FDI and Private equity in Brazil: a comment

February 2, 2011

Although many commentators consider that the steps taken by capital-importing states to attract foreign investors as submission gestures, I just read a fascinating article describing how the Brazilian government’s FDI (Foreign Direct Investment) policies actually succeeded in this undertaking.

Here are small abstracts of the article ‘Private Equity in Brazil: Entering a New Era’ by Daniel de Souza, Porter Leslie, José Luis González Pastor and Carol Strulovic.

Key Regulatory Modifications

Several major changes in legislation have increased the country’s attractiveness for both local and foreign PE investors. One of the most important improvements for PE investment in Brazil occurred in 2003, when the government passed several laws to legally adopt the registration of PE funds, to regulate such establishments, and to address their formal obligations in a method similar to that of the Limited Partner (LP) structure of funds in the U.S. and Europe. In the past, the funds had no clear legal framework on which to base their activity beyond acting as an offshore investor. This changed in 2003 with the introduction of FIPs (Fundos de Investimentos em Participações), investment vehicles that benefit from tax exemptions on capital gains, as found in other developed PE markets.

The Brazilian government has also approved several reforms in the last five years related to the regulation of majority and minority shareholder rights. These reforms have enhanced the rights (e.g., pre-emptive rights, tag-along rights) of minority shareholders and provided additional clarity and security for investors. As a result, there has been an increase in the number of minority investments in Brazil.


Despite these favorable adjustments to its legal framework, Brazil faces two significant legal challenges. The first is to simplify the nation’s extremely bureaucratic legal and tax systems, which inevitably lead to high transaction costs for PE investors. According to data from Veirano Advogados, a law firm, an average-size corporation in Brazil spends 6,000 labor hours per year to comply with all its legal obligations and tax payments (vs. approximately 200 hours per year in the U.S.). Second, Brazil must act to accelerate processes in its judiciary system. Legal experts indicate that, on average, competition lawsuits and patent conflicts typically remain unresolved for four to seven years.


The Evolution of Investor Appetite

Investor sentiment has grown increasingly positive toward Brazilian PE since 2003, and this tendency continued, if not accelerated, through the financial crisis of 2008 and 2009. Kevin Johnson, of Liberty Global, an emerging-markets-focused placement agency, comments on this dramatic shift in investor appetite: “In 2003, limited partners … were almost universally negative about investing in PE in Brazil; now, more and more people are enthusiastic about the macro situation.” Indeed, the most recent LP survey, conducted by the Emerging Markets Private Equity Association, found that 17% of LPs with existing investments in Brazil planned to increase their allocations, while 11% planned to enter the country for the first time in 2010.


‘Private Equity in Brazil: Entering a New Era’ by Daniel de Souza, Porter Leslie, José Luis González Pastor and Carol Strulovic, members of the Lauder Class of 2012. Published: January 26, 2011, Available here.


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