Friday Letter Hand to hand combat in Brazil

Brazilian pensions may become an integral stop on the private equity fundraising trail, but competition for their commitments will be fierce.

“Fundraising is the toughest I’ve ever seen it.”  That was an observation made earlier this week by a European fund manager with more than two decades of private equity experience. Developed market institutional investors that have long backed private equity funds are not just reducing relationships and commitment sizes, but also changing the ways in which they work with managers, increasingly preferring direct and co-investment programmes.

The situation, as we’ve noted before, is forcing some GPs to go to the market with smaller funds, in some cases even thinking about forgoing traditional fund structures altogether. Another thing you’ll hear nearly every fundraising professional talk about is the need to find new sources of capital.

One of those new sources is expected to be Brazilian pensions, which in the past have rarely been permitted to invest in foreign fund managers. Now the expectation is that within the next two years regulations will be eased, allowing them to follow an investment model similar to Chile’s, according to veteran fundraisers Kevin Albert, managing director at Pantheon, and Michael Sothiros, senior managing director at The Blackstone Group.

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 Blackstone in Brazil, where the firm is working with local brokerage firm Larrain Vial to market its sixth fund. Larrain has been raising a $700 million fund called Larrain Vial-BCP VI, according to documents filed with Chilean ratings agency Feller Rate.

Still, raising money from Brazilian investors isn’t going to be without obstacles. According to our sources, investor demand to sit on funds’ investment committees is near-ubiquitous. This request stems from the county’s institutional investors having gone through an investment fund implosion in the 1990s, after too many inexperienced managers raised too much capital and then lost it. Today jaded investors want significant control when they enter partnerships. 

This might be acceptable to some local managers but, need it be said, does not go over well with international firms. Neither does it sit well with international LPs, who make commitments based on their due diligence on fund managers and their investment abilities, and who would certainly not be  prepared to have another party involved in investment decisions. The good news is that Brazil’s institutions are beginning to recognise these potential deal breakers. Smaller pensions have committed to smaller funds that are raising capital outside of Latin America, and have conceded their demand to be on the investment committee, agreeing to sit instead on an LP advisory board.

Another, perhaps more obvious obstacle, is one with global relevance: increased competition for capital. Pantheon’s Albert notes that he has got to know his competitors for Brazilian commitments quite well  –  from constantly running into them at the same Brazilian hotels.

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

PS – In case you missed it, click here to download Private Equity International’s ‘Capital Pursuit’ board game. Players must navigate a series of positive and negative real world scenarios while traversing the fundraising trail. The first player to reach final close wins.