Foreign investors are no longer the biggest contributors to private equity and venture capital funds in Brazil – Latin America’s largest market – despite record investment volume in the country.
Due to poor historical performance, foreign investors have cycled out of Brazilian funds. But they’ve largely been replaced by family offices based in the country, according to a recent report from Brazilian secondaries buyer Spectra Investments that Private Equity International has seen exclusively.
Overall growth of investment in Brazil has been significant. Through H1 2021, Brazilian private equity and venture capital funds deployed $5.7 billion in the country, according to the Association for Private Capital Investment in Latin America (LAVCA) – more than the whole of 2020. This was the highest investment volume Brazil has seen yet.
High-net-worth families and family offices now account for 70 percent of private equity and venture capital fund investment in the country, up from just 5 percent in 1999. Foreign investors now account for just 20 percent of fund investment, down from more than 80 percent in 1999, the report said.
“Most of the families here are going from zero allocation to alternatives to something like 5 percent,” says Spectra partner Renato Abissamra. “It’s a huge move.”
Venture capital is the main beneficiary of this trend. Family offices have been the majority investors since 2010, and reached 73 percent of committed capital to venture funds in the last three-year period.
Brazilian pension funds were a significant presence in the private market in the 2000s, but a combination of low returns and allegations of corruption related to their private equity allocations caused a halt in investments after 2016. Since then, pensions’ share has fallen to just 1 percent of the total committed capital.
The above data doesn’t capture direct venture investment, which is attracting global players from its focus on financial services and fintech. Seventeen investors, including CPP Investments, Advent International and GIC Private Limited, invested $425 million in a Series D round for Brazilian digital real estate platform Loft in March.
In the last two years, the level of private fund returns in US, European and Asian markets were “outrageous”, Abissamra said. It is “impossible” for Brazilian funds to compete for international dollars right now, he added, especially factoring in the heightened political risk and cultural dynamics that demand savvy navigation.
The average US dollar IRR of Brazilian funds invested in by foreigners between the 2008-14 vintages was 2.9 percent, according to the report, while the global benchmark was 16.9 percent in the same period. Family offices performed better in the period, with an IRR of 14 percent driven by the outperformance of venture relative to private equity.
More recently, that performance has caught up to the realms of global counterparts. Family office investments had an IRR of 43 percent in the 2017 vintage across venture and private equity. Foreign investors were still able to beat the global benchmark after 2015, although this probably reflects survival bias from fewer investors selecting better managers, the report notes.
The environment in the US and Europe “will continue to be attractive, but won’t last forever”, Abissamra said. “It’s cyclical – we’ll see international investor appetites one day.”
Spectra, founded in 2011, has done about 70 deals. Its first fund, a 2012 vintage, has returned roughly 40 percent net since inception. Spectra’s most recent fund, Spectra Latin America Private Equity Feeder V, which launched in July, is targeting $400 million.