Brazilian pensions evolve, slowly

The country, already the focus of growing private equity investment, would be creating an even friendlier ecosystem by allowing foreign funds to market to its public pensions.

Brazilian pensions will begin making commitments to foreign-based funds within the next 18 to 24 months, according to two fundraising experts who spoke at an industry conference in New York this week.

Brazil’s popularity as a destination for private equity firms has not been mirrored by commitments to foreign funds from the country’s institutional investors, specifically its fast-growing public pension system, according to the panel. 

“Brazil, they had a bad episode 10 to 15 years ago where they had a number of scandals, where regulators clamped down and they weren’t allowed to invest in foreign firms,” Kevin Albert, managing director with fund of funds Pantheon, said. Albert has long been involved in private equity fundraising.

“It’s believed within the next 24 months, the most onerous of those regulations will go away and they’ll be able to invest with foreign funds on a Chilean model.”

Blackstone Group senior managing director Michael Sothiros, who was also on the panel, said he agreed with the time frame. The conference was run by Dow Jones.

You do have to be mercenary when it comes to going out and finding capital.

Michael Sothiros

Several foreign firms entered Brazil in the 1990s after strong macroeconomic indicators created a push for investments in the region. Economic crises in Asia led to the devaluation of the Brazilian real in 1999, pushing those same players out of the country, according to The Economist.

Other countries in Latin America have opened up to committing to foreign firms using various structures.

For example, Chile, which features a heavily regulated private equity industry, requires firms to establish feeder funds through local financial firms that can then direct commitments from the country’s public pensions to foreign private equity funds. The strategy has already been implemented by The Blackstone Group, which is working with a brokerage firm called Larrain Vial to market its sixth fund, said Sotirhos. Larrain has been raising a $700 million fund called Larrain Vial-BCP VI, according to documents filed with Chilean ratings agency Feller Rate. Prior media reports estimated the fund had raised $250 million by May last year.

The opening of Brazilian pensions to foreign funds would be welcome news for firms returning to market, panelists said. It would also continue a trend that has created an already private equity-friendly environment. In January, the country cut taxes on investments in foreign private equity funds from 6 percent to 2 percent.

With many US and European LPs tightening the reins on fund managers, firms have been forced to tap new capital markets in order to hit targets on newer funds. This has led to crowding and “promiscuity” in newer capital markets, panelists said. 

“You do have to be mercenary when it comes to going out and finding capital,” Sothiros said. “It’s hand-to-hand combat, you’re fighting against everybody in the market.”