Private Equity Funds in BrazilFundo de Investimento em Participações - FIP Luiz Otávio P. Villela June 2011
Brazilian PE Fund (“FIP”) General Information• Closed-end mutual fund• At least 90% of fund’s assets must be invested in stocks, debentures, subscription warrants and other securities issued by a special purpose company (SPC) which qualifies as a target for the FIP.• Mainly ruled by CVM Instruction nº 391 (2003) and the Infrastructure FIP by CVM Instruction nº 460 (2007) which mirrors Law nº 11.478/2007.
Brazilian PE Fund (“FIP”) General Information• Most suitable vehicle in Brazil for Venture Capital and Private Equity projects• May be used in tax plannings to reduce the taxable income in sale of assets• May be used in insolvency restructuring processes• FIP’s allocation can be made by business sector, multisector, single SPC or by other criterion.• Fund raising through registered public offerings or limited efforts’ offering exemption (similar to a private placement)
Brazilian PE Fund (“FIP”) General Information• Fixed maturity subject to extension for a pre- established period of time• May adopt different types of quotas with distinguished seniority claim levels, which are held either in electronic scrip or book-entry• Investors: financial institutions, insurers, pension funds and other qualified investors holding other investments exceeding R$ 300,000• FIP’s minimum investment value: R$ 100,000• FIP shall exert active influence over the management of the invested SPC.
Brazilian PE Fund (“FIP”) General Information• Allows channeling funds into specific sectors or projects which meet certain parameters.• An “Investment Committee” formed by members indicated by the fund’s manager and its top investors according to the fund’s internal rules may be adopted to decide on the allocation of fund’s assets.
Brazilian PE Fund (“FIP”) General Information• FIP must be audited by an independent auditor• Charges: Management Fee (%) varies according to the FIP’s assets. Extra performance fee may be charged upon achievement of benchmarks. Custody and other fees may also apply.• FIP does not qualify for the guarantee of the Brazilian deposit guarantee fund (FGC)• Pre-established investment and desinvestment periods are usual• Desinvestment occurs through IPO, secondary market sale or repurchase.
Brazilian PE Fund (“FIP”) Pension fund Investment LimitPension fund and official funds investment limits:• Pension Fund: May invest up to 20% of its assets in FIP’s The pension fund investment is limited to 25% of the FIP’s cotas/assets• Retirement institutes sponsored by federal, stateand municipal governments: May invest up to 5% of its assets in FIP’s The institute’s investment is limited to 20% of the FIP’s cotas/assets
Brazilian PE Fund (“FIP”) Management and Governance of Invested SPC’sThe fund may participate in the SPC’s decisions in anyof the following manners: I. Relevant shareholding (corporate control block) II. Shareholders Agreement III. Appointment of Board members; and IV. Other arrangement securing active influence on the company’s strategy and management control.
Brazilian PE Fund (“FIP”) SPC’s Eligibility CriteriaEligible SPC’s: Corporation, publicly-held or not, which:- Has not issued “parte beneficiária” (profit-sharing security)- Adopts an uniform office term of 1 year for the Board of Directors (or 2 years in case of a “FIP-IE”)- Discloses contracts with related parties, Shareholders Agreements, SOP’s and other relevant contracts- Adopts arbitration clause for corporate disputes- Balance sheets are audited by independent auditors- Commits to join one of BM&FBovespa’s special stock exchange segments if the SPC goes public.
Brazilian PE Fund (“FIP”) CVM FilingsCVM Filings:1. The FIP requires a prior registration at CVM, which is accomplished upon filing the documents listed in CVM’s Instruction 391 (Meeting Minutes, FIP’s Regulation (Charter), Affidavits etc.)2. Each new offering also requires a registration statement with CVM (except for public offerings with limited efforts pursuant to CVM Instruction 476/09).
Brazilian PE Fund (“FIP”)Dropdowns and noncash withdrawalsNoncash payments:CVM Instruction 391 allows creditors of an investedcompany under reorganization to acquire FIP’s cotaspaying with assets or credit rights enforceableagainst the invested company supported by avaluation report. In practice, any investors mayacquire FIP cotas paying with any securities or creditrights.If the fund’s rules allow, the investors’ withdrawalmay also be made with assets and rights (includingsecurities).
Brazilian PE Fund (“FIP”) Chart FlowInvestors: Custody, treasury QUALIFIED and back-office INVESTORS CUSTODY may also be R$ discharged by the Administrator FIP ADMINISTRATOR Administrator may Securities Firm, Bank etc. also manage the fund’s assets if SPC’s MANAGER licensed by CVM Asset Management
Brazilian PE Fund (“FIP”) Tax MattersTax Status (Law 11.312/06):Upon repayment, Redemption value less Acquisitionvalue = taxable gain: 15% Income tax(FIP must have 67% or more of its investmentscomposed of stocks, convertible debentures andsubscription warrants issued by Brazilian corporations)No semestral share-deduction taxationDividend received by FIP from invested companies maybe rolled-over to investors, pro rata to their fund’scotas, totally tax-free.
Brazilian PE Fund (“FIP”) Tax MattersIncome tax rate for nonresident investors is 0% if:(a) investor and related parties hold less than 40% of the FIP cotas (or corresponding rights); and(b) FIP’s investment has up to 5% in debt securities (except convertible debentures and government bonds).This tax benefit does not apply to parties domiciled orresident in “Tax Heaven” jurisdictions.
Brazilian PE Fund (“FIP”) Tax MattersIOF on entry of funds from offshore investors:Brazil levies an IOF tax on nonresident investmentsin FIP’s at a 2% rate, which is due upon the FXconversion into Brazilian currency after the fundsenter Brazil for credit into the fund account.
Brazilian PE Fund (“FIP”) Infrastructure FIPInfrastruture FIP (FIP-IE): CVM 460/07 & Law 11.478/07⇒ May qualify for credit support from Brazilian development agencies (e.g. BNDES programs)⇒ Within 180 days from incorporation, fund must have 95% of its assets invested in stocks or subscription warrants issued by companies or projects of energy, transportation, water and sewerage and irrigation⇒ SPC’s project must have started after Jan 22, 2007⇒FIP-IE must have at least 10 investors, each one having 20% or less of the fund cotas or its corresponding rights