The Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários – "CVM") has recently issued two new sets of rules relating to private equity funds (called Fundos de Investimento em Participações or "FIPs" in Portuguese), which implemented substantial changes to the formation, management and operation of these types of funds and may help the FIP industry sector further develop in the Brazilian market.
These changes may also benefit foreign investors interested in the Brazilian market. The regulations kept the ability to invest in FIPs only to qualified investors1, but introduced interesting innovations by granting a lot of flexibility to professional investors2. To wit, FIPs aimed exclusively at professional investors may: (a) attribute to one or more classes of quotas different economic-financial rights, in addition to the establishment of management fees and the order of preference in the payment of profits, amortizations or the liquidation balance, and (b) invest 100% of its subscribed capital in assets located abroad. This new provision will certainly facilitate the negotiations amongst different professional investors, taking into account each investor's different investment criteria, thus making the industry more vibrant.
Other important changes introduced by this new regulation (Instructions 578 and 579 of CVM) include: (a) FIPs can now invest in non-convertible debentures up to the limit of 33% of the subscribed capital, and may advance funds for future capital increases of an invested company; (b) FIPs will be classified into one of five categories: (i) Seed Capital, (ii) Emerging Companies, (iii) Infrastructure, (iv) Intensive Economic Production in Research, Development and Innovation (FIP-PD&I) and (v) Multi-strategy; (c) payment of the FIPs' quotas may be made with the following assets or rights: (i) shares, subscription bonuses, simple debentures, other securities convertible or exchangeable into shares of closely-held or privately-held companies, as well as securities representing participation in limited liability companies, provided that the FIP participates in the decision-making process of the invested entity, with effective influence in the definition of its strategy and management, and (ii) whenever the FIP invests in entities that are subject to bankruptcy reorganization ("Recuperação Judicial or Extrajudicial") or is under financial restructuring, duly approved by the entity's governing bodies, with assets or rights, including credit rights, provided such assets or rights are linked to the bankruptcy reorganization or financial restructuring; (d) FIPs may invest in limited liability companies according to the following limits: (i) Seed Capital FIP may invest in companies that have annual gross revenue up to R$ 16 million in the year immediately prior to the FIP's first investment, without having had revenues higher than this limit in the previous three fiscal years, and provided that the invested entity is not controlled by companies that have total assets higher than R$ 80 million or annual gross revenue higher than R$ 100 million, and (ii) Emerging Companies FIP may invest in companies that have annual gross revenue up to R$ 300 million in the year immediately prior to the FIP's first investment, without having had revenues higher than this limit in the previous three fiscal years and provided that the invested entity is not controlled by companies that have total assets higher than R$ 240 million or annual gross revenue higher than R$ 300 million.
Even though the FIP itself may not borrow funds3, the ability to structure the FIP's investment through debt via non-convertible debentures is certainly good news to the market. When debt may come into play, FIPs will have more flexibility in the financial modelling of their investments, with the possibility to increase their returns. The classification of the FIPs in five categories may provide a more clear understanding of the portfolio by the investors as well as facilitate CVM's supervision powers, and is in line with international standards.
Each category shall have its own investment policy. Allowing Seed Capital and Emerging Companies FIPs to invest in limited liability companies facilitates the funding of startups and early stage companies and is a vital step for the development of entrepreneurship in Brazil.
Considering Brazil's prominent agribusiness sector, the FIP industry may spearhead the financing of the development of innovative agribusiness technologies, where Seed Capital, Emerging Companies as well as PD&I FIPs could play a more active role.
Multi-strategy FIPs will be allowed to combine investments across several categories. In this sense, both agribusiness and real estate activities could benefit from investments of this type of FIP.
CVM also made it clear that FIPs may not invest directly in real estate properties, but may invest in companies that develop real estate activities.
Considering that non-resident investors are deemed professional investors under the new regulations and that FIPs aimed at professional investors have now much broader flexibility, we expect to see foreign investors looking more closely to the establishment of FIPs in Brazil in the near future.
- As defined by Article 9B of Instruction CVM 554/14, which include, among others: (i) professional investors, and (ii) individuals or legal entities, which hold financial investments in an amount higher than R$1.000.000,00 (one million reais) and that, additionally, attest in writing their capacity of qualified investor.
- As defined by Article 9A of Instruction CVM 554/14, which include: (i) financial institutions and other institutions authorized to operate by the Central Bank of Brazil; (ii) insurance companies and capital stock insurance companies; (iii) open-end and closed-end pension management companies; (iv) individuals or legal entities, which hold financial investments in an amount higher than R$10.000.000,00 (ten million reais) and that, additionally, attest in writing their capacity of professional investor; (v) investment funds; (vi) investment groups organized according to CVM rules ("Clubes de Investimento"), provided their portfolio is managed by a portfolio manager duly authorized by CVM; (vi) autonomous investment agents, portfolio managers, analysts and securities consultants duly authorized by CVM, in relation to their own investments, and (vii) non resident investors.
- Except in the case of FIPs that obtain financing from multilateral and/or Government agencies, which may borrow funds equivalent to up to 30% of the total assets of the fund (Article 10 of CVM Instruction 578/16).