards such as 1080p 4k 360deg VR and so on are
6 httpswwwtheatlanticcomtechnologyarchive201603the-invisible-opponent4756117 httpswwwnytimescom20170525technologydaily-report-alphago-wins-againhtml8 httpsdigitalcontentnextorgblog20170331timeline-youtube-brand-safety-debacle9 httpswwwinccomemily-canalyoutube-gets-1-billion-of-videos-watched-a-dayhtml10 httpstechcrunchcom20160127facebook-grows11 httpsyoutubegoogleblogcom201706updates-from-vidcon-more-users-morehtml
10
Quarterly Report | Second Quarter 2017
much easier to adopt ndash while satellite and cable TV
infrastructure is much less flexible All this is wreaking
havoc in the US TV industry with a greater impact on
younger cohorts
The critical mass it has already reached the ability to
capture growth in smartphone usage its leadership
in both data and AI and its privileged position in
on-demand digital video with YouTube are the main
reasons that lead us to believe that Google will
continue to attract increasing attention of users
We will now focus on Googlersquos value proposition
for advertisers
the ability to offer productive tools to advertisers
The Search business (AdWords) still represents
Googlersquos biggest source of revenue The company does
not disclose exact figures but we estimate that this
represents something around 60 of gross revenue
and more than 80 of operating profit Given the
penetration already reached - especially in developed
countries - it does not seem reasonable to suppose
wATch Time TrenDs per week fOr TrADiTiOnAl Tv in The usAby AGe GrOup in The lAsT five yeArs
12-17 18-24 25-34 35-49 50-64 65+
-375
-265
-98
1684
-390
Source Nielsen
that most advertisers are failing to take advantage of
available ROI in their campaigns Thus future revenue
growth will mainly depend on i) the increase in time
spent using Google services (discussed in the previous
section) ii) adjustments to the predominance of ads
vs organic content in Search results and iii) Googlersquos
ability to improve its advertising targeting tools
Google constantly adjusts the way ads appear on
its search results page with some pages recently
creating room for ads by showing fewer unpaid
(organic) results The addition of a third and fourth
paid ads in search results on smartphones in 2015 and
2016 is an example of this trend Another example
was the increased space dedicated to Product Listing
Ads (PLAs) We have also noticed that it is becoming
increasingly harder to distinguish ads from organic
results For instance Google no longer highlights
ads on the results page in yellow Because of this the
company is sometimes accused of squeezing more
dollars from the traffic it already has effectively
forcing companies to pay to appear in search results
The company defends itself by arguing that it always
prioritizes the user experience and constantly tests
the side effects of this kind of change Its algorithms
have always prioritized higher quality ads in the
rankings so many of these ads turn out to be more
useful to users than organic results However it
still raises a yellow flag If Googlersquos growth relies
only on its current traffic it will be squeezed dry at
some point
iP-PARTiCiPACcedilOtildeES
11
Fortunately we see other more structural reasons for
Googlersquos revenue growth and returns to advertisers
As mentioned earlier smartphone ads account for
the lionrsquos share of growth in spending on AdWords
However the average cost per click on smartphone ads
is still roughly half that of desktops As ads are priced
at auctions their final price is associated with the sales
volume they can generate In fact this conversion
of clicks into sales is much lower on smartphones
than on desktops partly because it is harder to fill
out forms with address and credit card data when
making purchases on mobile devices Technologies
such as Android Pay and Apple Pay which facilitate
the customer checkout process should help close this
gap promoting sales boosting ROI making these ads
more valuable and fueling Googlersquos growth
Another way to improve advertiser ROI is to provide
more granular ad targeting Last year Google finally
divided AdWords campaigns into smartphones
tablets and desktops enabling it to determine the
words and prices for each campaign in a more refined
and assertive manner which has also increased
advertiserrsquos returns and consequently their spending
power The feedback from digital agencies is that
other steps in this direction would have the same
effect such as the ability to target different prices for
ads that will appear on different smartphone brands
in different locations or even the possibility of taking
greater advantage of the data that Google already has
on each userrsquos profile
There is also the opportunity to capture more
revenue by connecting the physical world to the
online world with the help of smartphones We have
already mentioned what Google is doing with maps
and smartphone cameras Today a third of Google
searches are made for local interests12 such as shops
and restaurants While the Amazon boogeyman
terrorizes retail Google is seen as an essential ally for
those who want to survive ndash offering branding and
customer capture and conversion services Google
will soon be able to measure the impact not only on
traffic but also on sales in physical stores after users
interact with online ads13 As we have seen in the past
measuring returns is an important step in convincing
advertisers to spend As around 90 of global retail is
not yet on the Internet it becomes clear how valuable
this initiative can be
When the campaign involves banners and videos that
have not immediately generated a purchase but have
influenced the customerrsquos final decision correctly
attributing their impact is crucial to knowing how
much to pay for them One of the common mistakes
is to attribute all the merit to the last click before
the purchase which is why Google created another
recently announced machine learning initiative
Google Attribution which estimates the role of
interactions with each ad in the customer convincing
trajectory leading to the purchase This improves
advertisersrsquo conversion ability (and therefore ROI)
and ads that appeared before the customerrsquos last
12 httpsearchenginelandcomsaying-third-mobile-searches-local-google-brings-new-ads-maps-25027813 httpsadwordsgoogleblogcom201705powering-ads-and-analytics-innovationshtml
IP-Participaccedilotildees
12
Quarterly Report | Second Quarter 2017
14 httpswwwmagnaglobalcomwp-contentuploads201612MAGNA-December-Global-Forecast-Update-Press-Releasepdf
click become more valuable (generating revenue
for Google) This technique will also be useful for
YouTube where ads tend to promote brands rather
than immediately capture purchases as is the case
in AdWords
YouTubersquos success is allowing Google to compete for
the global TV advertising budget of around 186 billion
dollars14 Several steps have been taken to speed up
this process At the end of 2013 Google allowed
Nielsen and comScore to independently measure
user interactions with YouTube ads increasing the
confidence of TV advertisers to invest in the platform
In 2014 it created Google Preferred a selection of
YouTubersquos premium content (1-5) in 13 categories
including beauty food and auto These high-profile
videos were chosen to receive ads from the most
conservative brands (which are used to the world of
TV) In 2016 Magna responsible for buying advertising
space for brands such as Johnson amp Johnson Coca-
Cola and Fiat Chrysler promised to transfer at least
US$ 250 million of its TV spending to Google Preferred
between October 2016 and December 2017 This was
partially motivated by high TV time prices There are
several experiments on ad formats that would be
impossible without the interactivity of the Internet
YouTube has been gradually breaking the inertia of
the relationship between agencies and TV networks
to show that its ads offer good returns As a result we
expect advertising spending on YouTube to grow at a
fast rate possibly outpacing growth in the platformrsquos
watch time
At some point Googlersquos revenue growth will saturate
and keep pace with the growth of the global advertising
market The perception that the digitization of
advertising still has a long runway ahead and that
Google remains one of the leaders in this process
makes us believe that this moment is still far enough to
justify our investment Mobile revenue growth plenty
of opportunity to refine ad targeting the growing
connection between the online and physical worlds
and the evolution of YouTubersquos monetization initiatives
are the main reasons why we believe that Google will
still have a lot to offer to its advertisers and therefore
has ample room for growth
As with every investment there are some problems
Thorny issues related to Alphabet and Google lie on
our radar and demand attention These are all reasons
for the fundrsquos fairly controlled exposure to a business
we consider to be truly exceptional We will briefly go
over some of them
bull Our eternal ignorance Google operates highly
dynamic businesses Although its skills and
competitive advantages may protect it from
most frontal attacks other indirect attacks of a
competitive regulatory technological or even
criminal nature are always possible Some of
them can cause serious damage We are not able
iP-PARTiCiPACcedilOtildeES
13
to judge or even anticipate all these risks and
therefore we adjust the position to our ignorance
bull the price Alphabet shares returned 26 per year
over the last five years Simple math shows that its
price to earnings ratio went from 22x in 2011 to 28x
at the close of 2016 (GAAP criteria unadjusted)
In this period the company has accumulated
US$ 42 billion in net cash and began providing
transparency to its investments in Other Bets its
division for long maturity projects including the
self-driving car We prefer to look at the value of
the business by excluding cash from the market
value and the cost of these investments from
net income (as if they were being capitalized
instead of being recognized as an expense) At
current prices this would indicate an adjusted PE
multiple of 18x for 2018 It means some juggling
but we believe this is a reasonable way to value
the business After the gains recorded since
we resumed purchasing the stock in 2016 we
consider the current price reasonable although
obviously less attractive than a few months ago
We do not expect fast appreciation but we do
expect the continued growth of the business to
be gradually recognized
bull the dilution Google is one of the companies
that most heavily compensates its employees
with equity instruments especially restricted
stock The dilution ranges between 15 and
20 per year which bothers us We take this into
account in our calculations but we would prefer if
the company used this instrument less frequently
while also being more aggressive in buybacks We
welcome CFO Ruth Poratrsquos initiatives to force the
adoption of GAAP criteria (which at least attempt
to account for these costs) in internal discussions
and budgets of Googlersquos team leaders We are
also pleased with the fact that the company has
stopped discussing non-GAAP data with the
market and is now adopting GAAP Paraphrasing
Charlie Munger the granting of restricted stock
represents both spending and dilution for
us shareholders
bull the super-voting shares Larry Page and Sergey
Brin protect their controlling power with no less
than three classes of shares There were two
classes in the IPO one with ten votes per share
(for them) and another with one vote per share
(for everyone else) The third class was created in
2014 with no voting rights as the dilution caused
by restricted stock and share-based acquisitions
had started bothering them Both have sold shares
and are increasingly less active in the companyrsquos
day-to-day life leaving the biggest operational
responsibilities to Sundar Pichai Despite being a
genius Sundar still has to deal with the fact that he
is neither a founder nor a controlling shareholder
something history shows to be a handicap in
difficult decisions We prefer Amazonrsquos model
because Bezos has the same class of shares as we
IP-Participaccedilotildees
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
indEx
IP-Participaccedilotildees 04
Miscellaneous 16
Performance 19IP-Participaccedilotildees Class 20
4
Quarterly Report | Second Quarter 2017
Investors were excited about the Brazilian market With
greater rationality and reforms moving forward the
economy was stabilizing inflation and interest rates
were in free fall and the local index and exchange
rates kept rising Some were convinced that the realrsquos
appreciation against the dollar still had a long way to
go It seemed too good to be true
Profound reforms about to pass with no last-
minute dropouts among ldquoalliedrdquo parties from the
governmentrsquos base Would there be no deadlocks
for endless questioning in the judiciary branch
With several categories certainly upset about losing
privileges would there be no backlash from public
interest groups In other words would the ldquosystemrdquo
really accept these important changes because of
the basic arithmetic and public accountsrsquo logic that
underpins them ndash without any of the mayhem we
have grown accustomed to expect
As skeptical Brazilians while obviously hoping for
the best we were prepared for the worst Based on
historical standards the recent entanglement wasnrsquot
exactly a surprise - just another sad chapter in our
history brought upon by the materialization of widely
known risks
With the local market upheaval we were able to
deploy some of the fundsrsquo cash We slightly increased
our investments in ItauacuteItauacutesa and B3 (result of
the merger between BMampFBovespa and CETIP) In
addition the fundsrsquo foreign currency exposure ndash
which we had increased in favorable moments during
the first months of the year ndash was partially reduced as
the dollar appreciated against the real
Another important change in the first half of 2017
ndash between February and March ndash was the increase
of our stake in Alphabet (the holding company that
controls Google) which we will describe in greater
detail in this report
OutlOOk
The low volatility in the US stock market largely
influenced by still low interest rates and abundant
global liquidity should not be mistaken for low risk
After the appreciation of recent years it is only natural
that the US market should be more vulnerable to
shocks and price corrections
The same liquidity that reduces volatility in the
developed world also attracts funds to emerging
markets cushions shocks like the ones Brazil has
experienced in recent years and helps companies
maintain higher-than-usual leverage among other
indirect consequences At some point this tide will
turn with important consequences for many markets
Having said this it is also true that sitting out on the
truly exceptional businesses tends to cost dearly
What kind of crisis would it take for a conservative
investor to ldquoreach for a bucketrdquo A 25 drawdown
in the SampP500 Maybe 30 Well around two years
ago Alphabetrsquos shares traded at levels around 30
iP-PARTiCiPACcedilOtildeES
5
IP-Participaccedilotildees
lower than today Berkshire Hathaway was 17 below
current levels while Amazon Thermo Fisher and
Danaher were 55 25 and 18 lower respectively
In all these cases the increase in the value of these
companies was such that nowadays at prices of only
two years ago their shares would be trading at very
attractive valuations ndash even more so in a low interest
rate world To mention just one example which we
will discuss in further detail below Alphabet at prices
of two years ago would be trading at only 13x its 2016
earnings1 In practice we would see a drawdown of
this magnitude as a tremendous buying opportunity
rather than a risk of permanent loss Not investing in
such special companies for fear of a price correction is
usually a recipe for regret
Our goal therefore was and continues to be to obtain
superior returns over time searching for a balance
between attractive and conservative investments and
cash available to be deployed at times of pessimism
and crisis - but always making sure that we are not
excessively conservative which would prevent us from
participating in the growth of remarkable companies
AlphAbet2
ldquoOur mission is to organize the worldrsquos information and
make it universally accessible and useful We believe that
the most effective and ultimately the most profitable
way to accomplish our mission is to put the needs of our
users firstrdquo ndash Alphabetrsquos S-1 form
ldquoOur value proposition to marketers of all sizes is
simple mdash Google can help you show the right ads to
the right people at the right momentrdquo ndash Sundar Pichai
Googlersquos CEO
One of our first investments abroad after the creation
of the BDR3 market in 2012 was Google (currently a
subsidiary of Alphabet) The shares appreciated quickly
and we exited the investment at the end of 2013 We
watched from the sidelines for around two and a half
years in which the company continued to grow rapidly
In mid-2016 seeing that the shares had not accompanied
the colossal evolution of the business we began a new
investment which we increased at the beginning of
2017 We currently hold a mid-sized position
Advertising in the Internet age
Approximately 90 of Googlersquos revenue comes from
advertising The company is a pioneer in a secular
trend digital ads in which consumersrsquo attitudes can
be measured
With the mass adoption of the Internet since the
90s the advertising world has gone through its own
revolution Until then advertising was essentially
an exercise of creativity Professionals came up with
high-impact concepts to promote a product created
an ad and distributed it repeatedly on the radio
newspapers and TV Communication channels fought
over who would reach the greatest number of people
1 Multiple adjusted as mentioned further in the report Considers dilution from executive compensation2 In 2015 Google was restructured resulting in the creation of Alphabet the holding company that currently controls it The Google subsidiary comprises the companyrsquos main services such as Search Maps Android Play YouTube Cloud etc while others have been created to pursue longer maturity goals connected for instance to the transport health and robotics markets When disclosing its results Alphabet groups these other initiatives under the name Other Bets Currently Larry Page is CEO of Alphabet Sundar Pichai is CEO of Google and Ruth Porat is CFO of both companies In this report we are focusing our analysis on the business of the Google subsidiary which accounts for 99 of revenue and 100 of profits3 Brazilian Depositary Receipts are certificates representing shares of foreign companies traded in Brazil
6
Quarterly Report | Second Quarter 2017
who received exactly the same message regardless
of their particular interests The campaignrsquos impacts
were measured indirectly and imprecisely usually
based on consumer opinion surveys
On the Internet after a successful period for portals
such as AOL and Yahoo it became clear that the
first model to truly win would be Googlersquos In 2000
the company created AdWords a system in which
advertisers pay to show small ads to users of its search
service The factors that determine where and when an
ad appears are i) the relevance of the ad to the userrsquos
search ii) the amount the advertiser is willing to pay
(in an auction system) iii) the quality of the ad and iv)
the quality of the page to which the ad directs the user
The first point ndash the relevance to the search - in
itself already makes the AdWords system completely
different from traditional media The ad only appears
when the user expresses explicit interest in a particular
subject Another fundamental difference is that the
advertiser only pays when the ad is clicked which
reinforces the connection between the advertiserrsquos
investment and the userrsquos behavior With the evolution
of systems that track usersrsquo online attitudes it became
possible to monitor them until the time of purchase
As a result advertisers have definitive proof that their
investment has paid off
This basic concept is at the heart of the money-making
machine Google has turned into By delivering the
right ad to the right person at the right time every
dollar spent on AdWords produces easily measurable
results The success of AdWords coupled with Googlersquos
leadership in usability and technology solidified
the search enginersquos dominance outstripping rivals
like AltaVista to become the biggest gateway to the
Internet for billions of people
With the ease of assessing user attitudes advertisers
have increasingly adopted ROI measures to determine
the size of their advertising budgets As returns were -
and still are - high Google has captured an explosion
in online ad spending The result can be seen in the
graph below
iP-PARTiCiPACcedilOtildeES
Source Alphabet
GrOss revenue - AlphAbeT in us$ billiOn
ADVERTISING GOOGLE OTHERS OTHER BETS
20042010
20062012
20082014
20052011
20072013
20092015
2016
100
60
90
50
80
40
70
30
1020
032
293
61
379
106
460
166
555
218
660
237
750
903
Over time creative talent has given room to statistics
in advertising agencies Campaigns are designed in
an increasingly scientific manner with thousands of
variations evaluated iteratively
Large advertising conglomerates such as WPP have
updated their business model giving emphasis to
digital agencies some of which are solely dedicated
to the search service
7
IP-Participaccedilotildees
In the last 17 years both AdWords and Google Search have evolved a lot but the core concept has remained the
same In this period Google has absorbed an increasing share of advertising revenues in the world especially
superseding print media The graph below designed by venture capital firm Andreessen Horowitz clearly shows
what happened
Believing in Googlersquos revenue growth means to a
large extent a bet on the continuity of this share gain
There are essentially two elements required to make
this possible
bull The ability to attract users with interesting and
useful services
bull The ability to offer productive tools to advertisers
ndash connecting them to the right users at the
right times ndash in order to capture more of their
advertising budgets
We will analyze these two points below
the ability to attract users
We have reasons to believe that Google has a good
chance to continue attracting the attention of users
with differentiated services ndash beginning with the
critical mass that has already been reached Google
currently has seven assets with more than 1 billion
monthly active users Search Android Maps Chrome
YouTube Play and Gmail Android has over 2 billion
users and YouTube has more than 15 billion users
Besides these services the company has Drive with
800 million users and Photos with 500 million users
growing rapidly
8
Quarterly Report | Second Quarter 2017
iP-PARTiCiPACcedilOtildeES
4 For example Googlersquos work to index the web is the same as Bingrsquos but it can dilute those costs between far more users5 Machine learning is the science of giving computers the ability to learn without being explicitly programmed
The scale the company has achieved gives it
important advantages not only in terms of costs4
but also in terms of its ability to capture data about
users introduce new relevant products and take
advantage of network effects with participants such
as advertisers app creators (Play Store) and content
creators (YouTube in particular)
Googlersquos scale and engineering expertise have so
far protected it from frontal attacks on Search and
its adjacencies The company has also made highly
successful strategic acquisitions such as YouTube
DoubleClick and Android
Android which originally served to protect the
company from Microsoftrsquos possible dominance on the
web via smartphones was quickly and successfully
redirected to compete with the iPhone Today it has
over 80 of the smartphone market and serves as a
Trojan Horse for Google services Even on the iPhone
where Apple applications such as e-mail and maps
come pre-installed Google services are among the
most widely used
The ability to ride the adoption of smartphones has
been one of Googlersquos trump cards While Apple has
been the one to best turn the purchase of these
devices into profit Google is well positioned to
capture revenue from services related to their use
Smartphones have brutally increased the average
daily time people are connected to the Internet
Even with the rise of apps and social networks this
wave has also strongly boosted Googlersquos services In
the US market estimates of search-focused digital
agencies show that spending on AdWords ads for
smartphones has grown at rates above 50 percent in
recent years As the default search service on both
iOS and Android browsers Google Search has gained
even more market share (versus Bing and Yahoo) with
the adoption of smartphones
Time spenT per ADulT user per DAy wiTh DiGiTAl meDiA in The usA
ho
urs
per
day
Source eMarketer
MOBILE DESkTOPLAPTOP OTHER CONNECTED DEVICES
20102012
20082014
20112013
20092015
2016
6
2
5
1
4
3
0
22 23 24 26 25 23 22 22 22
03 0304
0816 23 26 28 31
The increasing processing power improved wireless
connections and larger screen sizes are also factors
that will enable increasingly useful and valuable
services for Google users Add to that the multiplicity
of existing sensors in smartphones and it becomes
easier to know the userrsquos context in order to provide
the most appropriate information or advertisement at
any given time
In order to seize these opportunities Google
invests heavily to remain at the forefront of artificial
intelligence techniques such as machine learning5
It appears to have been successful both in its own
9
IP-Participaccedilotildees
Source Google IO (517)
initiatives and in acquisitions and partnerships with
leaders in the field (such as Fei-Fei Li from Stanford)
One curious and impressive example was the victory
in the game of Go against champions Lee Sedol6 and
ke Jie7 In the practical field the combination of these
techniques with the infinite amount of data collected
by Google is beginning to emerge as a strong
competitive advantage
Results have appeared on various fronts such as voice
recognition accuracy facial recognition and image
contexts in the Photos app automated response
suggestions for e-mail and prediction of user interest
in various services Google has announced that it will
soon be possible to point your smartphone camera at
an object or establishment and receive information
about it
Search and Maps services have been great labs for
these techniques but YouTube may currently be the
most surprising beneficiary More than 400 hours of
video are uploaded to YouTube every minute Service
quality relies heavily on the ability to sort the wheat
from the chaff and recommend what really interests
each user ndash something absolutely impossible to do
with humans on the necessary scale Despite a few
stumbles here and there8 YouTube has learned and
reacted quickly At the beginning of 2016 YouTube
usersrsquo watch time grew at a rate of 60 per year
according to company data In December 2016 it
exceeded the mark of 1 billion hours per day 10 times
more than in 2012 Meanwhile the US TV industry
clocked in at 125 billion hours per day Netflix9 at
116 million hours and Facebook10 videos at
100 million hours
Digital video on demand is gaining ground for several
reasons The first of which is mobility YouTube users
watch on average one hour per day on their cell
phones11 without having to negotiate the use of the
home TV with anybody With improved screens and
connections this type of use only tends to grow Since
it is on demand users can take advantage of small
opportunities to watch throughout the day such as
on the way to work ndash or even in the bathroom As the
library is virtually endless (over 200 million hours of
video on YouTube) the content is extremely diverse
allowing users to search for the niche that most
appeals to them something impossible to accomplish
on TV regardless of the number of cable channels
available Finally since it is digital new content
standards such as 1080p 4k 360deg VR and so on are
6 httpswwwtheatlanticcomtechnologyarchive201603the-invisible-opponent4756117 httpswwwnytimescom20170525technologydaily-report-alphago-wins-againhtml8 httpsdigitalcontentnextorgblog20170331timeline-youtube-brand-safety-debacle9 httpswwwinccomemily-canalyoutube-gets-1-billion-of-videos-watched-a-dayhtml10 httpstechcrunchcom20160127facebook-grows11 httpsyoutubegoogleblogcom201706updates-from-vidcon-more-users-morehtml
10
Quarterly Report | Second Quarter 2017
much easier to adopt ndash while satellite and cable TV
infrastructure is much less flexible All this is wreaking
havoc in the US TV industry with a greater impact on
younger cohorts
The critical mass it has already reached the ability to
capture growth in smartphone usage its leadership
in both data and AI and its privileged position in
on-demand digital video with YouTube are the main
reasons that lead us to believe that Google will
continue to attract increasing attention of users
We will now focus on Googlersquos value proposition
for advertisers
the ability to offer productive tools to advertisers
The Search business (AdWords) still represents
Googlersquos biggest source of revenue The company does
not disclose exact figures but we estimate that this
represents something around 60 of gross revenue
and more than 80 of operating profit Given the
penetration already reached - especially in developed
countries - it does not seem reasonable to suppose
wATch Time TrenDs per week fOr TrADiTiOnAl Tv in The usAby AGe GrOup in The lAsT five yeArs
12-17 18-24 25-34 35-49 50-64 65+
-375
-265
-98
1684
-390
Source Nielsen
that most advertisers are failing to take advantage of
available ROI in their campaigns Thus future revenue
growth will mainly depend on i) the increase in time
spent using Google services (discussed in the previous
section) ii) adjustments to the predominance of ads
vs organic content in Search results and iii) Googlersquos
ability to improve its advertising targeting tools
Google constantly adjusts the way ads appear on
its search results page with some pages recently
creating room for ads by showing fewer unpaid
(organic) results The addition of a third and fourth
paid ads in search results on smartphones in 2015 and
2016 is an example of this trend Another example
was the increased space dedicated to Product Listing
Ads (PLAs) We have also noticed that it is becoming
increasingly harder to distinguish ads from organic
results For instance Google no longer highlights
ads on the results page in yellow Because of this the
company is sometimes accused of squeezing more
dollars from the traffic it already has effectively
forcing companies to pay to appear in search results
The company defends itself by arguing that it always
prioritizes the user experience and constantly tests
the side effects of this kind of change Its algorithms
have always prioritized higher quality ads in the
rankings so many of these ads turn out to be more
useful to users than organic results However it
still raises a yellow flag If Googlersquos growth relies
only on its current traffic it will be squeezed dry at
some point
iP-PARTiCiPACcedilOtildeES
11
Fortunately we see other more structural reasons for
Googlersquos revenue growth and returns to advertisers
As mentioned earlier smartphone ads account for
the lionrsquos share of growth in spending on AdWords
However the average cost per click on smartphone ads
is still roughly half that of desktops As ads are priced
at auctions their final price is associated with the sales
volume they can generate In fact this conversion
of clicks into sales is much lower on smartphones
than on desktops partly because it is harder to fill
out forms with address and credit card data when
making purchases on mobile devices Technologies
such as Android Pay and Apple Pay which facilitate
the customer checkout process should help close this
gap promoting sales boosting ROI making these ads
more valuable and fueling Googlersquos growth
Another way to improve advertiser ROI is to provide
more granular ad targeting Last year Google finally
divided AdWords campaigns into smartphones
tablets and desktops enabling it to determine the
words and prices for each campaign in a more refined
and assertive manner which has also increased
advertiserrsquos returns and consequently their spending
power The feedback from digital agencies is that
other steps in this direction would have the same
effect such as the ability to target different prices for
ads that will appear on different smartphone brands
in different locations or even the possibility of taking
greater advantage of the data that Google already has
on each userrsquos profile
There is also the opportunity to capture more
revenue by connecting the physical world to the
online world with the help of smartphones We have
already mentioned what Google is doing with maps
and smartphone cameras Today a third of Google
searches are made for local interests12 such as shops
and restaurants While the Amazon boogeyman
terrorizes retail Google is seen as an essential ally for
those who want to survive ndash offering branding and
customer capture and conversion services Google
will soon be able to measure the impact not only on
traffic but also on sales in physical stores after users
interact with online ads13 As we have seen in the past
measuring returns is an important step in convincing
advertisers to spend As around 90 of global retail is
not yet on the Internet it becomes clear how valuable
this initiative can be
When the campaign involves banners and videos that
have not immediately generated a purchase but have
influenced the customerrsquos final decision correctly
attributing their impact is crucial to knowing how
much to pay for them One of the common mistakes
is to attribute all the merit to the last click before
the purchase which is why Google created another
recently announced machine learning initiative
Google Attribution which estimates the role of
interactions with each ad in the customer convincing
trajectory leading to the purchase This improves
advertisersrsquo conversion ability (and therefore ROI)
and ads that appeared before the customerrsquos last
12 httpsearchenginelandcomsaying-third-mobile-searches-local-google-brings-new-ads-maps-25027813 httpsadwordsgoogleblogcom201705powering-ads-and-analytics-innovationshtml
IP-Participaccedilotildees
12
Quarterly Report | Second Quarter 2017
14 httpswwwmagnaglobalcomwp-contentuploads201612MAGNA-December-Global-Forecast-Update-Press-Releasepdf
click become more valuable (generating revenue
for Google) This technique will also be useful for
YouTube where ads tend to promote brands rather
than immediately capture purchases as is the case
in AdWords
YouTubersquos success is allowing Google to compete for
the global TV advertising budget of around 186 billion
dollars14 Several steps have been taken to speed up
this process At the end of 2013 Google allowed
Nielsen and comScore to independently measure
user interactions with YouTube ads increasing the
confidence of TV advertisers to invest in the platform
In 2014 it created Google Preferred a selection of
YouTubersquos premium content (1-5) in 13 categories
including beauty food and auto These high-profile
videos were chosen to receive ads from the most
conservative brands (which are used to the world of
TV) In 2016 Magna responsible for buying advertising
space for brands such as Johnson amp Johnson Coca-
Cola and Fiat Chrysler promised to transfer at least
US$ 250 million of its TV spending to Google Preferred
between October 2016 and December 2017 This was
partially motivated by high TV time prices There are
several experiments on ad formats that would be
impossible without the interactivity of the Internet
YouTube has been gradually breaking the inertia of
the relationship between agencies and TV networks
to show that its ads offer good returns As a result we
expect advertising spending on YouTube to grow at a
fast rate possibly outpacing growth in the platformrsquos
watch time
At some point Googlersquos revenue growth will saturate
and keep pace with the growth of the global advertising
market The perception that the digitization of
advertising still has a long runway ahead and that
Google remains one of the leaders in this process
makes us believe that this moment is still far enough to
justify our investment Mobile revenue growth plenty
of opportunity to refine ad targeting the growing
connection between the online and physical worlds
and the evolution of YouTubersquos monetization initiatives
are the main reasons why we believe that Google will
still have a lot to offer to its advertisers and therefore
has ample room for growth
As with every investment there are some problems
Thorny issues related to Alphabet and Google lie on
our radar and demand attention These are all reasons
for the fundrsquos fairly controlled exposure to a business
we consider to be truly exceptional We will briefly go
over some of them
bull Our eternal ignorance Google operates highly
dynamic businesses Although its skills and
competitive advantages may protect it from
most frontal attacks other indirect attacks of a
competitive regulatory technological or even
criminal nature are always possible Some of
them can cause serious damage We are not able
iP-PARTiCiPACcedilOtildeES
13
to judge or even anticipate all these risks and
therefore we adjust the position to our ignorance
bull the price Alphabet shares returned 26 per year
over the last five years Simple math shows that its
price to earnings ratio went from 22x in 2011 to 28x
at the close of 2016 (GAAP criteria unadjusted)
In this period the company has accumulated
US$ 42 billion in net cash and began providing
transparency to its investments in Other Bets its
division for long maturity projects including the
self-driving car We prefer to look at the value of
the business by excluding cash from the market
value and the cost of these investments from
net income (as if they were being capitalized
instead of being recognized as an expense) At
current prices this would indicate an adjusted PE
multiple of 18x for 2018 It means some juggling
but we believe this is a reasonable way to value
the business After the gains recorded since
we resumed purchasing the stock in 2016 we
consider the current price reasonable although
obviously less attractive than a few months ago
We do not expect fast appreciation but we do
expect the continued growth of the business to
be gradually recognized
bull the dilution Google is one of the companies
that most heavily compensates its employees
with equity instruments especially restricted
stock The dilution ranges between 15 and
20 per year which bothers us We take this into
account in our calculations but we would prefer if
the company used this instrument less frequently
while also being more aggressive in buybacks We
welcome CFO Ruth Poratrsquos initiatives to force the
adoption of GAAP criteria (which at least attempt
to account for these costs) in internal discussions
and budgets of Googlersquos team leaders We are
also pleased with the fact that the company has
stopped discussing non-GAAP data with the
market and is now adopting GAAP Paraphrasing
Charlie Munger the granting of restricted stock
represents both spending and dilution for
us shareholders
bull the super-voting shares Larry Page and Sergey
Brin protect their controlling power with no less
than three classes of shares There were two
classes in the IPO one with ten votes per share
(for them) and another with one vote per share
(for everyone else) The third class was created in
2014 with no voting rights as the dilution caused
by restricted stock and share-based acquisitions
had started bothering them Both have sold shares
and are increasingly less active in the companyrsquos
day-to-day life leaving the biggest operational
responsibilities to Sundar Pichai Despite being a
genius Sundar still has to deal with the fact that he
is neither a founder nor a controlling shareholder
something history shows to be a handicap in
difficult decisions We prefer Amazonrsquos model
because Bezos has the same class of shares as we
IP-Participaccedilotildees
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
4
Quarterly Report | Second Quarter 2017
Investors were excited about the Brazilian market With
greater rationality and reforms moving forward the
economy was stabilizing inflation and interest rates
were in free fall and the local index and exchange
rates kept rising Some were convinced that the realrsquos
appreciation against the dollar still had a long way to
go It seemed too good to be true
Profound reforms about to pass with no last-
minute dropouts among ldquoalliedrdquo parties from the
governmentrsquos base Would there be no deadlocks
for endless questioning in the judiciary branch
With several categories certainly upset about losing
privileges would there be no backlash from public
interest groups In other words would the ldquosystemrdquo
really accept these important changes because of
the basic arithmetic and public accountsrsquo logic that
underpins them ndash without any of the mayhem we
have grown accustomed to expect
As skeptical Brazilians while obviously hoping for
the best we were prepared for the worst Based on
historical standards the recent entanglement wasnrsquot
exactly a surprise - just another sad chapter in our
history brought upon by the materialization of widely
known risks
With the local market upheaval we were able to
deploy some of the fundsrsquo cash We slightly increased
our investments in ItauacuteItauacutesa and B3 (result of
the merger between BMampFBovespa and CETIP) In
addition the fundsrsquo foreign currency exposure ndash
which we had increased in favorable moments during
the first months of the year ndash was partially reduced as
the dollar appreciated against the real
Another important change in the first half of 2017
ndash between February and March ndash was the increase
of our stake in Alphabet (the holding company that
controls Google) which we will describe in greater
detail in this report
OutlOOk
The low volatility in the US stock market largely
influenced by still low interest rates and abundant
global liquidity should not be mistaken for low risk
After the appreciation of recent years it is only natural
that the US market should be more vulnerable to
shocks and price corrections
The same liquidity that reduces volatility in the
developed world also attracts funds to emerging
markets cushions shocks like the ones Brazil has
experienced in recent years and helps companies
maintain higher-than-usual leverage among other
indirect consequences At some point this tide will
turn with important consequences for many markets
Having said this it is also true that sitting out on the
truly exceptional businesses tends to cost dearly
What kind of crisis would it take for a conservative
investor to ldquoreach for a bucketrdquo A 25 drawdown
in the SampP500 Maybe 30 Well around two years
ago Alphabetrsquos shares traded at levels around 30
iP-PARTiCiPACcedilOtildeES
5
IP-Participaccedilotildees
lower than today Berkshire Hathaway was 17 below
current levels while Amazon Thermo Fisher and
Danaher were 55 25 and 18 lower respectively
In all these cases the increase in the value of these
companies was such that nowadays at prices of only
two years ago their shares would be trading at very
attractive valuations ndash even more so in a low interest
rate world To mention just one example which we
will discuss in further detail below Alphabet at prices
of two years ago would be trading at only 13x its 2016
earnings1 In practice we would see a drawdown of
this magnitude as a tremendous buying opportunity
rather than a risk of permanent loss Not investing in
such special companies for fear of a price correction is
usually a recipe for regret
Our goal therefore was and continues to be to obtain
superior returns over time searching for a balance
between attractive and conservative investments and
cash available to be deployed at times of pessimism
and crisis - but always making sure that we are not
excessively conservative which would prevent us from
participating in the growth of remarkable companies
AlphAbet2
ldquoOur mission is to organize the worldrsquos information and
make it universally accessible and useful We believe that
the most effective and ultimately the most profitable
way to accomplish our mission is to put the needs of our
users firstrdquo ndash Alphabetrsquos S-1 form
ldquoOur value proposition to marketers of all sizes is
simple mdash Google can help you show the right ads to
the right people at the right momentrdquo ndash Sundar Pichai
Googlersquos CEO
One of our first investments abroad after the creation
of the BDR3 market in 2012 was Google (currently a
subsidiary of Alphabet) The shares appreciated quickly
and we exited the investment at the end of 2013 We
watched from the sidelines for around two and a half
years in which the company continued to grow rapidly
In mid-2016 seeing that the shares had not accompanied
the colossal evolution of the business we began a new
investment which we increased at the beginning of
2017 We currently hold a mid-sized position
Advertising in the Internet age
Approximately 90 of Googlersquos revenue comes from
advertising The company is a pioneer in a secular
trend digital ads in which consumersrsquo attitudes can
be measured
With the mass adoption of the Internet since the
90s the advertising world has gone through its own
revolution Until then advertising was essentially
an exercise of creativity Professionals came up with
high-impact concepts to promote a product created
an ad and distributed it repeatedly on the radio
newspapers and TV Communication channels fought
over who would reach the greatest number of people
1 Multiple adjusted as mentioned further in the report Considers dilution from executive compensation2 In 2015 Google was restructured resulting in the creation of Alphabet the holding company that currently controls it The Google subsidiary comprises the companyrsquos main services such as Search Maps Android Play YouTube Cloud etc while others have been created to pursue longer maturity goals connected for instance to the transport health and robotics markets When disclosing its results Alphabet groups these other initiatives under the name Other Bets Currently Larry Page is CEO of Alphabet Sundar Pichai is CEO of Google and Ruth Porat is CFO of both companies In this report we are focusing our analysis on the business of the Google subsidiary which accounts for 99 of revenue and 100 of profits3 Brazilian Depositary Receipts are certificates representing shares of foreign companies traded in Brazil
6
Quarterly Report | Second Quarter 2017
who received exactly the same message regardless
of their particular interests The campaignrsquos impacts
were measured indirectly and imprecisely usually
based on consumer opinion surveys
On the Internet after a successful period for portals
such as AOL and Yahoo it became clear that the
first model to truly win would be Googlersquos In 2000
the company created AdWords a system in which
advertisers pay to show small ads to users of its search
service The factors that determine where and when an
ad appears are i) the relevance of the ad to the userrsquos
search ii) the amount the advertiser is willing to pay
(in an auction system) iii) the quality of the ad and iv)
the quality of the page to which the ad directs the user
The first point ndash the relevance to the search - in
itself already makes the AdWords system completely
different from traditional media The ad only appears
when the user expresses explicit interest in a particular
subject Another fundamental difference is that the
advertiser only pays when the ad is clicked which
reinforces the connection between the advertiserrsquos
investment and the userrsquos behavior With the evolution
of systems that track usersrsquo online attitudes it became
possible to monitor them until the time of purchase
As a result advertisers have definitive proof that their
investment has paid off
This basic concept is at the heart of the money-making
machine Google has turned into By delivering the
right ad to the right person at the right time every
dollar spent on AdWords produces easily measurable
results The success of AdWords coupled with Googlersquos
leadership in usability and technology solidified
the search enginersquos dominance outstripping rivals
like AltaVista to become the biggest gateway to the
Internet for billions of people
With the ease of assessing user attitudes advertisers
have increasingly adopted ROI measures to determine
the size of their advertising budgets As returns were -
and still are - high Google has captured an explosion
in online ad spending The result can be seen in the
graph below
iP-PARTiCiPACcedilOtildeES
Source Alphabet
GrOss revenue - AlphAbeT in us$ billiOn
ADVERTISING GOOGLE OTHERS OTHER BETS
20042010
20062012
20082014
20052011
20072013
20092015
2016
100
60
90
50
80
40
70
30
1020
032
293
61
379
106
460
166
555
218
660
237
750
903
Over time creative talent has given room to statistics
in advertising agencies Campaigns are designed in
an increasingly scientific manner with thousands of
variations evaluated iteratively
Large advertising conglomerates such as WPP have
updated their business model giving emphasis to
digital agencies some of which are solely dedicated
to the search service
7
IP-Participaccedilotildees
In the last 17 years both AdWords and Google Search have evolved a lot but the core concept has remained the
same In this period Google has absorbed an increasing share of advertising revenues in the world especially
superseding print media The graph below designed by venture capital firm Andreessen Horowitz clearly shows
what happened
Believing in Googlersquos revenue growth means to a
large extent a bet on the continuity of this share gain
There are essentially two elements required to make
this possible
bull The ability to attract users with interesting and
useful services
bull The ability to offer productive tools to advertisers
ndash connecting them to the right users at the
right times ndash in order to capture more of their
advertising budgets
We will analyze these two points below
the ability to attract users
We have reasons to believe that Google has a good
chance to continue attracting the attention of users
with differentiated services ndash beginning with the
critical mass that has already been reached Google
currently has seven assets with more than 1 billion
monthly active users Search Android Maps Chrome
YouTube Play and Gmail Android has over 2 billion
users and YouTube has more than 15 billion users
Besides these services the company has Drive with
800 million users and Photos with 500 million users
growing rapidly
8
Quarterly Report | Second Quarter 2017
iP-PARTiCiPACcedilOtildeES
4 For example Googlersquos work to index the web is the same as Bingrsquos but it can dilute those costs between far more users5 Machine learning is the science of giving computers the ability to learn without being explicitly programmed
The scale the company has achieved gives it
important advantages not only in terms of costs4
but also in terms of its ability to capture data about
users introduce new relevant products and take
advantage of network effects with participants such
as advertisers app creators (Play Store) and content
creators (YouTube in particular)
Googlersquos scale and engineering expertise have so
far protected it from frontal attacks on Search and
its adjacencies The company has also made highly
successful strategic acquisitions such as YouTube
DoubleClick and Android
Android which originally served to protect the
company from Microsoftrsquos possible dominance on the
web via smartphones was quickly and successfully
redirected to compete with the iPhone Today it has
over 80 of the smartphone market and serves as a
Trojan Horse for Google services Even on the iPhone
where Apple applications such as e-mail and maps
come pre-installed Google services are among the
most widely used
The ability to ride the adoption of smartphones has
been one of Googlersquos trump cards While Apple has
been the one to best turn the purchase of these
devices into profit Google is well positioned to
capture revenue from services related to their use
Smartphones have brutally increased the average
daily time people are connected to the Internet
Even with the rise of apps and social networks this
wave has also strongly boosted Googlersquos services In
the US market estimates of search-focused digital
agencies show that spending on AdWords ads for
smartphones has grown at rates above 50 percent in
recent years As the default search service on both
iOS and Android browsers Google Search has gained
even more market share (versus Bing and Yahoo) with
the adoption of smartphones
Time spenT per ADulT user per DAy wiTh DiGiTAl meDiA in The usA
ho
urs
per
day
Source eMarketer
MOBILE DESkTOPLAPTOP OTHER CONNECTED DEVICES
20102012
20082014
20112013
20092015
2016
6
2
5
1
4
3
0
22 23 24 26 25 23 22 22 22
03 0304
0816 23 26 28 31
The increasing processing power improved wireless
connections and larger screen sizes are also factors
that will enable increasingly useful and valuable
services for Google users Add to that the multiplicity
of existing sensors in smartphones and it becomes
easier to know the userrsquos context in order to provide
the most appropriate information or advertisement at
any given time
In order to seize these opportunities Google
invests heavily to remain at the forefront of artificial
intelligence techniques such as machine learning5
It appears to have been successful both in its own
9
IP-Participaccedilotildees
Source Google IO (517)
initiatives and in acquisitions and partnerships with
leaders in the field (such as Fei-Fei Li from Stanford)
One curious and impressive example was the victory
in the game of Go against champions Lee Sedol6 and
ke Jie7 In the practical field the combination of these
techniques with the infinite amount of data collected
by Google is beginning to emerge as a strong
competitive advantage
Results have appeared on various fronts such as voice
recognition accuracy facial recognition and image
contexts in the Photos app automated response
suggestions for e-mail and prediction of user interest
in various services Google has announced that it will
soon be possible to point your smartphone camera at
an object or establishment and receive information
about it
Search and Maps services have been great labs for
these techniques but YouTube may currently be the
most surprising beneficiary More than 400 hours of
video are uploaded to YouTube every minute Service
quality relies heavily on the ability to sort the wheat
from the chaff and recommend what really interests
each user ndash something absolutely impossible to do
with humans on the necessary scale Despite a few
stumbles here and there8 YouTube has learned and
reacted quickly At the beginning of 2016 YouTube
usersrsquo watch time grew at a rate of 60 per year
according to company data In December 2016 it
exceeded the mark of 1 billion hours per day 10 times
more than in 2012 Meanwhile the US TV industry
clocked in at 125 billion hours per day Netflix9 at
116 million hours and Facebook10 videos at
100 million hours
Digital video on demand is gaining ground for several
reasons The first of which is mobility YouTube users
watch on average one hour per day on their cell
phones11 without having to negotiate the use of the
home TV with anybody With improved screens and
connections this type of use only tends to grow Since
it is on demand users can take advantage of small
opportunities to watch throughout the day such as
on the way to work ndash or even in the bathroom As the
library is virtually endless (over 200 million hours of
video on YouTube) the content is extremely diverse
allowing users to search for the niche that most
appeals to them something impossible to accomplish
on TV regardless of the number of cable channels
available Finally since it is digital new content
standards such as 1080p 4k 360deg VR and so on are
6 httpswwwtheatlanticcomtechnologyarchive201603the-invisible-opponent4756117 httpswwwnytimescom20170525technologydaily-report-alphago-wins-againhtml8 httpsdigitalcontentnextorgblog20170331timeline-youtube-brand-safety-debacle9 httpswwwinccomemily-canalyoutube-gets-1-billion-of-videos-watched-a-dayhtml10 httpstechcrunchcom20160127facebook-grows11 httpsyoutubegoogleblogcom201706updates-from-vidcon-more-users-morehtml
10
Quarterly Report | Second Quarter 2017
much easier to adopt ndash while satellite and cable TV
infrastructure is much less flexible All this is wreaking
havoc in the US TV industry with a greater impact on
younger cohorts
The critical mass it has already reached the ability to
capture growth in smartphone usage its leadership
in both data and AI and its privileged position in
on-demand digital video with YouTube are the main
reasons that lead us to believe that Google will
continue to attract increasing attention of users
We will now focus on Googlersquos value proposition
for advertisers
the ability to offer productive tools to advertisers
The Search business (AdWords) still represents
Googlersquos biggest source of revenue The company does
not disclose exact figures but we estimate that this
represents something around 60 of gross revenue
and more than 80 of operating profit Given the
penetration already reached - especially in developed
countries - it does not seem reasonable to suppose
wATch Time TrenDs per week fOr TrADiTiOnAl Tv in The usAby AGe GrOup in The lAsT five yeArs
12-17 18-24 25-34 35-49 50-64 65+
-375
-265
-98
1684
-390
Source Nielsen
that most advertisers are failing to take advantage of
available ROI in their campaigns Thus future revenue
growth will mainly depend on i) the increase in time
spent using Google services (discussed in the previous
section) ii) adjustments to the predominance of ads
vs organic content in Search results and iii) Googlersquos
ability to improve its advertising targeting tools
Google constantly adjusts the way ads appear on
its search results page with some pages recently
creating room for ads by showing fewer unpaid
(organic) results The addition of a third and fourth
paid ads in search results on smartphones in 2015 and
2016 is an example of this trend Another example
was the increased space dedicated to Product Listing
Ads (PLAs) We have also noticed that it is becoming
increasingly harder to distinguish ads from organic
results For instance Google no longer highlights
ads on the results page in yellow Because of this the
company is sometimes accused of squeezing more
dollars from the traffic it already has effectively
forcing companies to pay to appear in search results
The company defends itself by arguing that it always
prioritizes the user experience and constantly tests
the side effects of this kind of change Its algorithms
have always prioritized higher quality ads in the
rankings so many of these ads turn out to be more
useful to users than organic results However it
still raises a yellow flag If Googlersquos growth relies
only on its current traffic it will be squeezed dry at
some point
iP-PARTiCiPACcedilOtildeES
11
Fortunately we see other more structural reasons for
Googlersquos revenue growth and returns to advertisers
As mentioned earlier smartphone ads account for
the lionrsquos share of growth in spending on AdWords
However the average cost per click on smartphone ads
is still roughly half that of desktops As ads are priced
at auctions their final price is associated with the sales
volume they can generate In fact this conversion
of clicks into sales is much lower on smartphones
than on desktops partly because it is harder to fill
out forms with address and credit card data when
making purchases on mobile devices Technologies
such as Android Pay and Apple Pay which facilitate
the customer checkout process should help close this
gap promoting sales boosting ROI making these ads
more valuable and fueling Googlersquos growth
Another way to improve advertiser ROI is to provide
more granular ad targeting Last year Google finally
divided AdWords campaigns into smartphones
tablets and desktops enabling it to determine the
words and prices for each campaign in a more refined
and assertive manner which has also increased
advertiserrsquos returns and consequently their spending
power The feedback from digital agencies is that
other steps in this direction would have the same
effect such as the ability to target different prices for
ads that will appear on different smartphone brands
in different locations or even the possibility of taking
greater advantage of the data that Google already has
on each userrsquos profile
There is also the opportunity to capture more
revenue by connecting the physical world to the
online world with the help of smartphones We have
already mentioned what Google is doing with maps
and smartphone cameras Today a third of Google
searches are made for local interests12 such as shops
and restaurants While the Amazon boogeyman
terrorizes retail Google is seen as an essential ally for
those who want to survive ndash offering branding and
customer capture and conversion services Google
will soon be able to measure the impact not only on
traffic but also on sales in physical stores after users
interact with online ads13 As we have seen in the past
measuring returns is an important step in convincing
advertisers to spend As around 90 of global retail is
not yet on the Internet it becomes clear how valuable
this initiative can be
When the campaign involves banners and videos that
have not immediately generated a purchase but have
influenced the customerrsquos final decision correctly
attributing their impact is crucial to knowing how
much to pay for them One of the common mistakes
is to attribute all the merit to the last click before
the purchase which is why Google created another
recently announced machine learning initiative
Google Attribution which estimates the role of
interactions with each ad in the customer convincing
trajectory leading to the purchase This improves
advertisersrsquo conversion ability (and therefore ROI)
and ads that appeared before the customerrsquos last
12 httpsearchenginelandcomsaying-third-mobile-searches-local-google-brings-new-ads-maps-25027813 httpsadwordsgoogleblogcom201705powering-ads-and-analytics-innovationshtml
IP-Participaccedilotildees
12
Quarterly Report | Second Quarter 2017
14 httpswwwmagnaglobalcomwp-contentuploads201612MAGNA-December-Global-Forecast-Update-Press-Releasepdf
click become more valuable (generating revenue
for Google) This technique will also be useful for
YouTube where ads tend to promote brands rather
than immediately capture purchases as is the case
in AdWords
YouTubersquos success is allowing Google to compete for
the global TV advertising budget of around 186 billion
dollars14 Several steps have been taken to speed up
this process At the end of 2013 Google allowed
Nielsen and comScore to independently measure
user interactions with YouTube ads increasing the
confidence of TV advertisers to invest in the platform
In 2014 it created Google Preferred a selection of
YouTubersquos premium content (1-5) in 13 categories
including beauty food and auto These high-profile
videos were chosen to receive ads from the most
conservative brands (which are used to the world of
TV) In 2016 Magna responsible for buying advertising
space for brands such as Johnson amp Johnson Coca-
Cola and Fiat Chrysler promised to transfer at least
US$ 250 million of its TV spending to Google Preferred
between October 2016 and December 2017 This was
partially motivated by high TV time prices There are
several experiments on ad formats that would be
impossible without the interactivity of the Internet
YouTube has been gradually breaking the inertia of
the relationship between agencies and TV networks
to show that its ads offer good returns As a result we
expect advertising spending on YouTube to grow at a
fast rate possibly outpacing growth in the platformrsquos
watch time
At some point Googlersquos revenue growth will saturate
and keep pace with the growth of the global advertising
market The perception that the digitization of
advertising still has a long runway ahead and that
Google remains one of the leaders in this process
makes us believe that this moment is still far enough to
justify our investment Mobile revenue growth plenty
of opportunity to refine ad targeting the growing
connection between the online and physical worlds
and the evolution of YouTubersquos monetization initiatives
are the main reasons why we believe that Google will
still have a lot to offer to its advertisers and therefore
has ample room for growth
As with every investment there are some problems
Thorny issues related to Alphabet and Google lie on
our radar and demand attention These are all reasons
for the fundrsquos fairly controlled exposure to a business
we consider to be truly exceptional We will briefly go
over some of them
bull Our eternal ignorance Google operates highly
dynamic businesses Although its skills and
competitive advantages may protect it from
most frontal attacks other indirect attacks of a
competitive regulatory technological or even
criminal nature are always possible Some of
them can cause serious damage We are not able
iP-PARTiCiPACcedilOtildeES
13
to judge or even anticipate all these risks and
therefore we adjust the position to our ignorance
bull the price Alphabet shares returned 26 per year
over the last five years Simple math shows that its
price to earnings ratio went from 22x in 2011 to 28x
at the close of 2016 (GAAP criteria unadjusted)
In this period the company has accumulated
US$ 42 billion in net cash and began providing
transparency to its investments in Other Bets its
division for long maturity projects including the
self-driving car We prefer to look at the value of
the business by excluding cash from the market
value and the cost of these investments from
net income (as if they were being capitalized
instead of being recognized as an expense) At
current prices this would indicate an adjusted PE
multiple of 18x for 2018 It means some juggling
but we believe this is a reasonable way to value
the business After the gains recorded since
we resumed purchasing the stock in 2016 we
consider the current price reasonable although
obviously less attractive than a few months ago
We do not expect fast appreciation but we do
expect the continued growth of the business to
be gradually recognized
bull the dilution Google is one of the companies
that most heavily compensates its employees
with equity instruments especially restricted
stock The dilution ranges between 15 and
20 per year which bothers us We take this into
account in our calculations but we would prefer if
the company used this instrument less frequently
while also being more aggressive in buybacks We
welcome CFO Ruth Poratrsquos initiatives to force the
adoption of GAAP criteria (which at least attempt
to account for these costs) in internal discussions
and budgets of Googlersquos team leaders We are
also pleased with the fact that the company has
stopped discussing non-GAAP data with the
market and is now adopting GAAP Paraphrasing
Charlie Munger the granting of restricted stock
represents both spending and dilution for
us shareholders
bull the super-voting shares Larry Page and Sergey
Brin protect their controlling power with no less
than three classes of shares There were two
classes in the IPO one with ten votes per share
(for them) and another with one vote per share
(for everyone else) The third class was created in
2014 with no voting rights as the dilution caused
by restricted stock and share-based acquisitions
had started bothering them Both have sold shares
and are increasingly less active in the companyrsquos
day-to-day life leaving the biggest operational
responsibilities to Sundar Pichai Despite being a
genius Sundar still has to deal with the fact that he
is neither a founder nor a controlling shareholder
something history shows to be a handicap in
difficult decisions We prefer Amazonrsquos model
because Bezos has the same class of shares as we
IP-Participaccedilotildees
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
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RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
5
IP-Participaccedilotildees
lower than today Berkshire Hathaway was 17 below
current levels while Amazon Thermo Fisher and
Danaher were 55 25 and 18 lower respectively
In all these cases the increase in the value of these
companies was such that nowadays at prices of only
two years ago their shares would be trading at very
attractive valuations ndash even more so in a low interest
rate world To mention just one example which we
will discuss in further detail below Alphabet at prices
of two years ago would be trading at only 13x its 2016
earnings1 In practice we would see a drawdown of
this magnitude as a tremendous buying opportunity
rather than a risk of permanent loss Not investing in
such special companies for fear of a price correction is
usually a recipe for regret
Our goal therefore was and continues to be to obtain
superior returns over time searching for a balance
between attractive and conservative investments and
cash available to be deployed at times of pessimism
and crisis - but always making sure that we are not
excessively conservative which would prevent us from
participating in the growth of remarkable companies
AlphAbet2
ldquoOur mission is to organize the worldrsquos information and
make it universally accessible and useful We believe that
the most effective and ultimately the most profitable
way to accomplish our mission is to put the needs of our
users firstrdquo ndash Alphabetrsquos S-1 form
ldquoOur value proposition to marketers of all sizes is
simple mdash Google can help you show the right ads to
the right people at the right momentrdquo ndash Sundar Pichai
Googlersquos CEO
One of our first investments abroad after the creation
of the BDR3 market in 2012 was Google (currently a
subsidiary of Alphabet) The shares appreciated quickly
and we exited the investment at the end of 2013 We
watched from the sidelines for around two and a half
years in which the company continued to grow rapidly
In mid-2016 seeing that the shares had not accompanied
the colossal evolution of the business we began a new
investment which we increased at the beginning of
2017 We currently hold a mid-sized position
Advertising in the Internet age
Approximately 90 of Googlersquos revenue comes from
advertising The company is a pioneer in a secular
trend digital ads in which consumersrsquo attitudes can
be measured
With the mass adoption of the Internet since the
90s the advertising world has gone through its own
revolution Until then advertising was essentially
an exercise of creativity Professionals came up with
high-impact concepts to promote a product created
an ad and distributed it repeatedly on the radio
newspapers and TV Communication channels fought
over who would reach the greatest number of people
1 Multiple adjusted as mentioned further in the report Considers dilution from executive compensation2 In 2015 Google was restructured resulting in the creation of Alphabet the holding company that currently controls it The Google subsidiary comprises the companyrsquos main services such as Search Maps Android Play YouTube Cloud etc while others have been created to pursue longer maturity goals connected for instance to the transport health and robotics markets When disclosing its results Alphabet groups these other initiatives under the name Other Bets Currently Larry Page is CEO of Alphabet Sundar Pichai is CEO of Google and Ruth Porat is CFO of both companies In this report we are focusing our analysis on the business of the Google subsidiary which accounts for 99 of revenue and 100 of profits3 Brazilian Depositary Receipts are certificates representing shares of foreign companies traded in Brazil
6
Quarterly Report | Second Quarter 2017
who received exactly the same message regardless
of their particular interests The campaignrsquos impacts
were measured indirectly and imprecisely usually
based on consumer opinion surveys
On the Internet after a successful period for portals
such as AOL and Yahoo it became clear that the
first model to truly win would be Googlersquos In 2000
the company created AdWords a system in which
advertisers pay to show small ads to users of its search
service The factors that determine where and when an
ad appears are i) the relevance of the ad to the userrsquos
search ii) the amount the advertiser is willing to pay
(in an auction system) iii) the quality of the ad and iv)
the quality of the page to which the ad directs the user
The first point ndash the relevance to the search - in
itself already makes the AdWords system completely
different from traditional media The ad only appears
when the user expresses explicit interest in a particular
subject Another fundamental difference is that the
advertiser only pays when the ad is clicked which
reinforces the connection between the advertiserrsquos
investment and the userrsquos behavior With the evolution
of systems that track usersrsquo online attitudes it became
possible to monitor them until the time of purchase
As a result advertisers have definitive proof that their
investment has paid off
This basic concept is at the heart of the money-making
machine Google has turned into By delivering the
right ad to the right person at the right time every
dollar spent on AdWords produces easily measurable
results The success of AdWords coupled with Googlersquos
leadership in usability and technology solidified
the search enginersquos dominance outstripping rivals
like AltaVista to become the biggest gateway to the
Internet for billions of people
With the ease of assessing user attitudes advertisers
have increasingly adopted ROI measures to determine
the size of their advertising budgets As returns were -
and still are - high Google has captured an explosion
in online ad spending The result can be seen in the
graph below
iP-PARTiCiPACcedilOtildeES
Source Alphabet
GrOss revenue - AlphAbeT in us$ billiOn
ADVERTISING GOOGLE OTHERS OTHER BETS
20042010
20062012
20082014
20052011
20072013
20092015
2016
100
60
90
50
80
40
70
30
1020
032
293
61
379
106
460
166
555
218
660
237
750
903
Over time creative talent has given room to statistics
in advertising agencies Campaigns are designed in
an increasingly scientific manner with thousands of
variations evaluated iteratively
Large advertising conglomerates such as WPP have
updated their business model giving emphasis to
digital agencies some of which are solely dedicated
to the search service
7
IP-Participaccedilotildees
In the last 17 years both AdWords and Google Search have evolved a lot but the core concept has remained the
same In this period Google has absorbed an increasing share of advertising revenues in the world especially
superseding print media The graph below designed by venture capital firm Andreessen Horowitz clearly shows
what happened
Believing in Googlersquos revenue growth means to a
large extent a bet on the continuity of this share gain
There are essentially two elements required to make
this possible
bull The ability to attract users with interesting and
useful services
bull The ability to offer productive tools to advertisers
ndash connecting them to the right users at the
right times ndash in order to capture more of their
advertising budgets
We will analyze these two points below
the ability to attract users
We have reasons to believe that Google has a good
chance to continue attracting the attention of users
with differentiated services ndash beginning with the
critical mass that has already been reached Google
currently has seven assets with more than 1 billion
monthly active users Search Android Maps Chrome
YouTube Play and Gmail Android has over 2 billion
users and YouTube has more than 15 billion users
Besides these services the company has Drive with
800 million users and Photos with 500 million users
growing rapidly
8
Quarterly Report | Second Quarter 2017
iP-PARTiCiPACcedilOtildeES
4 For example Googlersquos work to index the web is the same as Bingrsquos but it can dilute those costs between far more users5 Machine learning is the science of giving computers the ability to learn without being explicitly programmed
The scale the company has achieved gives it
important advantages not only in terms of costs4
but also in terms of its ability to capture data about
users introduce new relevant products and take
advantage of network effects with participants such
as advertisers app creators (Play Store) and content
creators (YouTube in particular)
Googlersquos scale and engineering expertise have so
far protected it from frontal attacks on Search and
its adjacencies The company has also made highly
successful strategic acquisitions such as YouTube
DoubleClick and Android
Android which originally served to protect the
company from Microsoftrsquos possible dominance on the
web via smartphones was quickly and successfully
redirected to compete with the iPhone Today it has
over 80 of the smartphone market and serves as a
Trojan Horse for Google services Even on the iPhone
where Apple applications such as e-mail and maps
come pre-installed Google services are among the
most widely used
The ability to ride the adoption of smartphones has
been one of Googlersquos trump cards While Apple has
been the one to best turn the purchase of these
devices into profit Google is well positioned to
capture revenue from services related to their use
Smartphones have brutally increased the average
daily time people are connected to the Internet
Even with the rise of apps and social networks this
wave has also strongly boosted Googlersquos services In
the US market estimates of search-focused digital
agencies show that spending on AdWords ads for
smartphones has grown at rates above 50 percent in
recent years As the default search service on both
iOS and Android browsers Google Search has gained
even more market share (versus Bing and Yahoo) with
the adoption of smartphones
Time spenT per ADulT user per DAy wiTh DiGiTAl meDiA in The usA
ho
urs
per
day
Source eMarketer
MOBILE DESkTOPLAPTOP OTHER CONNECTED DEVICES
20102012
20082014
20112013
20092015
2016
6
2
5
1
4
3
0
22 23 24 26 25 23 22 22 22
03 0304
0816 23 26 28 31
The increasing processing power improved wireless
connections and larger screen sizes are also factors
that will enable increasingly useful and valuable
services for Google users Add to that the multiplicity
of existing sensors in smartphones and it becomes
easier to know the userrsquos context in order to provide
the most appropriate information or advertisement at
any given time
In order to seize these opportunities Google
invests heavily to remain at the forefront of artificial
intelligence techniques such as machine learning5
It appears to have been successful both in its own
9
IP-Participaccedilotildees
Source Google IO (517)
initiatives and in acquisitions and partnerships with
leaders in the field (such as Fei-Fei Li from Stanford)
One curious and impressive example was the victory
in the game of Go against champions Lee Sedol6 and
ke Jie7 In the practical field the combination of these
techniques with the infinite amount of data collected
by Google is beginning to emerge as a strong
competitive advantage
Results have appeared on various fronts such as voice
recognition accuracy facial recognition and image
contexts in the Photos app automated response
suggestions for e-mail and prediction of user interest
in various services Google has announced that it will
soon be possible to point your smartphone camera at
an object or establishment and receive information
about it
Search and Maps services have been great labs for
these techniques but YouTube may currently be the
most surprising beneficiary More than 400 hours of
video are uploaded to YouTube every minute Service
quality relies heavily on the ability to sort the wheat
from the chaff and recommend what really interests
each user ndash something absolutely impossible to do
with humans on the necessary scale Despite a few
stumbles here and there8 YouTube has learned and
reacted quickly At the beginning of 2016 YouTube
usersrsquo watch time grew at a rate of 60 per year
according to company data In December 2016 it
exceeded the mark of 1 billion hours per day 10 times
more than in 2012 Meanwhile the US TV industry
clocked in at 125 billion hours per day Netflix9 at
116 million hours and Facebook10 videos at
100 million hours
Digital video on demand is gaining ground for several
reasons The first of which is mobility YouTube users
watch on average one hour per day on their cell
phones11 without having to negotiate the use of the
home TV with anybody With improved screens and
connections this type of use only tends to grow Since
it is on demand users can take advantage of small
opportunities to watch throughout the day such as
on the way to work ndash or even in the bathroom As the
library is virtually endless (over 200 million hours of
video on YouTube) the content is extremely diverse
allowing users to search for the niche that most
appeals to them something impossible to accomplish
on TV regardless of the number of cable channels
available Finally since it is digital new content
standards such as 1080p 4k 360deg VR and so on are
6 httpswwwtheatlanticcomtechnologyarchive201603the-invisible-opponent4756117 httpswwwnytimescom20170525technologydaily-report-alphago-wins-againhtml8 httpsdigitalcontentnextorgblog20170331timeline-youtube-brand-safety-debacle9 httpswwwinccomemily-canalyoutube-gets-1-billion-of-videos-watched-a-dayhtml10 httpstechcrunchcom20160127facebook-grows11 httpsyoutubegoogleblogcom201706updates-from-vidcon-more-users-morehtml
10
Quarterly Report | Second Quarter 2017
much easier to adopt ndash while satellite and cable TV
infrastructure is much less flexible All this is wreaking
havoc in the US TV industry with a greater impact on
younger cohorts
The critical mass it has already reached the ability to
capture growth in smartphone usage its leadership
in both data and AI and its privileged position in
on-demand digital video with YouTube are the main
reasons that lead us to believe that Google will
continue to attract increasing attention of users
We will now focus on Googlersquos value proposition
for advertisers
the ability to offer productive tools to advertisers
The Search business (AdWords) still represents
Googlersquos biggest source of revenue The company does
not disclose exact figures but we estimate that this
represents something around 60 of gross revenue
and more than 80 of operating profit Given the
penetration already reached - especially in developed
countries - it does not seem reasonable to suppose
wATch Time TrenDs per week fOr TrADiTiOnAl Tv in The usAby AGe GrOup in The lAsT five yeArs
12-17 18-24 25-34 35-49 50-64 65+
-375
-265
-98
1684
-390
Source Nielsen
that most advertisers are failing to take advantage of
available ROI in their campaigns Thus future revenue
growth will mainly depend on i) the increase in time
spent using Google services (discussed in the previous
section) ii) adjustments to the predominance of ads
vs organic content in Search results and iii) Googlersquos
ability to improve its advertising targeting tools
Google constantly adjusts the way ads appear on
its search results page with some pages recently
creating room for ads by showing fewer unpaid
(organic) results The addition of a third and fourth
paid ads in search results on smartphones in 2015 and
2016 is an example of this trend Another example
was the increased space dedicated to Product Listing
Ads (PLAs) We have also noticed that it is becoming
increasingly harder to distinguish ads from organic
results For instance Google no longer highlights
ads on the results page in yellow Because of this the
company is sometimes accused of squeezing more
dollars from the traffic it already has effectively
forcing companies to pay to appear in search results
The company defends itself by arguing that it always
prioritizes the user experience and constantly tests
the side effects of this kind of change Its algorithms
have always prioritized higher quality ads in the
rankings so many of these ads turn out to be more
useful to users than organic results However it
still raises a yellow flag If Googlersquos growth relies
only on its current traffic it will be squeezed dry at
some point
iP-PARTiCiPACcedilOtildeES
11
Fortunately we see other more structural reasons for
Googlersquos revenue growth and returns to advertisers
As mentioned earlier smartphone ads account for
the lionrsquos share of growth in spending on AdWords
However the average cost per click on smartphone ads
is still roughly half that of desktops As ads are priced
at auctions their final price is associated with the sales
volume they can generate In fact this conversion
of clicks into sales is much lower on smartphones
than on desktops partly because it is harder to fill
out forms with address and credit card data when
making purchases on mobile devices Technologies
such as Android Pay and Apple Pay which facilitate
the customer checkout process should help close this
gap promoting sales boosting ROI making these ads
more valuable and fueling Googlersquos growth
Another way to improve advertiser ROI is to provide
more granular ad targeting Last year Google finally
divided AdWords campaigns into smartphones
tablets and desktops enabling it to determine the
words and prices for each campaign in a more refined
and assertive manner which has also increased
advertiserrsquos returns and consequently their spending
power The feedback from digital agencies is that
other steps in this direction would have the same
effect such as the ability to target different prices for
ads that will appear on different smartphone brands
in different locations or even the possibility of taking
greater advantage of the data that Google already has
on each userrsquos profile
There is also the opportunity to capture more
revenue by connecting the physical world to the
online world with the help of smartphones We have
already mentioned what Google is doing with maps
and smartphone cameras Today a third of Google
searches are made for local interests12 such as shops
and restaurants While the Amazon boogeyman
terrorizes retail Google is seen as an essential ally for
those who want to survive ndash offering branding and
customer capture and conversion services Google
will soon be able to measure the impact not only on
traffic but also on sales in physical stores after users
interact with online ads13 As we have seen in the past
measuring returns is an important step in convincing
advertisers to spend As around 90 of global retail is
not yet on the Internet it becomes clear how valuable
this initiative can be
When the campaign involves banners and videos that
have not immediately generated a purchase but have
influenced the customerrsquos final decision correctly
attributing their impact is crucial to knowing how
much to pay for them One of the common mistakes
is to attribute all the merit to the last click before
the purchase which is why Google created another
recently announced machine learning initiative
Google Attribution which estimates the role of
interactions with each ad in the customer convincing
trajectory leading to the purchase This improves
advertisersrsquo conversion ability (and therefore ROI)
and ads that appeared before the customerrsquos last
12 httpsearchenginelandcomsaying-third-mobile-searches-local-google-brings-new-ads-maps-25027813 httpsadwordsgoogleblogcom201705powering-ads-and-analytics-innovationshtml
IP-Participaccedilotildees
12
Quarterly Report | Second Quarter 2017
14 httpswwwmagnaglobalcomwp-contentuploads201612MAGNA-December-Global-Forecast-Update-Press-Releasepdf
click become more valuable (generating revenue
for Google) This technique will also be useful for
YouTube where ads tend to promote brands rather
than immediately capture purchases as is the case
in AdWords
YouTubersquos success is allowing Google to compete for
the global TV advertising budget of around 186 billion
dollars14 Several steps have been taken to speed up
this process At the end of 2013 Google allowed
Nielsen and comScore to independently measure
user interactions with YouTube ads increasing the
confidence of TV advertisers to invest in the platform
In 2014 it created Google Preferred a selection of
YouTubersquos premium content (1-5) in 13 categories
including beauty food and auto These high-profile
videos were chosen to receive ads from the most
conservative brands (which are used to the world of
TV) In 2016 Magna responsible for buying advertising
space for brands such as Johnson amp Johnson Coca-
Cola and Fiat Chrysler promised to transfer at least
US$ 250 million of its TV spending to Google Preferred
between October 2016 and December 2017 This was
partially motivated by high TV time prices There are
several experiments on ad formats that would be
impossible without the interactivity of the Internet
YouTube has been gradually breaking the inertia of
the relationship between agencies and TV networks
to show that its ads offer good returns As a result we
expect advertising spending on YouTube to grow at a
fast rate possibly outpacing growth in the platformrsquos
watch time
At some point Googlersquos revenue growth will saturate
and keep pace with the growth of the global advertising
market The perception that the digitization of
advertising still has a long runway ahead and that
Google remains one of the leaders in this process
makes us believe that this moment is still far enough to
justify our investment Mobile revenue growth plenty
of opportunity to refine ad targeting the growing
connection between the online and physical worlds
and the evolution of YouTubersquos monetization initiatives
are the main reasons why we believe that Google will
still have a lot to offer to its advertisers and therefore
has ample room for growth
As with every investment there are some problems
Thorny issues related to Alphabet and Google lie on
our radar and demand attention These are all reasons
for the fundrsquos fairly controlled exposure to a business
we consider to be truly exceptional We will briefly go
over some of them
bull Our eternal ignorance Google operates highly
dynamic businesses Although its skills and
competitive advantages may protect it from
most frontal attacks other indirect attacks of a
competitive regulatory technological or even
criminal nature are always possible Some of
them can cause serious damage We are not able
iP-PARTiCiPACcedilOtildeES
13
to judge or even anticipate all these risks and
therefore we adjust the position to our ignorance
bull the price Alphabet shares returned 26 per year
over the last five years Simple math shows that its
price to earnings ratio went from 22x in 2011 to 28x
at the close of 2016 (GAAP criteria unadjusted)
In this period the company has accumulated
US$ 42 billion in net cash and began providing
transparency to its investments in Other Bets its
division for long maturity projects including the
self-driving car We prefer to look at the value of
the business by excluding cash from the market
value and the cost of these investments from
net income (as if they were being capitalized
instead of being recognized as an expense) At
current prices this would indicate an adjusted PE
multiple of 18x for 2018 It means some juggling
but we believe this is a reasonable way to value
the business After the gains recorded since
we resumed purchasing the stock in 2016 we
consider the current price reasonable although
obviously less attractive than a few months ago
We do not expect fast appreciation but we do
expect the continued growth of the business to
be gradually recognized
bull the dilution Google is one of the companies
that most heavily compensates its employees
with equity instruments especially restricted
stock The dilution ranges between 15 and
20 per year which bothers us We take this into
account in our calculations but we would prefer if
the company used this instrument less frequently
while also being more aggressive in buybacks We
welcome CFO Ruth Poratrsquos initiatives to force the
adoption of GAAP criteria (which at least attempt
to account for these costs) in internal discussions
and budgets of Googlersquos team leaders We are
also pleased with the fact that the company has
stopped discussing non-GAAP data with the
market and is now adopting GAAP Paraphrasing
Charlie Munger the granting of restricted stock
represents both spending and dilution for
us shareholders
bull the super-voting shares Larry Page and Sergey
Brin protect their controlling power with no less
than three classes of shares There were two
classes in the IPO one with ten votes per share
(for them) and another with one vote per share
(for everyone else) The third class was created in
2014 with no voting rights as the dilution caused
by restricted stock and share-based acquisitions
had started bothering them Both have sold shares
and are increasingly less active in the companyrsquos
day-to-day life leaving the biggest operational
responsibilities to Sundar Pichai Despite being a
genius Sundar still has to deal with the fact that he
is neither a founder nor a controlling shareholder
something history shows to be a handicap in
difficult decisions We prefer Amazonrsquos model
because Bezos has the same class of shares as we
IP-Participaccedilotildees
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
6
Quarterly Report | Second Quarter 2017
who received exactly the same message regardless
of their particular interests The campaignrsquos impacts
were measured indirectly and imprecisely usually
based on consumer opinion surveys
On the Internet after a successful period for portals
such as AOL and Yahoo it became clear that the
first model to truly win would be Googlersquos In 2000
the company created AdWords a system in which
advertisers pay to show small ads to users of its search
service The factors that determine where and when an
ad appears are i) the relevance of the ad to the userrsquos
search ii) the amount the advertiser is willing to pay
(in an auction system) iii) the quality of the ad and iv)
the quality of the page to which the ad directs the user
The first point ndash the relevance to the search - in
itself already makes the AdWords system completely
different from traditional media The ad only appears
when the user expresses explicit interest in a particular
subject Another fundamental difference is that the
advertiser only pays when the ad is clicked which
reinforces the connection between the advertiserrsquos
investment and the userrsquos behavior With the evolution
of systems that track usersrsquo online attitudes it became
possible to monitor them until the time of purchase
As a result advertisers have definitive proof that their
investment has paid off
This basic concept is at the heart of the money-making
machine Google has turned into By delivering the
right ad to the right person at the right time every
dollar spent on AdWords produces easily measurable
results The success of AdWords coupled with Googlersquos
leadership in usability and technology solidified
the search enginersquos dominance outstripping rivals
like AltaVista to become the biggest gateway to the
Internet for billions of people
With the ease of assessing user attitudes advertisers
have increasingly adopted ROI measures to determine
the size of their advertising budgets As returns were -
and still are - high Google has captured an explosion
in online ad spending The result can be seen in the
graph below
iP-PARTiCiPACcedilOtildeES
Source Alphabet
GrOss revenue - AlphAbeT in us$ billiOn
ADVERTISING GOOGLE OTHERS OTHER BETS
20042010
20062012
20082014
20052011
20072013
20092015
2016
100
60
90
50
80
40
70
30
1020
032
293
61
379
106
460
166
555
218
660
237
750
903
Over time creative talent has given room to statistics
in advertising agencies Campaigns are designed in
an increasingly scientific manner with thousands of
variations evaluated iteratively
Large advertising conglomerates such as WPP have
updated their business model giving emphasis to
digital agencies some of which are solely dedicated
to the search service
7
IP-Participaccedilotildees
In the last 17 years both AdWords and Google Search have evolved a lot but the core concept has remained the
same In this period Google has absorbed an increasing share of advertising revenues in the world especially
superseding print media The graph below designed by venture capital firm Andreessen Horowitz clearly shows
what happened
Believing in Googlersquos revenue growth means to a
large extent a bet on the continuity of this share gain
There are essentially two elements required to make
this possible
bull The ability to attract users with interesting and
useful services
bull The ability to offer productive tools to advertisers
ndash connecting them to the right users at the
right times ndash in order to capture more of their
advertising budgets
We will analyze these two points below
the ability to attract users
We have reasons to believe that Google has a good
chance to continue attracting the attention of users
with differentiated services ndash beginning with the
critical mass that has already been reached Google
currently has seven assets with more than 1 billion
monthly active users Search Android Maps Chrome
YouTube Play and Gmail Android has over 2 billion
users and YouTube has more than 15 billion users
Besides these services the company has Drive with
800 million users and Photos with 500 million users
growing rapidly
8
Quarterly Report | Second Quarter 2017
iP-PARTiCiPACcedilOtildeES
4 For example Googlersquos work to index the web is the same as Bingrsquos but it can dilute those costs between far more users5 Machine learning is the science of giving computers the ability to learn without being explicitly programmed
The scale the company has achieved gives it
important advantages not only in terms of costs4
but also in terms of its ability to capture data about
users introduce new relevant products and take
advantage of network effects with participants such
as advertisers app creators (Play Store) and content
creators (YouTube in particular)
Googlersquos scale and engineering expertise have so
far protected it from frontal attacks on Search and
its adjacencies The company has also made highly
successful strategic acquisitions such as YouTube
DoubleClick and Android
Android which originally served to protect the
company from Microsoftrsquos possible dominance on the
web via smartphones was quickly and successfully
redirected to compete with the iPhone Today it has
over 80 of the smartphone market and serves as a
Trojan Horse for Google services Even on the iPhone
where Apple applications such as e-mail and maps
come pre-installed Google services are among the
most widely used
The ability to ride the adoption of smartphones has
been one of Googlersquos trump cards While Apple has
been the one to best turn the purchase of these
devices into profit Google is well positioned to
capture revenue from services related to their use
Smartphones have brutally increased the average
daily time people are connected to the Internet
Even with the rise of apps and social networks this
wave has also strongly boosted Googlersquos services In
the US market estimates of search-focused digital
agencies show that spending on AdWords ads for
smartphones has grown at rates above 50 percent in
recent years As the default search service on both
iOS and Android browsers Google Search has gained
even more market share (versus Bing and Yahoo) with
the adoption of smartphones
Time spenT per ADulT user per DAy wiTh DiGiTAl meDiA in The usA
ho
urs
per
day
Source eMarketer
MOBILE DESkTOPLAPTOP OTHER CONNECTED DEVICES
20102012
20082014
20112013
20092015
2016
6
2
5
1
4
3
0
22 23 24 26 25 23 22 22 22
03 0304
0816 23 26 28 31
The increasing processing power improved wireless
connections and larger screen sizes are also factors
that will enable increasingly useful and valuable
services for Google users Add to that the multiplicity
of existing sensors in smartphones and it becomes
easier to know the userrsquos context in order to provide
the most appropriate information or advertisement at
any given time
In order to seize these opportunities Google
invests heavily to remain at the forefront of artificial
intelligence techniques such as machine learning5
It appears to have been successful both in its own
9
IP-Participaccedilotildees
Source Google IO (517)
initiatives and in acquisitions and partnerships with
leaders in the field (such as Fei-Fei Li from Stanford)
One curious and impressive example was the victory
in the game of Go against champions Lee Sedol6 and
ke Jie7 In the practical field the combination of these
techniques with the infinite amount of data collected
by Google is beginning to emerge as a strong
competitive advantage
Results have appeared on various fronts such as voice
recognition accuracy facial recognition and image
contexts in the Photos app automated response
suggestions for e-mail and prediction of user interest
in various services Google has announced that it will
soon be possible to point your smartphone camera at
an object or establishment and receive information
about it
Search and Maps services have been great labs for
these techniques but YouTube may currently be the
most surprising beneficiary More than 400 hours of
video are uploaded to YouTube every minute Service
quality relies heavily on the ability to sort the wheat
from the chaff and recommend what really interests
each user ndash something absolutely impossible to do
with humans on the necessary scale Despite a few
stumbles here and there8 YouTube has learned and
reacted quickly At the beginning of 2016 YouTube
usersrsquo watch time grew at a rate of 60 per year
according to company data In December 2016 it
exceeded the mark of 1 billion hours per day 10 times
more than in 2012 Meanwhile the US TV industry
clocked in at 125 billion hours per day Netflix9 at
116 million hours and Facebook10 videos at
100 million hours
Digital video on demand is gaining ground for several
reasons The first of which is mobility YouTube users
watch on average one hour per day on their cell
phones11 without having to negotiate the use of the
home TV with anybody With improved screens and
connections this type of use only tends to grow Since
it is on demand users can take advantage of small
opportunities to watch throughout the day such as
on the way to work ndash or even in the bathroom As the
library is virtually endless (over 200 million hours of
video on YouTube) the content is extremely diverse
allowing users to search for the niche that most
appeals to them something impossible to accomplish
on TV regardless of the number of cable channels
available Finally since it is digital new content
standards such as 1080p 4k 360deg VR and so on are
6 httpswwwtheatlanticcomtechnologyarchive201603the-invisible-opponent4756117 httpswwwnytimescom20170525technologydaily-report-alphago-wins-againhtml8 httpsdigitalcontentnextorgblog20170331timeline-youtube-brand-safety-debacle9 httpswwwinccomemily-canalyoutube-gets-1-billion-of-videos-watched-a-dayhtml10 httpstechcrunchcom20160127facebook-grows11 httpsyoutubegoogleblogcom201706updates-from-vidcon-more-users-morehtml
10
Quarterly Report | Second Quarter 2017
much easier to adopt ndash while satellite and cable TV
infrastructure is much less flexible All this is wreaking
havoc in the US TV industry with a greater impact on
younger cohorts
The critical mass it has already reached the ability to
capture growth in smartphone usage its leadership
in both data and AI and its privileged position in
on-demand digital video with YouTube are the main
reasons that lead us to believe that Google will
continue to attract increasing attention of users
We will now focus on Googlersquos value proposition
for advertisers
the ability to offer productive tools to advertisers
The Search business (AdWords) still represents
Googlersquos biggest source of revenue The company does
not disclose exact figures but we estimate that this
represents something around 60 of gross revenue
and more than 80 of operating profit Given the
penetration already reached - especially in developed
countries - it does not seem reasonable to suppose
wATch Time TrenDs per week fOr TrADiTiOnAl Tv in The usAby AGe GrOup in The lAsT five yeArs
12-17 18-24 25-34 35-49 50-64 65+
-375
-265
-98
1684
-390
Source Nielsen
that most advertisers are failing to take advantage of
available ROI in their campaigns Thus future revenue
growth will mainly depend on i) the increase in time
spent using Google services (discussed in the previous
section) ii) adjustments to the predominance of ads
vs organic content in Search results and iii) Googlersquos
ability to improve its advertising targeting tools
Google constantly adjusts the way ads appear on
its search results page with some pages recently
creating room for ads by showing fewer unpaid
(organic) results The addition of a third and fourth
paid ads in search results on smartphones in 2015 and
2016 is an example of this trend Another example
was the increased space dedicated to Product Listing
Ads (PLAs) We have also noticed that it is becoming
increasingly harder to distinguish ads from organic
results For instance Google no longer highlights
ads on the results page in yellow Because of this the
company is sometimes accused of squeezing more
dollars from the traffic it already has effectively
forcing companies to pay to appear in search results
The company defends itself by arguing that it always
prioritizes the user experience and constantly tests
the side effects of this kind of change Its algorithms
have always prioritized higher quality ads in the
rankings so many of these ads turn out to be more
useful to users than organic results However it
still raises a yellow flag If Googlersquos growth relies
only on its current traffic it will be squeezed dry at
some point
iP-PARTiCiPACcedilOtildeES
11
Fortunately we see other more structural reasons for
Googlersquos revenue growth and returns to advertisers
As mentioned earlier smartphone ads account for
the lionrsquos share of growth in spending on AdWords
However the average cost per click on smartphone ads
is still roughly half that of desktops As ads are priced
at auctions their final price is associated with the sales
volume they can generate In fact this conversion
of clicks into sales is much lower on smartphones
than on desktops partly because it is harder to fill
out forms with address and credit card data when
making purchases on mobile devices Technologies
such as Android Pay and Apple Pay which facilitate
the customer checkout process should help close this
gap promoting sales boosting ROI making these ads
more valuable and fueling Googlersquos growth
Another way to improve advertiser ROI is to provide
more granular ad targeting Last year Google finally
divided AdWords campaigns into smartphones
tablets and desktops enabling it to determine the
words and prices for each campaign in a more refined
and assertive manner which has also increased
advertiserrsquos returns and consequently their spending
power The feedback from digital agencies is that
other steps in this direction would have the same
effect such as the ability to target different prices for
ads that will appear on different smartphone brands
in different locations or even the possibility of taking
greater advantage of the data that Google already has
on each userrsquos profile
There is also the opportunity to capture more
revenue by connecting the physical world to the
online world with the help of smartphones We have
already mentioned what Google is doing with maps
and smartphone cameras Today a third of Google
searches are made for local interests12 such as shops
and restaurants While the Amazon boogeyman
terrorizes retail Google is seen as an essential ally for
those who want to survive ndash offering branding and
customer capture and conversion services Google
will soon be able to measure the impact not only on
traffic but also on sales in physical stores after users
interact with online ads13 As we have seen in the past
measuring returns is an important step in convincing
advertisers to spend As around 90 of global retail is
not yet on the Internet it becomes clear how valuable
this initiative can be
When the campaign involves banners and videos that
have not immediately generated a purchase but have
influenced the customerrsquos final decision correctly
attributing their impact is crucial to knowing how
much to pay for them One of the common mistakes
is to attribute all the merit to the last click before
the purchase which is why Google created another
recently announced machine learning initiative
Google Attribution which estimates the role of
interactions with each ad in the customer convincing
trajectory leading to the purchase This improves
advertisersrsquo conversion ability (and therefore ROI)
and ads that appeared before the customerrsquos last
12 httpsearchenginelandcomsaying-third-mobile-searches-local-google-brings-new-ads-maps-25027813 httpsadwordsgoogleblogcom201705powering-ads-and-analytics-innovationshtml
IP-Participaccedilotildees
12
Quarterly Report | Second Quarter 2017
14 httpswwwmagnaglobalcomwp-contentuploads201612MAGNA-December-Global-Forecast-Update-Press-Releasepdf
click become more valuable (generating revenue
for Google) This technique will also be useful for
YouTube where ads tend to promote brands rather
than immediately capture purchases as is the case
in AdWords
YouTubersquos success is allowing Google to compete for
the global TV advertising budget of around 186 billion
dollars14 Several steps have been taken to speed up
this process At the end of 2013 Google allowed
Nielsen and comScore to independently measure
user interactions with YouTube ads increasing the
confidence of TV advertisers to invest in the platform
In 2014 it created Google Preferred a selection of
YouTubersquos premium content (1-5) in 13 categories
including beauty food and auto These high-profile
videos were chosen to receive ads from the most
conservative brands (which are used to the world of
TV) In 2016 Magna responsible for buying advertising
space for brands such as Johnson amp Johnson Coca-
Cola and Fiat Chrysler promised to transfer at least
US$ 250 million of its TV spending to Google Preferred
between October 2016 and December 2017 This was
partially motivated by high TV time prices There are
several experiments on ad formats that would be
impossible without the interactivity of the Internet
YouTube has been gradually breaking the inertia of
the relationship between agencies and TV networks
to show that its ads offer good returns As a result we
expect advertising spending on YouTube to grow at a
fast rate possibly outpacing growth in the platformrsquos
watch time
At some point Googlersquos revenue growth will saturate
and keep pace with the growth of the global advertising
market The perception that the digitization of
advertising still has a long runway ahead and that
Google remains one of the leaders in this process
makes us believe that this moment is still far enough to
justify our investment Mobile revenue growth plenty
of opportunity to refine ad targeting the growing
connection between the online and physical worlds
and the evolution of YouTubersquos monetization initiatives
are the main reasons why we believe that Google will
still have a lot to offer to its advertisers and therefore
has ample room for growth
As with every investment there are some problems
Thorny issues related to Alphabet and Google lie on
our radar and demand attention These are all reasons
for the fundrsquos fairly controlled exposure to a business
we consider to be truly exceptional We will briefly go
over some of them
bull Our eternal ignorance Google operates highly
dynamic businesses Although its skills and
competitive advantages may protect it from
most frontal attacks other indirect attacks of a
competitive regulatory technological or even
criminal nature are always possible Some of
them can cause serious damage We are not able
iP-PARTiCiPACcedilOtildeES
13
to judge or even anticipate all these risks and
therefore we adjust the position to our ignorance
bull the price Alphabet shares returned 26 per year
over the last five years Simple math shows that its
price to earnings ratio went from 22x in 2011 to 28x
at the close of 2016 (GAAP criteria unadjusted)
In this period the company has accumulated
US$ 42 billion in net cash and began providing
transparency to its investments in Other Bets its
division for long maturity projects including the
self-driving car We prefer to look at the value of
the business by excluding cash from the market
value and the cost of these investments from
net income (as if they were being capitalized
instead of being recognized as an expense) At
current prices this would indicate an adjusted PE
multiple of 18x for 2018 It means some juggling
but we believe this is a reasonable way to value
the business After the gains recorded since
we resumed purchasing the stock in 2016 we
consider the current price reasonable although
obviously less attractive than a few months ago
We do not expect fast appreciation but we do
expect the continued growth of the business to
be gradually recognized
bull the dilution Google is one of the companies
that most heavily compensates its employees
with equity instruments especially restricted
stock The dilution ranges between 15 and
20 per year which bothers us We take this into
account in our calculations but we would prefer if
the company used this instrument less frequently
while also being more aggressive in buybacks We
welcome CFO Ruth Poratrsquos initiatives to force the
adoption of GAAP criteria (which at least attempt
to account for these costs) in internal discussions
and budgets of Googlersquos team leaders We are
also pleased with the fact that the company has
stopped discussing non-GAAP data with the
market and is now adopting GAAP Paraphrasing
Charlie Munger the granting of restricted stock
represents both spending and dilution for
us shareholders
bull the super-voting shares Larry Page and Sergey
Brin protect their controlling power with no less
than three classes of shares There were two
classes in the IPO one with ten votes per share
(for them) and another with one vote per share
(for everyone else) The third class was created in
2014 with no voting rights as the dilution caused
by restricted stock and share-based acquisitions
had started bothering them Both have sold shares
and are increasingly less active in the companyrsquos
day-to-day life leaving the biggest operational
responsibilities to Sundar Pichai Despite being a
genius Sundar still has to deal with the fact that he
is neither a founder nor a controlling shareholder
something history shows to be a handicap in
difficult decisions We prefer Amazonrsquos model
because Bezos has the same class of shares as we
IP-Participaccedilotildees
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
7
IP-Participaccedilotildees
In the last 17 years both AdWords and Google Search have evolved a lot but the core concept has remained the
same In this period Google has absorbed an increasing share of advertising revenues in the world especially
superseding print media The graph below designed by venture capital firm Andreessen Horowitz clearly shows
what happened
Believing in Googlersquos revenue growth means to a
large extent a bet on the continuity of this share gain
There are essentially two elements required to make
this possible
bull The ability to attract users with interesting and
useful services
bull The ability to offer productive tools to advertisers
ndash connecting them to the right users at the
right times ndash in order to capture more of their
advertising budgets
We will analyze these two points below
the ability to attract users
We have reasons to believe that Google has a good
chance to continue attracting the attention of users
with differentiated services ndash beginning with the
critical mass that has already been reached Google
currently has seven assets with more than 1 billion
monthly active users Search Android Maps Chrome
YouTube Play and Gmail Android has over 2 billion
users and YouTube has more than 15 billion users
Besides these services the company has Drive with
800 million users and Photos with 500 million users
growing rapidly
8
Quarterly Report | Second Quarter 2017
iP-PARTiCiPACcedilOtildeES
4 For example Googlersquos work to index the web is the same as Bingrsquos but it can dilute those costs between far more users5 Machine learning is the science of giving computers the ability to learn without being explicitly programmed
The scale the company has achieved gives it
important advantages not only in terms of costs4
but also in terms of its ability to capture data about
users introduce new relevant products and take
advantage of network effects with participants such
as advertisers app creators (Play Store) and content
creators (YouTube in particular)
Googlersquos scale and engineering expertise have so
far protected it from frontal attacks on Search and
its adjacencies The company has also made highly
successful strategic acquisitions such as YouTube
DoubleClick and Android
Android which originally served to protect the
company from Microsoftrsquos possible dominance on the
web via smartphones was quickly and successfully
redirected to compete with the iPhone Today it has
over 80 of the smartphone market and serves as a
Trojan Horse for Google services Even on the iPhone
where Apple applications such as e-mail and maps
come pre-installed Google services are among the
most widely used
The ability to ride the adoption of smartphones has
been one of Googlersquos trump cards While Apple has
been the one to best turn the purchase of these
devices into profit Google is well positioned to
capture revenue from services related to their use
Smartphones have brutally increased the average
daily time people are connected to the Internet
Even with the rise of apps and social networks this
wave has also strongly boosted Googlersquos services In
the US market estimates of search-focused digital
agencies show that spending on AdWords ads for
smartphones has grown at rates above 50 percent in
recent years As the default search service on both
iOS and Android browsers Google Search has gained
even more market share (versus Bing and Yahoo) with
the adoption of smartphones
Time spenT per ADulT user per DAy wiTh DiGiTAl meDiA in The usA
ho
urs
per
day
Source eMarketer
MOBILE DESkTOPLAPTOP OTHER CONNECTED DEVICES
20102012
20082014
20112013
20092015
2016
6
2
5
1
4
3
0
22 23 24 26 25 23 22 22 22
03 0304
0816 23 26 28 31
The increasing processing power improved wireless
connections and larger screen sizes are also factors
that will enable increasingly useful and valuable
services for Google users Add to that the multiplicity
of existing sensors in smartphones and it becomes
easier to know the userrsquos context in order to provide
the most appropriate information or advertisement at
any given time
In order to seize these opportunities Google
invests heavily to remain at the forefront of artificial
intelligence techniques such as machine learning5
It appears to have been successful both in its own
9
IP-Participaccedilotildees
Source Google IO (517)
initiatives and in acquisitions and partnerships with
leaders in the field (such as Fei-Fei Li from Stanford)
One curious and impressive example was the victory
in the game of Go against champions Lee Sedol6 and
ke Jie7 In the practical field the combination of these
techniques with the infinite amount of data collected
by Google is beginning to emerge as a strong
competitive advantage
Results have appeared on various fronts such as voice
recognition accuracy facial recognition and image
contexts in the Photos app automated response
suggestions for e-mail and prediction of user interest
in various services Google has announced that it will
soon be possible to point your smartphone camera at
an object or establishment and receive information
about it
Search and Maps services have been great labs for
these techniques but YouTube may currently be the
most surprising beneficiary More than 400 hours of
video are uploaded to YouTube every minute Service
quality relies heavily on the ability to sort the wheat
from the chaff and recommend what really interests
each user ndash something absolutely impossible to do
with humans on the necessary scale Despite a few
stumbles here and there8 YouTube has learned and
reacted quickly At the beginning of 2016 YouTube
usersrsquo watch time grew at a rate of 60 per year
according to company data In December 2016 it
exceeded the mark of 1 billion hours per day 10 times
more than in 2012 Meanwhile the US TV industry
clocked in at 125 billion hours per day Netflix9 at
116 million hours and Facebook10 videos at
100 million hours
Digital video on demand is gaining ground for several
reasons The first of which is mobility YouTube users
watch on average one hour per day on their cell
phones11 without having to negotiate the use of the
home TV with anybody With improved screens and
connections this type of use only tends to grow Since
it is on demand users can take advantage of small
opportunities to watch throughout the day such as
on the way to work ndash or even in the bathroom As the
library is virtually endless (over 200 million hours of
video on YouTube) the content is extremely diverse
allowing users to search for the niche that most
appeals to them something impossible to accomplish
on TV regardless of the number of cable channels
available Finally since it is digital new content
standards such as 1080p 4k 360deg VR and so on are
6 httpswwwtheatlanticcomtechnologyarchive201603the-invisible-opponent4756117 httpswwwnytimescom20170525technologydaily-report-alphago-wins-againhtml8 httpsdigitalcontentnextorgblog20170331timeline-youtube-brand-safety-debacle9 httpswwwinccomemily-canalyoutube-gets-1-billion-of-videos-watched-a-dayhtml10 httpstechcrunchcom20160127facebook-grows11 httpsyoutubegoogleblogcom201706updates-from-vidcon-more-users-morehtml
10
Quarterly Report | Second Quarter 2017
much easier to adopt ndash while satellite and cable TV
infrastructure is much less flexible All this is wreaking
havoc in the US TV industry with a greater impact on
younger cohorts
The critical mass it has already reached the ability to
capture growth in smartphone usage its leadership
in both data and AI and its privileged position in
on-demand digital video with YouTube are the main
reasons that lead us to believe that Google will
continue to attract increasing attention of users
We will now focus on Googlersquos value proposition
for advertisers
the ability to offer productive tools to advertisers
The Search business (AdWords) still represents
Googlersquos biggest source of revenue The company does
not disclose exact figures but we estimate that this
represents something around 60 of gross revenue
and more than 80 of operating profit Given the
penetration already reached - especially in developed
countries - it does not seem reasonable to suppose
wATch Time TrenDs per week fOr TrADiTiOnAl Tv in The usAby AGe GrOup in The lAsT five yeArs
12-17 18-24 25-34 35-49 50-64 65+
-375
-265
-98
1684
-390
Source Nielsen
that most advertisers are failing to take advantage of
available ROI in their campaigns Thus future revenue
growth will mainly depend on i) the increase in time
spent using Google services (discussed in the previous
section) ii) adjustments to the predominance of ads
vs organic content in Search results and iii) Googlersquos
ability to improve its advertising targeting tools
Google constantly adjusts the way ads appear on
its search results page with some pages recently
creating room for ads by showing fewer unpaid
(organic) results The addition of a third and fourth
paid ads in search results on smartphones in 2015 and
2016 is an example of this trend Another example
was the increased space dedicated to Product Listing
Ads (PLAs) We have also noticed that it is becoming
increasingly harder to distinguish ads from organic
results For instance Google no longer highlights
ads on the results page in yellow Because of this the
company is sometimes accused of squeezing more
dollars from the traffic it already has effectively
forcing companies to pay to appear in search results
The company defends itself by arguing that it always
prioritizes the user experience and constantly tests
the side effects of this kind of change Its algorithms
have always prioritized higher quality ads in the
rankings so many of these ads turn out to be more
useful to users than organic results However it
still raises a yellow flag If Googlersquos growth relies
only on its current traffic it will be squeezed dry at
some point
iP-PARTiCiPACcedilOtildeES
11
Fortunately we see other more structural reasons for
Googlersquos revenue growth and returns to advertisers
As mentioned earlier smartphone ads account for
the lionrsquos share of growth in spending on AdWords
However the average cost per click on smartphone ads
is still roughly half that of desktops As ads are priced
at auctions their final price is associated with the sales
volume they can generate In fact this conversion
of clicks into sales is much lower on smartphones
than on desktops partly because it is harder to fill
out forms with address and credit card data when
making purchases on mobile devices Technologies
such as Android Pay and Apple Pay which facilitate
the customer checkout process should help close this
gap promoting sales boosting ROI making these ads
more valuable and fueling Googlersquos growth
Another way to improve advertiser ROI is to provide
more granular ad targeting Last year Google finally
divided AdWords campaigns into smartphones
tablets and desktops enabling it to determine the
words and prices for each campaign in a more refined
and assertive manner which has also increased
advertiserrsquos returns and consequently their spending
power The feedback from digital agencies is that
other steps in this direction would have the same
effect such as the ability to target different prices for
ads that will appear on different smartphone brands
in different locations or even the possibility of taking
greater advantage of the data that Google already has
on each userrsquos profile
There is also the opportunity to capture more
revenue by connecting the physical world to the
online world with the help of smartphones We have
already mentioned what Google is doing with maps
and smartphone cameras Today a third of Google
searches are made for local interests12 such as shops
and restaurants While the Amazon boogeyman
terrorizes retail Google is seen as an essential ally for
those who want to survive ndash offering branding and
customer capture and conversion services Google
will soon be able to measure the impact not only on
traffic but also on sales in physical stores after users
interact with online ads13 As we have seen in the past
measuring returns is an important step in convincing
advertisers to spend As around 90 of global retail is
not yet on the Internet it becomes clear how valuable
this initiative can be
When the campaign involves banners and videos that
have not immediately generated a purchase but have
influenced the customerrsquos final decision correctly
attributing their impact is crucial to knowing how
much to pay for them One of the common mistakes
is to attribute all the merit to the last click before
the purchase which is why Google created another
recently announced machine learning initiative
Google Attribution which estimates the role of
interactions with each ad in the customer convincing
trajectory leading to the purchase This improves
advertisersrsquo conversion ability (and therefore ROI)
and ads that appeared before the customerrsquos last
12 httpsearchenginelandcomsaying-third-mobile-searches-local-google-brings-new-ads-maps-25027813 httpsadwordsgoogleblogcom201705powering-ads-and-analytics-innovationshtml
IP-Participaccedilotildees
12
Quarterly Report | Second Quarter 2017
14 httpswwwmagnaglobalcomwp-contentuploads201612MAGNA-December-Global-Forecast-Update-Press-Releasepdf
click become more valuable (generating revenue
for Google) This technique will also be useful for
YouTube where ads tend to promote brands rather
than immediately capture purchases as is the case
in AdWords
YouTubersquos success is allowing Google to compete for
the global TV advertising budget of around 186 billion
dollars14 Several steps have been taken to speed up
this process At the end of 2013 Google allowed
Nielsen and comScore to independently measure
user interactions with YouTube ads increasing the
confidence of TV advertisers to invest in the platform
In 2014 it created Google Preferred a selection of
YouTubersquos premium content (1-5) in 13 categories
including beauty food and auto These high-profile
videos were chosen to receive ads from the most
conservative brands (which are used to the world of
TV) In 2016 Magna responsible for buying advertising
space for brands such as Johnson amp Johnson Coca-
Cola and Fiat Chrysler promised to transfer at least
US$ 250 million of its TV spending to Google Preferred
between October 2016 and December 2017 This was
partially motivated by high TV time prices There are
several experiments on ad formats that would be
impossible without the interactivity of the Internet
YouTube has been gradually breaking the inertia of
the relationship between agencies and TV networks
to show that its ads offer good returns As a result we
expect advertising spending on YouTube to grow at a
fast rate possibly outpacing growth in the platformrsquos
watch time
At some point Googlersquos revenue growth will saturate
and keep pace with the growth of the global advertising
market The perception that the digitization of
advertising still has a long runway ahead and that
Google remains one of the leaders in this process
makes us believe that this moment is still far enough to
justify our investment Mobile revenue growth plenty
of opportunity to refine ad targeting the growing
connection between the online and physical worlds
and the evolution of YouTubersquos monetization initiatives
are the main reasons why we believe that Google will
still have a lot to offer to its advertisers and therefore
has ample room for growth
As with every investment there are some problems
Thorny issues related to Alphabet and Google lie on
our radar and demand attention These are all reasons
for the fundrsquos fairly controlled exposure to a business
we consider to be truly exceptional We will briefly go
over some of them
bull Our eternal ignorance Google operates highly
dynamic businesses Although its skills and
competitive advantages may protect it from
most frontal attacks other indirect attacks of a
competitive regulatory technological or even
criminal nature are always possible Some of
them can cause serious damage We are not able
iP-PARTiCiPACcedilOtildeES
13
to judge or even anticipate all these risks and
therefore we adjust the position to our ignorance
bull the price Alphabet shares returned 26 per year
over the last five years Simple math shows that its
price to earnings ratio went from 22x in 2011 to 28x
at the close of 2016 (GAAP criteria unadjusted)
In this period the company has accumulated
US$ 42 billion in net cash and began providing
transparency to its investments in Other Bets its
division for long maturity projects including the
self-driving car We prefer to look at the value of
the business by excluding cash from the market
value and the cost of these investments from
net income (as if they were being capitalized
instead of being recognized as an expense) At
current prices this would indicate an adjusted PE
multiple of 18x for 2018 It means some juggling
but we believe this is a reasonable way to value
the business After the gains recorded since
we resumed purchasing the stock in 2016 we
consider the current price reasonable although
obviously less attractive than a few months ago
We do not expect fast appreciation but we do
expect the continued growth of the business to
be gradually recognized
bull the dilution Google is one of the companies
that most heavily compensates its employees
with equity instruments especially restricted
stock The dilution ranges between 15 and
20 per year which bothers us We take this into
account in our calculations but we would prefer if
the company used this instrument less frequently
while also being more aggressive in buybacks We
welcome CFO Ruth Poratrsquos initiatives to force the
adoption of GAAP criteria (which at least attempt
to account for these costs) in internal discussions
and budgets of Googlersquos team leaders We are
also pleased with the fact that the company has
stopped discussing non-GAAP data with the
market and is now adopting GAAP Paraphrasing
Charlie Munger the granting of restricted stock
represents both spending and dilution for
us shareholders
bull the super-voting shares Larry Page and Sergey
Brin protect their controlling power with no less
than three classes of shares There were two
classes in the IPO one with ten votes per share
(for them) and another with one vote per share
(for everyone else) The third class was created in
2014 with no voting rights as the dilution caused
by restricted stock and share-based acquisitions
had started bothering them Both have sold shares
and are increasingly less active in the companyrsquos
day-to-day life leaving the biggest operational
responsibilities to Sundar Pichai Despite being a
genius Sundar still has to deal with the fact that he
is neither a founder nor a controlling shareholder
something history shows to be a handicap in
difficult decisions We prefer Amazonrsquos model
because Bezos has the same class of shares as we
IP-Participaccedilotildees
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
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Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
8
Quarterly Report | Second Quarter 2017
iP-PARTiCiPACcedilOtildeES
4 For example Googlersquos work to index the web is the same as Bingrsquos but it can dilute those costs between far more users5 Machine learning is the science of giving computers the ability to learn without being explicitly programmed
The scale the company has achieved gives it
important advantages not only in terms of costs4
but also in terms of its ability to capture data about
users introduce new relevant products and take
advantage of network effects with participants such
as advertisers app creators (Play Store) and content
creators (YouTube in particular)
Googlersquos scale and engineering expertise have so
far protected it from frontal attacks on Search and
its adjacencies The company has also made highly
successful strategic acquisitions such as YouTube
DoubleClick and Android
Android which originally served to protect the
company from Microsoftrsquos possible dominance on the
web via smartphones was quickly and successfully
redirected to compete with the iPhone Today it has
over 80 of the smartphone market and serves as a
Trojan Horse for Google services Even on the iPhone
where Apple applications such as e-mail and maps
come pre-installed Google services are among the
most widely used
The ability to ride the adoption of smartphones has
been one of Googlersquos trump cards While Apple has
been the one to best turn the purchase of these
devices into profit Google is well positioned to
capture revenue from services related to their use
Smartphones have brutally increased the average
daily time people are connected to the Internet
Even with the rise of apps and social networks this
wave has also strongly boosted Googlersquos services In
the US market estimates of search-focused digital
agencies show that spending on AdWords ads for
smartphones has grown at rates above 50 percent in
recent years As the default search service on both
iOS and Android browsers Google Search has gained
even more market share (versus Bing and Yahoo) with
the adoption of smartphones
Time spenT per ADulT user per DAy wiTh DiGiTAl meDiA in The usA
ho
urs
per
day
Source eMarketer
MOBILE DESkTOPLAPTOP OTHER CONNECTED DEVICES
20102012
20082014
20112013
20092015
2016
6
2
5
1
4
3
0
22 23 24 26 25 23 22 22 22
03 0304
0816 23 26 28 31
The increasing processing power improved wireless
connections and larger screen sizes are also factors
that will enable increasingly useful and valuable
services for Google users Add to that the multiplicity
of existing sensors in smartphones and it becomes
easier to know the userrsquos context in order to provide
the most appropriate information or advertisement at
any given time
In order to seize these opportunities Google
invests heavily to remain at the forefront of artificial
intelligence techniques such as machine learning5
It appears to have been successful both in its own
9
IP-Participaccedilotildees
Source Google IO (517)
initiatives and in acquisitions and partnerships with
leaders in the field (such as Fei-Fei Li from Stanford)
One curious and impressive example was the victory
in the game of Go against champions Lee Sedol6 and
ke Jie7 In the practical field the combination of these
techniques with the infinite amount of data collected
by Google is beginning to emerge as a strong
competitive advantage
Results have appeared on various fronts such as voice
recognition accuracy facial recognition and image
contexts in the Photos app automated response
suggestions for e-mail and prediction of user interest
in various services Google has announced that it will
soon be possible to point your smartphone camera at
an object or establishment and receive information
about it
Search and Maps services have been great labs for
these techniques but YouTube may currently be the
most surprising beneficiary More than 400 hours of
video are uploaded to YouTube every minute Service
quality relies heavily on the ability to sort the wheat
from the chaff and recommend what really interests
each user ndash something absolutely impossible to do
with humans on the necessary scale Despite a few
stumbles here and there8 YouTube has learned and
reacted quickly At the beginning of 2016 YouTube
usersrsquo watch time grew at a rate of 60 per year
according to company data In December 2016 it
exceeded the mark of 1 billion hours per day 10 times
more than in 2012 Meanwhile the US TV industry
clocked in at 125 billion hours per day Netflix9 at
116 million hours and Facebook10 videos at
100 million hours
Digital video on demand is gaining ground for several
reasons The first of which is mobility YouTube users
watch on average one hour per day on their cell
phones11 without having to negotiate the use of the
home TV with anybody With improved screens and
connections this type of use only tends to grow Since
it is on demand users can take advantage of small
opportunities to watch throughout the day such as
on the way to work ndash or even in the bathroom As the
library is virtually endless (over 200 million hours of
video on YouTube) the content is extremely diverse
allowing users to search for the niche that most
appeals to them something impossible to accomplish
on TV regardless of the number of cable channels
available Finally since it is digital new content
standards such as 1080p 4k 360deg VR and so on are
6 httpswwwtheatlanticcomtechnologyarchive201603the-invisible-opponent4756117 httpswwwnytimescom20170525technologydaily-report-alphago-wins-againhtml8 httpsdigitalcontentnextorgblog20170331timeline-youtube-brand-safety-debacle9 httpswwwinccomemily-canalyoutube-gets-1-billion-of-videos-watched-a-dayhtml10 httpstechcrunchcom20160127facebook-grows11 httpsyoutubegoogleblogcom201706updates-from-vidcon-more-users-morehtml
10
Quarterly Report | Second Quarter 2017
much easier to adopt ndash while satellite and cable TV
infrastructure is much less flexible All this is wreaking
havoc in the US TV industry with a greater impact on
younger cohorts
The critical mass it has already reached the ability to
capture growth in smartphone usage its leadership
in both data and AI and its privileged position in
on-demand digital video with YouTube are the main
reasons that lead us to believe that Google will
continue to attract increasing attention of users
We will now focus on Googlersquos value proposition
for advertisers
the ability to offer productive tools to advertisers
The Search business (AdWords) still represents
Googlersquos biggest source of revenue The company does
not disclose exact figures but we estimate that this
represents something around 60 of gross revenue
and more than 80 of operating profit Given the
penetration already reached - especially in developed
countries - it does not seem reasonable to suppose
wATch Time TrenDs per week fOr TrADiTiOnAl Tv in The usAby AGe GrOup in The lAsT five yeArs
12-17 18-24 25-34 35-49 50-64 65+
-375
-265
-98
1684
-390
Source Nielsen
that most advertisers are failing to take advantage of
available ROI in their campaigns Thus future revenue
growth will mainly depend on i) the increase in time
spent using Google services (discussed in the previous
section) ii) adjustments to the predominance of ads
vs organic content in Search results and iii) Googlersquos
ability to improve its advertising targeting tools
Google constantly adjusts the way ads appear on
its search results page with some pages recently
creating room for ads by showing fewer unpaid
(organic) results The addition of a third and fourth
paid ads in search results on smartphones in 2015 and
2016 is an example of this trend Another example
was the increased space dedicated to Product Listing
Ads (PLAs) We have also noticed that it is becoming
increasingly harder to distinguish ads from organic
results For instance Google no longer highlights
ads on the results page in yellow Because of this the
company is sometimes accused of squeezing more
dollars from the traffic it already has effectively
forcing companies to pay to appear in search results
The company defends itself by arguing that it always
prioritizes the user experience and constantly tests
the side effects of this kind of change Its algorithms
have always prioritized higher quality ads in the
rankings so many of these ads turn out to be more
useful to users than organic results However it
still raises a yellow flag If Googlersquos growth relies
only on its current traffic it will be squeezed dry at
some point
iP-PARTiCiPACcedilOtildeES
11
Fortunately we see other more structural reasons for
Googlersquos revenue growth and returns to advertisers
As mentioned earlier smartphone ads account for
the lionrsquos share of growth in spending on AdWords
However the average cost per click on smartphone ads
is still roughly half that of desktops As ads are priced
at auctions their final price is associated with the sales
volume they can generate In fact this conversion
of clicks into sales is much lower on smartphones
than on desktops partly because it is harder to fill
out forms with address and credit card data when
making purchases on mobile devices Technologies
such as Android Pay and Apple Pay which facilitate
the customer checkout process should help close this
gap promoting sales boosting ROI making these ads
more valuable and fueling Googlersquos growth
Another way to improve advertiser ROI is to provide
more granular ad targeting Last year Google finally
divided AdWords campaigns into smartphones
tablets and desktops enabling it to determine the
words and prices for each campaign in a more refined
and assertive manner which has also increased
advertiserrsquos returns and consequently their spending
power The feedback from digital agencies is that
other steps in this direction would have the same
effect such as the ability to target different prices for
ads that will appear on different smartphone brands
in different locations or even the possibility of taking
greater advantage of the data that Google already has
on each userrsquos profile
There is also the opportunity to capture more
revenue by connecting the physical world to the
online world with the help of smartphones We have
already mentioned what Google is doing with maps
and smartphone cameras Today a third of Google
searches are made for local interests12 such as shops
and restaurants While the Amazon boogeyman
terrorizes retail Google is seen as an essential ally for
those who want to survive ndash offering branding and
customer capture and conversion services Google
will soon be able to measure the impact not only on
traffic but also on sales in physical stores after users
interact with online ads13 As we have seen in the past
measuring returns is an important step in convincing
advertisers to spend As around 90 of global retail is
not yet on the Internet it becomes clear how valuable
this initiative can be
When the campaign involves banners and videos that
have not immediately generated a purchase but have
influenced the customerrsquos final decision correctly
attributing their impact is crucial to knowing how
much to pay for them One of the common mistakes
is to attribute all the merit to the last click before
the purchase which is why Google created another
recently announced machine learning initiative
Google Attribution which estimates the role of
interactions with each ad in the customer convincing
trajectory leading to the purchase This improves
advertisersrsquo conversion ability (and therefore ROI)
and ads that appeared before the customerrsquos last
12 httpsearchenginelandcomsaying-third-mobile-searches-local-google-brings-new-ads-maps-25027813 httpsadwordsgoogleblogcom201705powering-ads-and-analytics-innovationshtml
IP-Participaccedilotildees
12
Quarterly Report | Second Quarter 2017
14 httpswwwmagnaglobalcomwp-contentuploads201612MAGNA-December-Global-Forecast-Update-Press-Releasepdf
click become more valuable (generating revenue
for Google) This technique will also be useful for
YouTube where ads tend to promote brands rather
than immediately capture purchases as is the case
in AdWords
YouTubersquos success is allowing Google to compete for
the global TV advertising budget of around 186 billion
dollars14 Several steps have been taken to speed up
this process At the end of 2013 Google allowed
Nielsen and comScore to independently measure
user interactions with YouTube ads increasing the
confidence of TV advertisers to invest in the platform
In 2014 it created Google Preferred a selection of
YouTubersquos premium content (1-5) in 13 categories
including beauty food and auto These high-profile
videos were chosen to receive ads from the most
conservative brands (which are used to the world of
TV) In 2016 Magna responsible for buying advertising
space for brands such as Johnson amp Johnson Coca-
Cola and Fiat Chrysler promised to transfer at least
US$ 250 million of its TV spending to Google Preferred
between October 2016 and December 2017 This was
partially motivated by high TV time prices There are
several experiments on ad formats that would be
impossible without the interactivity of the Internet
YouTube has been gradually breaking the inertia of
the relationship between agencies and TV networks
to show that its ads offer good returns As a result we
expect advertising spending on YouTube to grow at a
fast rate possibly outpacing growth in the platformrsquos
watch time
At some point Googlersquos revenue growth will saturate
and keep pace with the growth of the global advertising
market The perception that the digitization of
advertising still has a long runway ahead and that
Google remains one of the leaders in this process
makes us believe that this moment is still far enough to
justify our investment Mobile revenue growth plenty
of opportunity to refine ad targeting the growing
connection between the online and physical worlds
and the evolution of YouTubersquos monetization initiatives
are the main reasons why we believe that Google will
still have a lot to offer to its advertisers and therefore
has ample room for growth
As with every investment there are some problems
Thorny issues related to Alphabet and Google lie on
our radar and demand attention These are all reasons
for the fundrsquos fairly controlled exposure to a business
we consider to be truly exceptional We will briefly go
over some of them
bull Our eternal ignorance Google operates highly
dynamic businesses Although its skills and
competitive advantages may protect it from
most frontal attacks other indirect attacks of a
competitive regulatory technological or even
criminal nature are always possible Some of
them can cause serious damage We are not able
iP-PARTiCiPACcedilOtildeES
13
to judge or even anticipate all these risks and
therefore we adjust the position to our ignorance
bull the price Alphabet shares returned 26 per year
over the last five years Simple math shows that its
price to earnings ratio went from 22x in 2011 to 28x
at the close of 2016 (GAAP criteria unadjusted)
In this period the company has accumulated
US$ 42 billion in net cash and began providing
transparency to its investments in Other Bets its
division for long maturity projects including the
self-driving car We prefer to look at the value of
the business by excluding cash from the market
value and the cost of these investments from
net income (as if they were being capitalized
instead of being recognized as an expense) At
current prices this would indicate an adjusted PE
multiple of 18x for 2018 It means some juggling
but we believe this is a reasonable way to value
the business After the gains recorded since
we resumed purchasing the stock in 2016 we
consider the current price reasonable although
obviously less attractive than a few months ago
We do not expect fast appreciation but we do
expect the continued growth of the business to
be gradually recognized
bull the dilution Google is one of the companies
that most heavily compensates its employees
with equity instruments especially restricted
stock The dilution ranges between 15 and
20 per year which bothers us We take this into
account in our calculations but we would prefer if
the company used this instrument less frequently
while also being more aggressive in buybacks We
welcome CFO Ruth Poratrsquos initiatives to force the
adoption of GAAP criteria (which at least attempt
to account for these costs) in internal discussions
and budgets of Googlersquos team leaders We are
also pleased with the fact that the company has
stopped discussing non-GAAP data with the
market and is now adopting GAAP Paraphrasing
Charlie Munger the granting of restricted stock
represents both spending and dilution for
us shareholders
bull the super-voting shares Larry Page and Sergey
Brin protect their controlling power with no less
than three classes of shares There were two
classes in the IPO one with ten votes per share
(for them) and another with one vote per share
(for everyone else) The third class was created in
2014 with no voting rights as the dilution caused
by restricted stock and share-based acquisitions
had started bothering them Both have sold shares
and are increasingly less active in the companyrsquos
day-to-day life leaving the biggest operational
responsibilities to Sundar Pichai Despite being a
genius Sundar still has to deal with the fact that he
is neither a founder nor a controlling shareholder
something history shows to be a handicap in
difficult decisions We prefer Amazonrsquos model
because Bezos has the same class of shares as we
IP-Participaccedilotildees
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
9
IP-Participaccedilotildees
Source Google IO (517)
initiatives and in acquisitions and partnerships with
leaders in the field (such as Fei-Fei Li from Stanford)
One curious and impressive example was the victory
in the game of Go against champions Lee Sedol6 and
ke Jie7 In the practical field the combination of these
techniques with the infinite amount of data collected
by Google is beginning to emerge as a strong
competitive advantage
Results have appeared on various fronts such as voice
recognition accuracy facial recognition and image
contexts in the Photos app automated response
suggestions for e-mail and prediction of user interest
in various services Google has announced that it will
soon be possible to point your smartphone camera at
an object or establishment and receive information
about it
Search and Maps services have been great labs for
these techniques but YouTube may currently be the
most surprising beneficiary More than 400 hours of
video are uploaded to YouTube every minute Service
quality relies heavily on the ability to sort the wheat
from the chaff and recommend what really interests
each user ndash something absolutely impossible to do
with humans on the necessary scale Despite a few
stumbles here and there8 YouTube has learned and
reacted quickly At the beginning of 2016 YouTube
usersrsquo watch time grew at a rate of 60 per year
according to company data In December 2016 it
exceeded the mark of 1 billion hours per day 10 times
more than in 2012 Meanwhile the US TV industry
clocked in at 125 billion hours per day Netflix9 at
116 million hours and Facebook10 videos at
100 million hours
Digital video on demand is gaining ground for several
reasons The first of which is mobility YouTube users
watch on average one hour per day on their cell
phones11 without having to negotiate the use of the
home TV with anybody With improved screens and
connections this type of use only tends to grow Since
it is on demand users can take advantage of small
opportunities to watch throughout the day such as
on the way to work ndash or even in the bathroom As the
library is virtually endless (over 200 million hours of
video on YouTube) the content is extremely diverse
allowing users to search for the niche that most
appeals to them something impossible to accomplish
on TV regardless of the number of cable channels
available Finally since it is digital new content
standards such as 1080p 4k 360deg VR and so on are
6 httpswwwtheatlanticcomtechnologyarchive201603the-invisible-opponent4756117 httpswwwnytimescom20170525technologydaily-report-alphago-wins-againhtml8 httpsdigitalcontentnextorgblog20170331timeline-youtube-brand-safety-debacle9 httpswwwinccomemily-canalyoutube-gets-1-billion-of-videos-watched-a-dayhtml10 httpstechcrunchcom20160127facebook-grows11 httpsyoutubegoogleblogcom201706updates-from-vidcon-more-users-morehtml
10
Quarterly Report | Second Quarter 2017
much easier to adopt ndash while satellite and cable TV
infrastructure is much less flexible All this is wreaking
havoc in the US TV industry with a greater impact on
younger cohorts
The critical mass it has already reached the ability to
capture growth in smartphone usage its leadership
in both data and AI and its privileged position in
on-demand digital video with YouTube are the main
reasons that lead us to believe that Google will
continue to attract increasing attention of users
We will now focus on Googlersquos value proposition
for advertisers
the ability to offer productive tools to advertisers
The Search business (AdWords) still represents
Googlersquos biggest source of revenue The company does
not disclose exact figures but we estimate that this
represents something around 60 of gross revenue
and more than 80 of operating profit Given the
penetration already reached - especially in developed
countries - it does not seem reasonable to suppose
wATch Time TrenDs per week fOr TrADiTiOnAl Tv in The usAby AGe GrOup in The lAsT five yeArs
12-17 18-24 25-34 35-49 50-64 65+
-375
-265
-98
1684
-390
Source Nielsen
that most advertisers are failing to take advantage of
available ROI in their campaigns Thus future revenue
growth will mainly depend on i) the increase in time
spent using Google services (discussed in the previous
section) ii) adjustments to the predominance of ads
vs organic content in Search results and iii) Googlersquos
ability to improve its advertising targeting tools
Google constantly adjusts the way ads appear on
its search results page with some pages recently
creating room for ads by showing fewer unpaid
(organic) results The addition of a third and fourth
paid ads in search results on smartphones in 2015 and
2016 is an example of this trend Another example
was the increased space dedicated to Product Listing
Ads (PLAs) We have also noticed that it is becoming
increasingly harder to distinguish ads from organic
results For instance Google no longer highlights
ads on the results page in yellow Because of this the
company is sometimes accused of squeezing more
dollars from the traffic it already has effectively
forcing companies to pay to appear in search results
The company defends itself by arguing that it always
prioritizes the user experience and constantly tests
the side effects of this kind of change Its algorithms
have always prioritized higher quality ads in the
rankings so many of these ads turn out to be more
useful to users than organic results However it
still raises a yellow flag If Googlersquos growth relies
only on its current traffic it will be squeezed dry at
some point
iP-PARTiCiPACcedilOtildeES
11
Fortunately we see other more structural reasons for
Googlersquos revenue growth and returns to advertisers
As mentioned earlier smartphone ads account for
the lionrsquos share of growth in spending on AdWords
However the average cost per click on smartphone ads
is still roughly half that of desktops As ads are priced
at auctions their final price is associated with the sales
volume they can generate In fact this conversion
of clicks into sales is much lower on smartphones
than on desktops partly because it is harder to fill
out forms with address and credit card data when
making purchases on mobile devices Technologies
such as Android Pay and Apple Pay which facilitate
the customer checkout process should help close this
gap promoting sales boosting ROI making these ads
more valuable and fueling Googlersquos growth
Another way to improve advertiser ROI is to provide
more granular ad targeting Last year Google finally
divided AdWords campaigns into smartphones
tablets and desktops enabling it to determine the
words and prices for each campaign in a more refined
and assertive manner which has also increased
advertiserrsquos returns and consequently their spending
power The feedback from digital agencies is that
other steps in this direction would have the same
effect such as the ability to target different prices for
ads that will appear on different smartphone brands
in different locations or even the possibility of taking
greater advantage of the data that Google already has
on each userrsquos profile
There is also the opportunity to capture more
revenue by connecting the physical world to the
online world with the help of smartphones We have
already mentioned what Google is doing with maps
and smartphone cameras Today a third of Google
searches are made for local interests12 such as shops
and restaurants While the Amazon boogeyman
terrorizes retail Google is seen as an essential ally for
those who want to survive ndash offering branding and
customer capture and conversion services Google
will soon be able to measure the impact not only on
traffic but also on sales in physical stores after users
interact with online ads13 As we have seen in the past
measuring returns is an important step in convincing
advertisers to spend As around 90 of global retail is
not yet on the Internet it becomes clear how valuable
this initiative can be
When the campaign involves banners and videos that
have not immediately generated a purchase but have
influenced the customerrsquos final decision correctly
attributing their impact is crucial to knowing how
much to pay for them One of the common mistakes
is to attribute all the merit to the last click before
the purchase which is why Google created another
recently announced machine learning initiative
Google Attribution which estimates the role of
interactions with each ad in the customer convincing
trajectory leading to the purchase This improves
advertisersrsquo conversion ability (and therefore ROI)
and ads that appeared before the customerrsquos last
12 httpsearchenginelandcomsaying-third-mobile-searches-local-google-brings-new-ads-maps-25027813 httpsadwordsgoogleblogcom201705powering-ads-and-analytics-innovationshtml
IP-Participaccedilotildees
12
Quarterly Report | Second Quarter 2017
14 httpswwwmagnaglobalcomwp-contentuploads201612MAGNA-December-Global-Forecast-Update-Press-Releasepdf
click become more valuable (generating revenue
for Google) This technique will also be useful for
YouTube where ads tend to promote brands rather
than immediately capture purchases as is the case
in AdWords
YouTubersquos success is allowing Google to compete for
the global TV advertising budget of around 186 billion
dollars14 Several steps have been taken to speed up
this process At the end of 2013 Google allowed
Nielsen and comScore to independently measure
user interactions with YouTube ads increasing the
confidence of TV advertisers to invest in the platform
In 2014 it created Google Preferred a selection of
YouTubersquos premium content (1-5) in 13 categories
including beauty food and auto These high-profile
videos were chosen to receive ads from the most
conservative brands (which are used to the world of
TV) In 2016 Magna responsible for buying advertising
space for brands such as Johnson amp Johnson Coca-
Cola and Fiat Chrysler promised to transfer at least
US$ 250 million of its TV spending to Google Preferred
between October 2016 and December 2017 This was
partially motivated by high TV time prices There are
several experiments on ad formats that would be
impossible without the interactivity of the Internet
YouTube has been gradually breaking the inertia of
the relationship between agencies and TV networks
to show that its ads offer good returns As a result we
expect advertising spending on YouTube to grow at a
fast rate possibly outpacing growth in the platformrsquos
watch time
At some point Googlersquos revenue growth will saturate
and keep pace with the growth of the global advertising
market The perception that the digitization of
advertising still has a long runway ahead and that
Google remains one of the leaders in this process
makes us believe that this moment is still far enough to
justify our investment Mobile revenue growth plenty
of opportunity to refine ad targeting the growing
connection between the online and physical worlds
and the evolution of YouTubersquos monetization initiatives
are the main reasons why we believe that Google will
still have a lot to offer to its advertisers and therefore
has ample room for growth
As with every investment there are some problems
Thorny issues related to Alphabet and Google lie on
our radar and demand attention These are all reasons
for the fundrsquos fairly controlled exposure to a business
we consider to be truly exceptional We will briefly go
over some of them
bull Our eternal ignorance Google operates highly
dynamic businesses Although its skills and
competitive advantages may protect it from
most frontal attacks other indirect attacks of a
competitive regulatory technological or even
criminal nature are always possible Some of
them can cause serious damage We are not able
iP-PARTiCiPACcedilOtildeES
13
to judge or even anticipate all these risks and
therefore we adjust the position to our ignorance
bull the price Alphabet shares returned 26 per year
over the last five years Simple math shows that its
price to earnings ratio went from 22x in 2011 to 28x
at the close of 2016 (GAAP criteria unadjusted)
In this period the company has accumulated
US$ 42 billion in net cash and began providing
transparency to its investments in Other Bets its
division for long maturity projects including the
self-driving car We prefer to look at the value of
the business by excluding cash from the market
value and the cost of these investments from
net income (as if they were being capitalized
instead of being recognized as an expense) At
current prices this would indicate an adjusted PE
multiple of 18x for 2018 It means some juggling
but we believe this is a reasonable way to value
the business After the gains recorded since
we resumed purchasing the stock in 2016 we
consider the current price reasonable although
obviously less attractive than a few months ago
We do not expect fast appreciation but we do
expect the continued growth of the business to
be gradually recognized
bull the dilution Google is one of the companies
that most heavily compensates its employees
with equity instruments especially restricted
stock The dilution ranges between 15 and
20 per year which bothers us We take this into
account in our calculations but we would prefer if
the company used this instrument less frequently
while also being more aggressive in buybacks We
welcome CFO Ruth Poratrsquos initiatives to force the
adoption of GAAP criteria (which at least attempt
to account for these costs) in internal discussions
and budgets of Googlersquos team leaders We are
also pleased with the fact that the company has
stopped discussing non-GAAP data with the
market and is now adopting GAAP Paraphrasing
Charlie Munger the granting of restricted stock
represents both spending and dilution for
us shareholders
bull the super-voting shares Larry Page and Sergey
Brin protect their controlling power with no less
than three classes of shares There were two
classes in the IPO one with ten votes per share
(for them) and another with one vote per share
(for everyone else) The third class was created in
2014 with no voting rights as the dilution caused
by restricted stock and share-based acquisitions
had started bothering them Both have sold shares
and are increasingly less active in the companyrsquos
day-to-day life leaving the biggest operational
responsibilities to Sundar Pichai Despite being a
genius Sundar still has to deal with the fact that he
is neither a founder nor a controlling shareholder
something history shows to be a handicap in
difficult decisions We prefer Amazonrsquos model
because Bezos has the same class of shares as we
IP-Participaccedilotildees
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
10
Quarterly Report | Second Quarter 2017
much easier to adopt ndash while satellite and cable TV
infrastructure is much less flexible All this is wreaking
havoc in the US TV industry with a greater impact on
younger cohorts
The critical mass it has already reached the ability to
capture growth in smartphone usage its leadership
in both data and AI and its privileged position in
on-demand digital video with YouTube are the main
reasons that lead us to believe that Google will
continue to attract increasing attention of users
We will now focus on Googlersquos value proposition
for advertisers
the ability to offer productive tools to advertisers
The Search business (AdWords) still represents
Googlersquos biggest source of revenue The company does
not disclose exact figures but we estimate that this
represents something around 60 of gross revenue
and more than 80 of operating profit Given the
penetration already reached - especially in developed
countries - it does not seem reasonable to suppose
wATch Time TrenDs per week fOr TrADiTiOnAl Tv in The usAby AGe GrOup in The lAsT five yeArs
12-17 18-24 25-34 35-49 50-64 65+
-375
-265
-98
1684
-390
Source Nielsen
that most advertisers are failing to take advantage of
available ROI in their campaigns Thus future revenue
growth will mainly depend on i) the increase in time
spent using Google services (discussed in the previous
section) ii) adjustments to the predominance of ads
vs organic content in Search results and iii) Googlersquos
ability to improve its advertising targeting tools
Google constantly adjusts the way ads appear on
its search results page with some pages recently
creating room for ads by showing fewer unpaid
(organic) results The addition of a third and fourth
paid ads in search results on smartphones in 2015 and
2016 is an example of this trend Another example
was the increased space dedicated to Product Listing
Ads (PLAs) We have also noticed that it is becoming
increasingly harder to distinguish ads from organic
results For instance Google no longer highlights
ads on the results page in yellow Because of this the
company is sometimes accused of squeezing more
dollars from the traffic it already has effectively
forcing companies to pay to appear in search results
The company defends itself by arguing that it always
prioritizes the user experience and constantly tests
the side effects of this kind of change Its algorithms
have always prioritized higher quality ads in the
rankings so many of these ads turn out to be more
useful to users than organic results However it
still raises a yellow flag If Googlersquos growth relies
only on its current traffic it will be squeezed dry at
some point
iP-PARTiCiPACcedilOtildeES
11
Fortunately we see other more structural reasons for
Googlersquos revenue growth and returns to advertisers
As mentioned earlier smartphone ads account for
the lionrsquos share of growth in spending on AdWords
However the average cost per click on smartphone ads
is still roughly half that of desktops As ads are priced
at auctions their final price is associated with the sales
volume they can generate In fact this conversion
of clicks into sales is much lower on smartphones
than on desktops partly because it is harder to fill
out forms with address and credit card data when
making purchases on mobile devices Technologies
such as Android Pay and Apple Pay which facilitate
the customer checkout process should help close this
gap promoting sales boosting ROI making these ads
more valuable and fueling Googlersquos growth
Another way to improve advertiser ROI is to provide
more granular ad targeting Last year Google finally
divided AdWords campaigns into smartphones
tablets and desktops enabling it to determine the
words and prices for each campaign in a more refined
and assertive manner which has also increased
advertiserrsquos returns and consequently their spending
power The feedback from digital agencies is that
other steps in this direction would have the same
effect such as the ability to target different prices for
ads that will appear on different smartphone brands
in different locations or even the possibility of taking
greater advantage of the data that Google already has
on each userrsquos profile
There is also the opportunity to capture more
revenue by connecting the physical world to the
online world with the help of smartphones We have
already mentioned what Google is doing with maps
and smartphone cameras Today a third of Google
searches are made for local interests12 such as shops
and restaurants While the Amazon boogeyman
terrorizes retail Google is seen as an essential ally for
those who want to survive ndash offering branding and
customer capture and conversion services Google
will soon be able to measure the impact not only on
traffic but also on sales in physical stores after users
interact with online ads13 As we have seen in the past
measuring returns is an important step in convincing
advertisers to spend As around 90 of global retail is
not yet on the Internet it becomes clear how valuable
this initiative can be
When the campaign involves banners and videos that
have not immediately generated a purchase but have
influenced the customerrsquos final decision correctly
attributing their impact is crucial to knowing how
much to pay for them One of the common mistakes
is to attribute all the merit to the last click before
the purchase which is why Google created another
recently announced machine learning initiative
Google Attribution which estimates the role of
interactions with each ad in the customer convincing
trajectory leading to the purchase This improves
advertisersrsquo conversion ability (and therefore ROI)
and ads that appeared before the customerrsquos last
12 httpsearchenginelandcomsaying-third-mobile-searches-local-google-brings-new-ads-maps-25027813 httpsadwordsgoogleblogcom201705powering-ads-and-analytics-innovationshtml
IP-Participaccedilotildees
12
Quarterly Report | Second Quarter 2017
14 httpswwwmagnaglobalcomwp-contentuploads201612MAGNA-December-Global-Forecast-Update-Press-Releasepdf
click become more valuable (generating revenue
for Google) This technique will also be useful for
YouTube where ads tend to promote brands rather
than immediately capture purchases as is the case
in AdWords
YouTubersquos success is allowing Google to compete for
the global TV advertising budget of around 186 billion
dollars14 Several steps have been taken to speed up
this process At the end of 2013 Google allowed
Nielsen and comScore to independently measure
user interactions with YouTube ads increasing the
confidence of TV advertisers to invest in the platform
In 2014 it created Google Preferred a selection of
YouTubersquos premium content (1-5) in 13 categories
including beauty food and auto These high-profile
videos were chosen to receive ads from the most
conservative brands (which are used to the world of
TV) In 2016 Magna responsible for buying advertising
space for brands such as Johnson amp Johnson Coca-
Cola and Fiat Chrysler promised to transfer at least
US$ 250 million of its TV spending to Google Preferred
between October 2016 and December 2017 This was
partially motivated by high TV time prices There are
several experiments on ad formats that would be
impossible without the interactivity of the Internet
YouTube has been gradually breaking the inertia of
the relationship between agencies and TV networks
to show that its ads offer good returns As a result we
expect advertising spending on YouTube to grow at a
fast rate possibly outpacing growth in the platformrsquos
watch time
At some point Googlersquos revenue growth will saturate
and keep pace with the growth of the global advertising
market The perception that the digitization of
advertising still has a long runway ahead and that
Google remains one of the leaders in this process
makes us believe that this moment is still far enough to
justify our investment Mobile revenue growth plenty
of opportunity to refine ad targeting the growing
connection between the online and physical worlds
and the evolution of YouTubersquos monetization initiatives
are the main reasons why we believe that Google will
still have a lot to offer to its advertisers and therefore
has ample room for growth
As with every investment there are some problems
Thorny issues related to Alphabet and Google lie on
our radar and demand attention These are all reasons
for the fundrsquos fairly controlled exposure to a business
we consider to be truly exceptional We will briefly go
over some of them
bull Our eternal ignorance Google operates highly
dynamic businesses Although its skills and
competitive advantages may protect it from
most frontal attacks other indirect attacks of a
competitive regulatory technological or even
criminal nature are always possible Some of
them can cause serious damage We are not able
iP-PARTiCiPACcedilOtildeES
13
to judge or even anticipate all these risks and
therefore we adjust the position to our ignorance
bull the price Alphabet shares returned 26 per year
over the last five years Simple math shows that its
price to earnings ratio went from 22x in 2011 to 28x
at the close of 2016 (GAAP criteria unadjusted)
In this period the company has accumulated
US$ 42 billion in net cash and began providing
transparency to its investments in Other Bets its
division for long maturity projects including the
self-driving car We prefer to look at the value of
the business by excluding cash from the market
value and the cost of these investments from
net income (as if they were being capitalized
instead of being recognized as an expense) At
current prices this would indicate an adjusted PE
multiple of 18x for 2018 It means some juggling
but we believe this is a reasonable way to value
the business After the gains recorded since
we resumed purchasing the stock in 2016 we
consider the current price reasonable although
obviously less attractive than a few months ago
We do not expect fast appreciation but we do
expect the continued growth of the business to
be gradually recognized
bull the dilution Google is one of the companies
that most heavily compensates its employees
with equity instruments especially restricted
stock The dilution ranges between 15 and
20 per year which bothers us We take this into
account in our calculations but we would prefer if
the company used this instrument less frequently
while also being more aggressive in buybacks We
welcome CFO Ruth Poratrsquos initiatives to force the
adoption of GAAP criteria (which at least attempt
to account for these costs) in internal discussions
and budgets of Googlersquos team leaders We are
also pleased with the fact that the company has
stopped discussing non-GAAP data with the
market and is now adopting GAAP Paraphrasing
Charlie Munger the granting of restricted stock
represents both spending and dilution for
us shareholders
bull the super-voting shares Larry Page and Sergey
Brin protect their controlling power with no less
than three classes of shares There were two
classes in the IPO one with ten votes per share
(for them) and another with one vote per share
(for everyone else) The third class was created in
2014 with no voting rights as the dilution caused
by restricted stock and share-based acquisitions
had started bothering them Both have sold shares
and are increasingly less active in the companyrsquos
day-to-day life leaving the biggest operational
responsibilities to Sundar Pichai Despite being a
genius Sundar still has to deal with the fact that he
is neither a founder nor a controlling shareholder
something history shows to be a handicap in
difficult decisions We prefer Amazonrsquos model
because Bezos has the same class of shares as we
IP-Participaccedilotildees
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
11
Fortunately we see other more structural reasons for
Googlersquos revenue growth and returns to advertisers
As mentioned earlier smartphone ads account for
the lionrsquos share of growth in spending on AdWords
However the average cost per click on smartphone ads
is still roughly half that of desktops As ads are priced
at auctions their final price is associated with the sales
volume they can generate In fact this conversion
of clicks into sales is much lower on smartphones
than on desktops partly because it is harder to fill
out forms with address and credit card data when
making purchases on mobile devices Technologies
such as Android Pay and Apple Pay which facilitate
the customer checkout process should help close this
gap promoting sales boosting ROI making these ads
more valuable and fueling Googlersquos growth
Another way to improve advertiser ROI is to provide
more granular ad targeting Last year Google finally
divided AdWords campaigns into smartphones
tablets and desktops enabling it to determine the
words and prices for each campaign in a more refined
and assertive manner which has also increased
advertiserrsquos returns and consequently their spending
power The feedback from digital agencies is that
other steps in this direction would have the same
effect such as the ability to target different prices for
ads that will appear on different smartphone brands
in different locations or even the possibility of taking
greater advantage of the data that Google already has
on each userrsquos profile
There is also the opportunity to capture more
revenue by connecting the physical world to the
online world with the help of smartphones We have
already mentioned what Google is doing with maps
and smartphone cameras Today a third of Google
searches are made for local interests12 such as shops
and restaurants While the Amazon boogeyman
terrorizes retail Google is seen as an essential ally for
those who want to survive ndash offering branding and
customer capture and conversion services Google
will soon be able to measure the impact not only on
traffic but also on sales in physical stores after users
interact with online ads13 As we have seen in the past
measuring returns is an important step in convincing
advertisers to spend As around 90 of global retail is
not yet on the Internet it becomes clear how valuable
this initiative can be
When the campaign involves banners and videos that
have not immediately generated a purchase but have
influenced the customerrsquos final decision correctly
attributing their impact is crucial to knowing how
much to pay for them One of the common mistakes
is to attribute all the merit to the last click before
the purchase which is why Google created another
recently announced machine learning initiative
Google Attribution which estimates the role of
interactions with each ad in the customer convincing
trajectory leading to the purchase This improves
advertisersrsquo conversion ability (and therefore ROI)
and ads that appeared before the customerrsquos last
12 httpsearchenginelandcomsaying-third-mobile-searches-local-google-brings-new-ads-maps-25027813 httpsadwordsgoogleblogcom201705powering-ads-and-analytics-innovationshtml
IP-Participaccedilotildees
12
Quarterly Report | Second Quarter 2017
14 httpswwwmagnaglobalcomwp-contentuploads201612MAGNA-December-Global-Forecast-Update-Press-Releasepdf
click become more valuable (generating revenue
for Google) This technique will also be useful for
YouTube where ads tend to promote brands rather
than immediately capture purchases as is the case
in AdWords
YouTubersquos success is allowing Google to compete for
the global TV advertising budget of around 186 billion
dollars14 Several steps have been taken to speed up
this process At the end of 2013 Google allowed
Nielsen and comScore to independently measure
user interactions with YouTube ads increasing the
confidence of TV advertisers to invest in the platform
In 2014 it created Google Preferred a selection of
YouTubersquos premium content (1-5) in 13 categories
including beauty food and auto These high-profile
videos were chosen to receive ads from the most
conservative brands (which are used to the world of
TV) In 2016 Magna responsible for buying advertising
space for brands such as Johnson amp Johnson Coca-
Cola and Fiat Chrysler promised to transfer at least
US$ 250 million of its TV spending to Google Preferred
between October 2016 and December 2017 This was
partially motivated by high TV time prices There are
several experiments on ad formats that would be
impossible without the interactivity of the Internet
YouTube has been gradually breaking the inertia of
the relationship between agencies and TV networks
to show that its ads offer good returns As a result we
expect advertising spending on YouTube to grow at a
fast rate possibly outpacing growth in the platformrsquos
watch time
At some point Googlersquos revenue growth will saturate
and keep pace with the growth of the global advertising
market The perception that the digitization of
advertising still has a long runway ahead and that
Google remains one of the leaders in this process
makes us believe that this moment is still far enough to
justify our investment Mobile revenue growth plenty
of opportunity to refine ad targeting the growing
connection between the online and physical worlds
and the evolution of YouTubersquos monetization initiatives
are the main reasons why we believe that Google will
still have a lot to offer to its advertisers and therefore
has ample room for growth
As with every investment there are some problems
Thorny issues related to Alphabet and Google lie on
our radar and demand attention These are all reasons
for the fundrsquos fairly controlled exposure to a business
we consider to be truly exceptional We will briefly go
over some of them
bull Our eternal ignorance Google operates highly
dynamic businesses Although its skills and
competitive advantages may protect it from
most frontal attacks other indirect attacks of a
competitive regulatory technological or even
criminal nature are always possible Some of
them can cause serious damage We are not able
iP-PARTiCiPACcedilOtildeES
13
to judge or even anticipate all these risks and
therefore we adjust the position to our ignorance
bull the price Alphabet shares returned 26 per year
over the last five years Simple math shows that its
price to earnings ratio went from 22x in 2011 to 28x
at the close of 2016 (GAAP criteria unadjusted)
In this period the company has accumulated
US$ 42 billion in net cash and began providing
transparency to its investments in Other Bets its
division for long maturity projects including the
self-driving car We prefer to look at the value of
the business by excluding cash from the market
value and the cost of these investments from
net income (as if they were being capitalized
instead of being recognized as an expense) At
current prices this would indicate an adjusted PE
multiple of 18x for 2018 It means some juggling
but we believe this is a reasonable way to value
the business After the gains recorded since
we resumed purchasing the stock in 2016 we
consider the current price reasonable although
obviously less attractive than a few months ago
We do not expect fast appreciation but we do
expect the continued growth of the business to
be gradually recognized
bull the dilution Google is one of the companies
that most heavily compensates its employees
with equity instruments especially restricted
stock The dilution ranges between 15 and
20 per year which bothers us We take this into
account in our calculations but we would prefer if
the company used this instrument less frequently
while also being more aggressive in buybacks We
welcome CFO Ruth Poratrsquos initiatives to force the
adoption of GAAP criteria (which at least attempt
to account for these costs) in internal discussions
and budgets of Googlersquos team leaders We are
also pleased with the fact that the company has
stopped discussing non-GAAP data with the
market and is now adopting GAAP Paraphrasing
Charlie Munger the granting of restricted stock
represents both spending and dilution for
us shareholders
bull the super-voting shares Larry Page and Sergey
Brin protect their controlling power with no less
than three classes of shares There were two
classes in the IPO one with ten votes per share
(for them) and another with one vote per share
(for everyone else) The third class was created in
2014 with no voting rights as the dilution caused
by restricted stock and share-based acquisitions
had started bothering them Both have sold shares
and are increasingly less active in the companyrsquos
day-to-day life leaving the biggest operational
responsibilities to Sundar Pichai Despite being a
genius Sundar still has to deal with the fact that he
is neither a founder nor a controlling shareholder
something history shows to be a handicap in
difficult decisions We prefer Amazonrsquos model
because Bezos has the same class of shares as we
IP-Participaccedilotildees
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
12
Quarterly Report | Second Quarter 2017
14 httpswwwmagnaglobalcomwp-contentuploads201612MAGNA-December-Global-Forecast-Update-Press-Releasepdf
click become more valuable (generating revenue
for Google) This technique will also be useful for
YouTube where ads tend to promote brands rather
than immediately capture purchases as is the case
in AdWords
YouTubersquos success is allowing Google to compete for
the global TV advertising budget of around 186 billion
dollars14 Several steps have been taken to speed up
this process At the end of 2013 Google allowed
Nielsen and comScore to independently measure
user interactions with YouTube ads increasing the
confidence of TV advertisers to invest in the platform
In 2014 it created Google Preferred a selection of
YouTubersquos premium content (1-5) in 13 categories
including beauty food and auto These high-profile
videos were chosen to receive ads from the most
conservative brands (which are used to the world of
TV) In 2016 Magna responsible for buying advertising
space for brands such as Johnson amp Johnson Coca-
Cola and Fiat Chrysler promised to transfer at least
US$ 250 million of its TV spending to Google Preferred
between October 2016 and December 2017 This was
partially motivated by high TV time prices There are
several experiments on ad formats that would be
impossible without the interactivity of the Internet
YouTube has been gradually breaking the inertia of
the relationship between agencies and TV networks
to show that its ads offer good returns As a result we
expect advertising spending on YouTube to grow at a
fast rate possibly outpacing growth in the platformrsquos
watch time
At some point Googlersquos revenue growth will saturate
and keep pace with the growth of the global advertising
market The perception that the digitization of
advertising still has a long runway ahead and that
Google remains one of the leaders in this process
makes us believe that this moment is still far enough to
justify our investment Mobile revenue growth plenty
of opportunity to refine ad targeting the growing
connection between the online and physical worlds
and the evolution of YouTubersquos monetization initiatives
are the main reasons why we believe that Google will
still have a lot to offer to its advertisers and therefore
has ample room for growth
As with every investment there are some problems
Thorny issues related to Alphabet and Google lie on
our radar and demand attention These are all reasons
for the fundrsquos fairly controlled exposure to a business
we consider to be truly exceptional We will briefly go
over some of them
bull Our eternal ignorance Google operates highly
dynamic businesses Although its skills and
competitive advantages may protect it from
most frontal attacks other indirect attacks of a
competitive regulatory technological or even
criminal nature are always possible Some of
them can cause serious damage We are not able
iP-PARTiCiPACcedilOtildeES
13
to judge or even anticipate all these risks and
therefore we adjust the position to our ignorance
bull the price Alphabet shares returned 26 per year
over the last five years Simple math shows that its
price to earnings ratio went from 22x in 2011 to 28x
at the close of 2016 (GAAP criteria unadjusted)
In this period the company has accumulated
US$ 42 billion in net cash and began providing
transparency to its investments in Other Bets its
division for long maturity projects including the
self-driving car We prefer to look at the value of
the business by excluding cash from the market
value and the cost of these investments from
net income (as if they were being capitalized
instead of being recognized as an expense) At
current prices this would indicate an adjusted PE
multiple of 18x for 2018 It means some juggling
but we believe this is a reasonable way to value
the business After the gains recorded since
we resumed purchasing the stock in 2016 we
consider the current price reasonable although
obviously less attractive than a few months ago
We do not expect fast appreciation but we do
expect the continued growth of the business to
be gradually recognized
bull the dilution Google is one of the companies
that most heavily compensates its employees
with equity instruments especially restricted
stock The dilution ranges between 15 and
20 per year which bothers us We take this into
account in our calculations but we would prefer if
the company used this instrument less frequently
while also being more aggressive in buybacks We
welcome CFO Ruth Poratrsquos initiatives to force the
adoption of GAAP criteria (which at least attempt
to account for these costs) in internal discussions
and budgets of Googlersquos team leaders We are
also pleased with the fact that the company has
stopped discussing non-GAAP data with the
market and is now adopting GAAP Paraphrasing
Charlie Munger the granting of restricted stock
represents both spending and dilution for
us shareholders
bull the super-voting shares Larry Page and Sergey
Brin protect their controlling power with no less
than three classes of shares There were two
classes in the IPO one with ten votes per share
(for them) and another with one vote per share
(for everyone else) The third class was created in
2014 with no voting rights as the dilution caused
by restricted stock and share-based acquisitions
had started bothering them Both have sold shares
and are increasingly less active in the companyrsquos
day-to-day life leaving the biggest operational
responsibilities to Sundar Pichai Despite being a
genius Sundar still has to deal with the fact that he
is neither a founder nor a controlling shareholder
something history shows to be a handicap in
difficult decisions We prefer Amazonrsquos model
because Bezos has the same class of shares as we
IP-Participaccedilotildees
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
13
to judge or even anticipate all these risks and
therefore we adjust the position to our ignorance
bull the price Alphabet shares returned 26 per year
over the last five years Simple math shows that its
price to earnings ratio went from 22x in 2011 to 28x
at the close of 2016 (GAAP criteria unadjusted)
In this period the company has accumulated
US$ 42 billion in net cash and began providing
transparency to its investments in Other Bets its
division for long maturity projects including the
self-driving car We prefer to look at the value of
the business by excluding cash from the market
value and the cost of these investments from
net income (as if they were being capitalized
instead of being recognized as an expense) At
current prices this would indicate an adjusted PE
multiple of 18x for 2018 It means some juggling
but we believe this is a reasonable way to value
the business After the gains recorded since
we resumed purchasing the stock in 2016 we
consider the current price reasonable although
obviously less attractive than a few months ago
We do not expect fast appreciation but we do
expect the continued growth of the business to
be gradually recognized
bull the dilution Google is one of the companies
that most heavily compensates its employees
with equity instruments especially restricted
stock The dilution ranges between 15 and
20 per year which bothers us We take this into
account in our calculations but we would prefer if
the company used this instrument less frequently
while also being more aggressive in buybacks We
welcome CFO Ruth Poratrsquos initiatives to force the
adoption of GAAP criteria (which at least attempt
to account for these costs) in internal discussions
and budgets of Googlersquos team leaders We are
also pleased with the fact that the company has
stopped discussing non-GAAP data with the
market and is now adopting GAAP Paraphrasing
Charlie Munger the granting of restricted stock
represents both spending and dilution for
us shareholders
bull the super-voting shares Larry Page and Sergey
Brin protect their controlling power with no less
than three classes of shares There were two
classes in the IPO one with ten votes per share
(for them) and another with one vote per share
(for everyone else) The third class was created in
2014 with no voting rights as the dilution caused
by restricted stock and share-based acquisitions
had started bothering them Both have sold shares
and are increasingly less active in the companyrsquos
day-to-day life leaving the biggest operational
responsibilities to Sundar Pichai Despite being a
genius Sundar still has to deal with the fact that he
is neither a founder nor a controlling shareholder
something history shows to be a handicap in
difficult decisions We prefer Amazonrsquos model
because Bezos has the same class of shares as we
IP-Participaccedilotildees
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
14
Quarterly Report | Second Quarter 2017
do and his voting power like ours is diluted when
it comes to rewarding executives This makes us
less confident about the long-term commitment
of Googlersquos founders to minority shareholders
and reduces the maximum size of the position we
are willing to hold
bull Antitrust When companies become too strong
problems tend to come from governments
Googlersquos power has attracted the scrutiny of
antitrust regulators for a number of years In the
United States where regulators value consumer
well-being above all else the company has so far
been able to avoid major problems In Europe
where there is greater concern about protecting
competition things have been a lot more
complicated As has been widely reported the
company was recently fined 24 billion euros for
allegedly abusing its monopoly power at Search
in order to offer product comparison services
(the Product Listing Ads mentioned above) A lot
more complicated than the fine is negotiating the
complex practical aspects to meet the regulatorsrsquo
requests and the fact that this decision creates a
precedent for other probable convictions Google
is deciding whether to appeal in a case that
is likely to last for a few years Europe accounts
for approximately 30 of Googlersquos revenue and
European Product Listing Ads generate around
US$ 4 billion in annual revenue (around 4 of
total) according to JP Morgan estimates
bull Amazon The Bezos steamroller also bothers
Google Research shows that more than half of
online product searches in the US are already
made directly through the Amazon website15
Amazon is also increasingly developing
advertising solutions within its own website
which should eventually steal dollars from the
budgets currently allocated to AdWords These
moves have not yet had a meaningful impact
but represent trends we will closely monitor On
the other hand global digital budgets should
continue to rise Given the different use situations
we do not see this as a zero-sum game In any
event we are also Amazon shareholders and hope
to benefit in the other side of the equation
bull Facebook The same idea (that this is not a
zero-sum game) applies to Mark Zuckerbergrsquos
social network the main alternative to Google
in the online advertising market Facebook
has been quick to adopt new features and
copy competitors such as Twitter and Snap
Zuckerberg has recently tried to direct user
experience to videos in an attempt to increase
engagement on the platform ndash which puts it on
a collision course with YouTube At the end of the
day the competition is for usersrsquo attention and
ultimately for advertisers Facebook has made
enormous strides in this field its two billion users
currently spend an average of almost an hour per
day engaged with its products Facebook also
15 httpswwwbloombergcomnewsarticles2016-09-27more-than-50-of-shoppers-turn-first-to-amazon-in-product-search
iP-PARTiCiPACcedilOtildeES
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
15
allows very precise audience targeting based on
detailed profile and use data voluntarily provided
by its users However Facebook offers only a few
of the many useful services that attract usersrsquo
attention Google has its own services which have
proved to be useful as discussed above While
there are obvious threats between companies like
Alphabet Facebook and Amazon - which must
be monitored - we believe it is more productive
for us investors to focus on the great opportunity
to gain ground against more traditional players
(eg TV and newspapers) rather than on the fight
between them
bull the mix There are few businesses as profitable
as Search As Google grows with products such as
YouTube and Cloud (which we did not have space
to discuss in this report) or even through the
maturity of its Other Bets there will be a natural
pressure on margins The focus should clearly
be on absolute profit growth In this aspect the
fact that Google is one of the highest-spending
companies we know may ldquohelprdquo It is curious to see
that while revenue climbed from US$ 46 billion in
2012 to US$ 90 billion in 2016 margins did not
rise by a single percentage point This is largely
explained by the number of people Google has
hired to develop its new initiatives ndash almost
40000 in the last five years an annual growth of
17 Given Searchrsquos scalability the growth of this
business and the various initiatives Google has
become involved in over the last few years we
believe the company has a relevant and latent
ability to adjust the volume of these expenses if
necessary CFO Ruth ldquoVaderrdquo has her eye on it
Based on its original mission to organize the worldrsquos
information and make it available and useful Google
has created a fabulous collection of assets As an
ldquoinvisible tollrdquo on the Internet it provides essential
services ndash a true utility company that connects
everyone and everything Regardless of how big the
business has become we believe that the company
has an interesting and profitable future ahead
IP-Participaccedilotildees
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
16
Quarterly Report | Second Quarter 2017
MiSCELLAnEOUS
ldquoBrazil is not a serious countryrdquo mdash Quote attributed to Charles de Gaulle
ldquoWhen something seems too good to be true it probably isrdquo mdash Anonymous
ldquoAnything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen that yoursquore still around to play the next dayrdquo mdash Warren Buffett
ldquoIf you ask me in retrospect what our biggest mistake is in the tech field itrsquos not buying Google We were smart enoughrdquo mdash Charlie Munger 2017 Berkshire Hathaway Annual Meeting
ldquoIf you focus on your competition you will never deliver anything truly innovativerdquo mdash Eric Schmidt How Google Works
ldquoWe want to build technology that everybody loves using and that affects everyone We want to create beautiful intuitive services and technologies that are so incredibly useful that people use them twice a day Like they use a toothbrush There arenrsquot that many things people use twice a dayrdquo mdash Larry Page
ldquoA platform is when the economic value of everybody that uses it exceeds the value of the company that creates it Then itrsquos a platformrdquo mdash Bill Gates
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
17
ldquoAt Google our users are the people who use our products while our customers are the companies that
buy our advertising and license our technology There are rarely conflicts between the two but when there are our bias is toward the user It had to be this way regardless of your industry Users are more empowered than ever and
wonrsquot tolerate crummy productsrdquo mdash Eric Schmidt How Google Works
ldquoRight now wersquore in a period of growth Wersquore thinking about how we get to the next billion users and how we build additional monetization Wersquore focused on setting
ourselves up for the most successful long-term business Wersquore reinvesting in the business to reach users and offer more monetization options and better service Growth is
the priorityrdquo mdash Susan Wojcicki CEO of YouTube
ldquoUsers can make decisions relatively quickly and there is no cost associated with making a change in your viewing
behavior But if yoursquore an advertiser you need to make sure it works Advertisers usually start small and test it It
doesnrsquot make sense for them to advertise in a place where there are no users right Irsquom confident that advertisers
will catch up and the ad dollars will flow to digital Itrsquos just going to take some timerdquo
mdash Susan Wojcicki CEO of YouTube
Miscellaneous
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
18
Quarterly Report | Second Quarter 2017
ldquoWhat we want with Alphabet is to be an extraordinary magnet the best magnet for entrepreneurs and to be an accelerant for their development and to give them the kind of environment where they can continue to thrive and therefore build great businesses that generate tremendous returnsrdquomdash Ruth Porat CFO of Alphabet and Google
ldquoEntrepreneurship is working very hard having a strong belief being very consistent choosing the right partners choosing very solid consistent paths considering the medium and long term instead of worrying about tomorrow () It is the day-to-day job of building a business There are no giant leaps (hellip) Something that is very consistent over time which actually builds something in the long term There are no shortcuts () It may take a while but it gets there One step at a time () This consistency is fundamental That relentless routine of someone who is working hard to make the business grow to create somethingrdquomdash Roberto Setubal at a recent conference emphasis added
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
PERFORMAnCE
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
20
Quarterly Report | Second Quarter 2017
sTrucTure
ObJecTive AnD sTrATeGy
IP-Participaccedilotildees Class is a class of the IP Fund SPC VBF Segregated Portfolio which is an exempted company registered as a segregated portfolio company incorporated under the provisions of the Companies Law of August 3rd 2006 of the Cayman Islands
IP-Participaccedilotildees Class aims to provide absolute returns through long positions in both Brazilian and foreign companies that exhibit interesting combinations of criteria such as (i) excellent business models (ii) a competent and ethical management team (iii) an alignment of interests between management and minority shareholders and (iv) prices that provide a good margin of safety and allow for substantial absolute return over a minimum 5-year investment horizon
5223
IP-
Part
Clas
s
868
Ibove
spa
457
MSCI
Emerg
ing M
arket
s
PERFORMANCE iP-PARTiCiPACcedilOtildeES CLASS
lAsT 12 mOnThs reTurns (us$)perfOrmAnce
Since February 26th 1993(2)
AnnuAl reTurns (us$)
eQuiTy hOlDinG chArAcTerisTics
cOncenTrATiOn
AnnuAliZeD reTurns (us$)
(1) Only Brazilian companies were taken into account in the market capitalization breakdown (2) For the period before IP-Participaccedilotildees Class inception on December 1995 for reference we show the Brazilian investment vehicle (IP-Participaccedilotildees) results in dollar terms The returns are net of all fees(3) Inception of the Brazilian investment vehicle IP-Participaccedilotildees 02261993
portfolioTop 5 44Next 5 19Other 8Cash 27
portfolioInternational Assets 39Small Cap (smaller than US$ 1bi)(1) 16Mid Cap (between US$ 1bi and US$ 5bi)(1) 0Large Cap (larger than US$ 5bi)(1) 16
IP-Part Class(2) () Ibovespa () MSCI EM ()June 17 -063 -165 107May 17 -113 -545 298April 17 -057 -030 221March 17 -109 -464 255February 17 263 400 307January 17 547 1191 595December 16 1089 140 -016November 16 -646 -1070 -460October 16 356 1351 025September 16 -001 062 132August 16 294 099 252July 16 260 1022 50912 months 1864 1844 2417
IP-Part Class(2) () Ibovespa () MSCI EM ()2017 (YTD) 459 289 19132016 4933 6646 11112015 -2467 -4103 -14602014 -405 -1437 -1822013 -616 -2629 -2272012 1823 -142 18632011 -1047 -2726 -18172010 3952 559 19202009 12767 14516 79022008 -5706 -5547 -53182007 5410 7343 39822006 4532 4641 32552005 2313 4409 34542004 2811 2816 25952003 8765 14104 56282002 -2636 -4601 -6002001 -758 -2398 -2372000 -099 -1808 -30611999 13673 6955 66411998 -2564 -3844 -25341997 -1153 3447 -11191996 3257 5323 5551995 334 -1377 -5211994 14254 5897 -7321993 5054 6392 6565
IP-Part Class(2) () Ibovespa () MSCI EM ()Last 5 years 474 -664 430Last 10 years 519 -386 224Last 15 years 1614 1105 1106Since Inception(3) 1789 981 738
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
21
TERMS And COndiTiOnS
IP-PARTICIPACcedilOtildeES CLASS
Minimum Initial
Management fee
Minimum Balance Left
Minimum Additional
Performance fee
Redemption
Subscription
US$ 10000000
bull2paoftheNetAssetValuebullAccrueddailyandpaidmonthly
US$ 10000000
US$ 10000000
bull15oftheincreaseoftheNetAsset Value per SharebullAccrueddailyandpaidsemi-annualyor on redemption subjetct to highwater mark
The redemption day shall be the lastbusiness day of the second subsequentmonth following receipt by the RTAof the redemption form Payment ofredemption proceeds shall generally bemade within 10 business days followingthe redemption day
Daily
Terms and Conditions
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
22
Quarterly Report | Second Quarter 2017
AddiTiOnAL inFORMATiOn
IP-PARTICIPACcedilOtildeES CLASS
Net Asset ValueCalculator
Auditor
Bank
Brazilian Custodian
Registrar and TransferAgent
Investment Manager
BNY Mellon Serviccedilos Financeiros DTVM SAPhone +55 21 39744600wwwbnymelloncombrsf
kPMG
UBS AG Stamford Branch CT (USA)
Banco BNY Mellon SA
MUFG Alternative Fund Services (Cayman) LtdMain Officer Sherie DawkinsEmail SDawkinsmfsadmincomOL-Investidor-IRmfsadmincomPhone +345 914 6164
Investidor Profissional Gestatildeo de Recursos LtdaPhone +55 21 21040506wwwip-capitalpartnerscomcontactusip-capitalpartnerscom
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050
IP-CAPITAL PARTNERSCOM
RUA DIAS FERREIRA190 - 702 LEBLONRIO DE JANEIRO RJ - BRASILCEP 22431050