Brazil: Open for business

Latin America’s private equity hub is creating a regulatory and tax framework on par with international standards, though corruption concerns remain.

Recent tax reforms in Brazil are the latest sign the government is doing everything in its power to cultivate a lively private equity industry. Overseas private equity investors will no longer suffer a 2 percent tax on their fund commitments – a policy change designed to encourage long term investment in a country now prioritising growth over inflation concerns. 

And judging by the level of LP enthusiasm for Brazil, the government’s efforts have certainly borne fruit: a recent study of LP appetites found Brazil had taken China's place at the top of the podium as the place LPs regard as the most attractive destination for private equity dealmaking (China, however, continues to capture the lion’s share of fundraising attention).

One oft-cited concern, however, is corruption – an issue plaguing all countries forming part of the BRIC acronym. According to the latest corruption perceptions index released late last year by advocacy group Transparency International, Brazil ranks 73rd among the 182 countries surveyed, just two spots ahead of China. 

Brazil has been working to change the situation. First and foremost the country has allowed the Organisation for Economic Co-operation & Development (OECD) to review its “public sector integrity”, the first time a G20 country agreed to such an evaluation. The OECD report, released last month, praised Brazil for its progress over the past decade, acknowledging its public sector reforms promoting accountability and making government more cost-effective. But more works need to be done, the report said, offering a number of proposals to do just that. The proposals include suggestions on how to effectively introduce a comprehensive freedom of information law, provide public workers more resources to sniff out corruption and implement a risk-based approach to internal control systems, among other measures. 

Brazil has also been moving towards global accounting standards – though cultural norms may make the transition choppy, it’s yet another measure that should give greater comfort to international private equity investors eager for exposure to Brazil. 

It’s also worth noting that the country’s private equity industry has imposed its own best practices code, mandatory for all members of the Brazilian Private Equity and Venture Capital Association, in order to increase transparency and monitor local fund activity, standardise practices and processes, address conflicts of interest and further integrate Brazil’s private equity market across borders. In some respects, that puts it miles ahead of the private equity industries in some developed markets.  

If both Brazil’s private equity industry and the country’s government continue to make progress along these lines, it’s not far-fetched to believe that, going forward, Brazil will command an even greater share of private equity capital allocated towards emerging markets.