Brazil: The new hotspot in investment management 

Unlike many other large economies, Brazil has a comparatively welcoming attitude to investment funds and hedge funds – recognizing the need to attract foreign investment to underpin continued economic and infrastructure development. The combination of high returns and a favorable regulatory regime is driving a massive wave of interest in investment in Brazil: it is indeed the new hotspot in investment management.

Investment Management industry in Brazil

Brazil’s investment management industry is mature, well-managed and effectivelyregulated. All funds – including those which would be described as hedge funds – must be registered with the Comissão de Valores Mobiliários (CVM) – Brazil’s equivalent of the Securities and Exchange Commission. The capital markets association, ANBIMA, operates a system of self-regulation which is generally well-regarded. The market is transparent, with daily updates of asset values and portfolio details being posted on the internet.

Although the investment management sector is large, it faces competition from certificates of deposit and savings accounts. The total investment portfolio is concentrated in Brazilian assets, with 60 percent of total investment in government bonds.

Alternative investment industry in Brazil

There is increasing interest in the alternative investment market in Brazil. A number of different classes of investment vehicle exist. These are all summarized in the panel on the next page.

The most attractive emerging market for private equity

A recent survey by Coller Capital and the Emerging Markets Private Equity Association shows that Brazil has overtaken China as the most attractive market for fund managers’ deal-making in the coming year. Brazil offers a number of fiscal incentives for inward investment in private equity funds (Fundos de Investimento em Participações – FIPs):

• come and capital gains received by the funds are usually not subject to taxation in Brazil;
• There is no withholding tax on disposal of FIP quotas for non-residents as long as they hold, together with related parties, less than 40 percent of the shares of the FIP and are not located in a low tax jurisdiction (defined as where income is taxed at less than 20 percent and/or where there are restrictions on disclosure of shareholder composition or beneficial ownership).

FIP investments are subject to certain restrictions:

The portfolio company is usually a Sociedade Anonima (S.A.), and is required to have its financial statements audited by an independent auditor registered with the Brazilian CVM. The FIP must have influence in strategic decisions and its management.
• The investment must adhere to the existing foreign exchange regime for investments in Brazil’s capital market.
• The financial tax (IOF) is levied on the inflow of foreign funds into the FIP at a 2 percent rate (reduced to zero on 1 December 2011).

Investing in the Brazilian financial market:

Non-resident investors may invest in Brazil’s financial and capital markets on level terms with resident investors. They need simply to hire a legal representative in Brazil (a financial institution), and complete the necessary paperwork. However, getting the structure right and optimizing the balance sheet to take advantage of the favorable tax opportunities as well as to comply with domestic legislation and regulation is complex. Where purchases of local companies are concerned – as they have been with sovereign wealth fund investments – the necessary due diligence can be time-consuming.

Having said this, the requirement in Brazil for infrastructure investment, especially, is pressing, particularly in the transport sector. In addition, Brazil is to host the football World Cup in 2014 and the Olympic Games in 2016, both of which require major investment in the country’s infrastructure. It has been estimated that Rio de Janeiro alone needs $36 billion of investment to prepare for these two events. Brazil’s investment management industry is most definitely open for business.

Article author

¹CIA World Factbook, February 2011

²EMPEA/Coller Capital Emerging Markets Private Equity Survey – 18 April 2011

³Financial Times, ‘Rio eyes ‘Olympic bonds’ to fund 2016 games’, 2 February 2011

⁴As quoted in The Economist, 17 February 2011