Brazil provides PE investors with real route to LatAm opportunities
When it comes to investing in Latin America’s private markets, Brazil leads the way, accounting for 58 per cent of all Private Equity and Venture Capital investment in 2019, according to the Association for Private Capital Investment in Latin America (LAVCA).
Some of the notable deals completed last year included: SoftBank acquiring shares worth USD344 million in Banco Inter; Brookfield Asset Management’s USD1.8 billion acquisition of Ascenty, a Brazilian data centre operator, in a joint venture with Digital Realty; and HIG Capital’s acquisition of glassware manufacturer Nadir Figueiredo for USD224 million.
On 20 September 2019, the Brazilian Federal Government enacted Federal Law No13,874 (Economic Freedom Act), which establishes the Declaration of Economic Freedom Rights, with the intention of stimulating economic activity by reducing government intervention in private activity.
This could well encourage greater investment activity among global investors. However, Brazil is not for the feint hearted. It is a complicated country in which to do business.
For global asset managers setting their sights on tapping into LatAm’s potential, Brazil – and more specifically Sao Paulo, the country’s de facto business capital – is the go-to option for structuring onshore fund vehicles.
Mauricio Carmagnani, Commercial Director, International Markets at TMF Group, comments: “Countries like Colombia and Mexico tend to follow what comes out of Brazil and we see a wide number of global PE firms setting up their regional headquarters here in Sao Paulo.”
When asked where he feels investors might find value in Latin America over the coming years, he points out that recent discussions in Brazilian law in relation to land investments, mean that foreign investment ownership could go beyond the existing 25 per cent limit.
“This has triggered a lot more interest among global real estate/infrastructure investors seeking to acquire not only corporate offices, shopping malls etc, but also farmland that relates to the agribusiness (Brazil strongest industry).
“Brazilian utility companies are also interesting, in light of the renewable energy transition. There are good opportunities to invest in renewable energy assets. The infrastructure is good but at the moment these assets don’t have the cash flows so Brazil is opening up to more foreign investment.
“There is a lot of untapped potential in Latin America. We are currently working on a large mandate with one of the largest global real estate developers, which is setting up a LatAm fund to deploy approximately USD600 million over the next five years. SoftBank is another example of a large investor, which has a USD5 billion fund investing here. Foreign capital has been invested into many infrastructure and large real estate projects with investor interest showing no sign of waning.”
SoftBank has said it intends to deploy nearly USD500 million of the fund’s capital into third-party venture capital funds. Reuters reported in September that it had sealed deals to invest in funds run by at least two venture capital firms: Brazilian firm Valor Capital and Argentina’s Kaszek Ventures.
In the past few years, a lot of large institutional LPs, including Sovereign Wealth Funds, and renowned global asset managers such as BlackRock, CVC Capital, and Carlyle, have established investment offices in Brazil to set up domestic fund vehicles for the purpose of investing locally in Brazilian real.
Other investors don’t have that ability, requiring them instead to set up an onshore fund in a developed jurisdiction like Luxembourg, which acts as the focal point for fundraising and investing into LatAm, and other global markets.
Luxembourg is very interesting when it comes to Brazilian funds because it has an excellent tax treaty with the country. On top of being an AAA jurisdiction, the well-established tax treaty between both countries, gives GPs and LPs a stable environment in which to operate. It’s a very stable jurisdiction and Luxembourg has invested a lot of time in developing its relationship with Brazil.
There have been several trade missions between the two countries and in 2018 Luxembourg opened its first embassy in South America in Brazil as part of Luxembourg's desire to ensure a more visible and operational presence of the Grand Duchy in Brazil in particular and, more generally, strengthen its political-diplomatic, economic and cultural relations with the South American continent.
Luxembourg is seen as a safe harbour when it comes to investing in Brazil, explains Carmagnani. In addition, Luxembourg for Finance sent a financial delegation to Brazil in 2016 and 2018 to promote a dialogue between both Financial Regulators and discussion among asset management, wealth management and capital markets participants.
Joel Cardenas is Director Client Services at TMF Group (Luxembourg) and Head of its LatAm desk. He notes: “In Luxembourg we have seen more interest to invest in Brazil, especially among European asset managers.”
Much of Luxembourg’s success, says Cardenas, is attributable to it becoming a global hub for cross-border investments, offering asset managers a wide range of investment vehicles; from non-regulated such as holding companies, semi-regulated such as the Reserved AIF (RAIF) to fully regulated investment funds including the SIF and the SICAR. Just like Brazil, it is important for managers to appoint local legal and fiscal experts to advise them properly,” states Cardenas.
The complexity of the Brazilian tax and banking system means “this is not a marketplace for amateurs” remarks Carmagnani. He says: “Before planning to invest in the country, asset managers need to spend time to understand the way of doing of business before making strategic investment decisions.
“The country’s fund market is well developed but you need to have good fiscal advisors to guide you through the best structures when looking to set up an onshore fund.”
The most commonly used vehicle for private equity investments is the FIP (which translates as ‘Investment Fund for Specific Purpose). A FIP does not have a separate legal personality: it is classified as a co-ownership and must be represented by its administrator. For direct real estate investing, the most common structure is an SPE; a company that may be incorporated in the form of a limited liability partnership or a Brazilian corporation.
“There are a number of vehicles one could choose to use, depending on the investment strategy. If an international manager wants to have exposure to the Brazilian real, they could set up a fund for specific purpose but it requires them to hire someone to act as the local GP. There are a lot of good quality service providers in Sao Paulo to help with the fund formation work and represent international PE managers as the local GP.”
Language is a major barrier and also, Brazil does not allow international law firms to operate there so anyone wishing to set up a fund is required to use a local law firm to assist with the set-up process and liaise with the regulator; the Securities and Exchange Commission (Comissão de Valores Mobiliários or ‘CVM’).
There are representative offices of international law firms in the country but they serve only to facilitate the discussion between the fund manager and the local legal advisor. “It helps having the likes of Baker McKenzie and DLA Piper on the ground in Brazil to assist with this communication,” adds Carmagnani.
Over the last five years, Cardenas says Luxembourg has seen “a growing number of Brazilian banks, corporations and investment companies either increasing their presence in Luxembourg or opening new offices”. Santander Brazil, for example, opened a branch, while numerous Brazilian family offices have opened offices to increase their economic substance and oversee their investment activities from Europe.
“Luxembourg is an international place of business,” says Cardenas. “Around 50 per cent of its population comes from overseas locations. The largest single immigrant community comes from Portugal, thus ensuring Luxembourg can support seamless day-to-day cooperation with Brazilian stakeholders.”
According to Carmagnani, a number of TMF Group’s Brazilian clients investing in Chile, Peru and Colombia are choosing to use a Luxembourg fund structure, due to the legal framework there and protections afforded to investors’ capital.
“I’m sure this will attract a lot of new players,” concludes Carmagnani.