Transcript Slide 1

PRIVATE EQUITY & VENTURE CAPITAL
INVESTMENTS IN BRAZILIAN COMPANIES
MARCH, 2012
SÃO PAULO
RIO DE JANEIRO
ALAMEDA SANTOS, 2.335 | 10º E 11º ANDARES | CEP 01419 002
SÃO PAULO | SP | BRASIL | TEL 55 11 3082 9398 | FAX 3082 3272
[email protected] | www.mfra.com.br
AV. ALMIRANTE BARROSO, 52 | 5º ANDAR | CEP 20031 000
RIO DE JANEIRO | RJ | BRASIL | TEL 55 21 2533 2200 | FAX 2262 2459
[email protected] | www.mfra.com.br
Private Equity Fund – Fundo de Investimento em Partipações (FIP)
 Regulated by Ruling CVM 391
 Required to participate in the
decision
process
of
portfolio
companies
 Has no legal personality and shall be
registered before the Brazilian
Securities and Exchange Commission
(CVM)
LP
(5)
(1)
(2)
FIP
(3)
(4)
(3)
Portfolio Company 1
(4)
Portfolio Company 2
 Attractive vehicle
 Is not subject to the Corporate
Income Tax (IRPJ) and Social
Contribution on Profits (CSL) and is
not subject to Profit Participation
Program Contribution (PIS) or Social
Financing Contribution (COFINS)
(1) Fund first closing;
(2) Capital Calls;
(3) Investments
companies;
in
portfolio
(4) Exits and transaction fees;
(5) Distributions.
FUND OF FUNDS (FIC-FIP)

“Fundo de Investimento em Cotas de Fundos de
Investimentos em Participações” (FIC-FIP):

Access to the top funds in the market

Portfolio Diversification

Ruling CVM 391, Art.37 - At least 90% of its
capital must be invested in FIPs and/or FMIEEs
quotas
Investors
Fund of Funds (FIC-FIP)
FIP
Portfolio Company 1
FIP
Portfolio Company 2
FMIEE – “Fundo Mutuo de Investimento em
Empresas Emergentes”
RESTRICT PLACEMENT EFFORTS

The Brazilian Securities and Exchange Commission (CVM) issued Instruction 476/09 ruling on
public offerings with restricted efforts.

Public offerings with restricted efforts are those in which the issuers do not have to request
previous registration of the issuance before CVM, as it is usually required in relation to
public offerings.

The public offerings with restricted efforts shall be directed exclusively to qualified investors
(minimum subscription of R$ 1,000,000.00), and intermediated by members of the system of
distribution of securities. The issuers are not allowed to reach investors through offices nor public
means of communication, such as media, radio, television, and internet.

Public offerings with restricted efforts shall be offered to 50 qualified investors, however only 20
qualified investors can subscribe or acquire the securities.
Private Equity/Venture Capital Funds Timeline
Fund
formation
1 Month
Fundraising
6 – 18 Months
Investment
period
1 to 4 Years
Portfolio
management/
investment
grown
1 to 7 Years
Exits
3 to 10 Years
Tax Chart Structure
Foreign Investor
Abroad
(6)
Foreign Investor
30%
Foreign Investor
50%
(7)
20%
Tax Heaven
(8)
(1)
Brazil
Brazilian Investor
(4)
(5)
FIP
(2)
Buyer
(3)
Portfolio Company
(1) IOF tax rate of 0% to foreign investment fund inflows;
(2) Taxation at the level of quotaholders. FIP portfolio is exempt from taxation;
(3) Profits and dividends paid by the portfolio company to FIP are tax exempt;
(4) Capital gain arising from the sale of FIP’s corporate interests on portfolio companies are tax exempt.
(5) To Brazilian Investors, income and capital gain in the sale of quotas of the FIP are subject to a income tax rate of 15%.
(6) For Foreign Investor, income or capital gain are exempt from tax income if certain conditions are met;
(7) In case certain conditions are not observed, the proceeds distributed by the FIP to foreign investor will be subjected to a income tax of 15%.
(Example: more than 40%)
(8) In case certain conditions are not observed, the proceeds distributed by the FIP to foreign investor will be subjected to a income tax of 15%.
(Example: Tax Heaven Resident)
Direct Investment Tax Chart
Foreign Investor
Foreign Investor
(3)
(2)
Abroad
(1)
Brazil
Portfolio Company
(1) IOF tax rate of 0% to foreign investment fund inflows;
(2) Profits and dividends paid by the invested company to the investors are exempt from tax income;
(3) Eventual payments of interests on net equity and capital gain in the sale of foreign investors investments are
subject to tax rate of 15%;
 Foreign Direct Investments can be converted in to investments in FIP, if certain conditions are met, provided that
Brazilian Central Bank authorizes such conversion.
FIP Structure V. Direct Investment Structure
 FIP Advantages:
 FIP Disadvantages:
▲ FIP is tax exempted;
▲ Tax Benefits
investors
for
foreign
 Direct Investment Advantages:
▲ Simple implementation and
Lower costs;
▲ There is no limitation to the
amount invested by each
foreign investor.
▲ Possibility
to
further
conversion to investment in
FIP.
▼ Costs for incorporation and
maintenance of a FIP;
▼ The foreign investor can not
hold individually or jointly
with related persons, quotas
representing 40% or more of
all the FIP quotas;
 Direct Investment Disadvantages:
▼ Lower tax efficiency in
comparison to FIP
▼ Capital gain in the sale of
corporate
interests
is
subjected to a 15% income
tax rate.
INOVAR PROJECT – GENERAL INFORMATION


THE PROJECT:
•
INOVAR PROJECT was launched in May 2000 as a strategic action of FINEP and its aim
is to promote the development of private equity and venture capital.
•
Although Brazil has pre-conditions to develop venture capital and private equity, this
emerging market in the country lacks a comprehensive institutional structure that can
bring the various interested agents together, combining their efforts for one common
purpose. Acting in partnership with agencies and pension funds, the Inovar Project has
been seeking to build an institutional framework – a bridge between managers and
investors
ELIGIBILITY OF TENDERERS
•

Management companies interested in creating a private equity fund or a private equity
fund of fund
PRESENTATION OF THE PROPOSAL
•
Detailed Information concerning the fund: Management company; FUND type, Size
designed for the FUND; FUND term;
Details of the structure of the FUND
management fee and carried interest; Details of the team/staff retention policy; Exit
strategies; Other investors fundraising, including investor profile, stage of negotiations
and possible compromises; FUND Investment Strategy; FUND Internal Rate of Return;
FUND governance; pipeline; among others.
INOVAR PROJECT – EVALUATION PROCESS

EVALUATION PROCESS:
•
Pre-qualification – Phase 1
•
Appeals to the pre-qualification – Phase 2
•
Evaluation Panel – Phase 3
•
Result of the Evaluation Panel
•
The proposals will be allocated in three (3) groups:
‒
Group 1 – due diligence;
‒
Group 2 – conditioned due diligence; and
‒
Group 3 – non implementation of due diligence.
•
The Group 2 is composed by Proposals which questions and/or requirements made by
any of the Evaluation Panel members should be solved as precedent condition to start
the due diligence process.
•
After the due diligence process, the interested investors will continue individually the
analysis process in a more detailed way and further approval by its own decision-board
institutions.
INOVAR PROJECT – EVALUATION PROCESS

POTENTIAL CALENDAR:
ACTIVITY
DATES (most likely )
Release of the Bid and Questions
April
Proposal Presentation
May
Release of the pre-qualification result
May
Deadline to present an appeal to prequalification
May
Release of the final result of the prequalification for the ones who presented an
appeal
May
Evaluation Panel
June
Release of the Evaluation Panel result
July
Main Pensions Funds in Brazil (Institutional Investors)
Brazil’s Top Closed Pension Funds

Brazil
ranks
among
the
Type of Sponsor
Total Capital
Investment (in
national currency)*
world’s top pension markets


Pension
assets
1.
PREVI/BB
Public
up to 131,3 billion
represent 22% of Brazilian
2.
PETROS
Public
up to 48 billion
GDP
3.
FUNCEF
Public
up to 35,9 billion
4.
FUNCESP
Private
up to 20,6 billion
5.
VALIA
Private
up to 11,1 billion
6.
SISTEL
Private
up to 10,2 billion
7.
ITAUBANCO
Private
up to 10 billion
8.
BANESPREV
Private
up to 9,3 billion
9.
FORLUZ
Public
up to 8,8 billion
10.
CENTRUS
Public
up to 8,2 billion
the
funds’
country’s
institutional investors
largest
Structure 1 – Foreign Investors and Brazilian Pension Funds
LP
a)
LP invests in a foreign vehicle and
Brazilian Pension Funds invest in a
FIP;
1)
GP
analyzes
opportunities;
2)
GP
recommends
selected
investment opportunities to the
Investment Committee;
3)
Investment Committee reviews the
recommended
investment
opportunities and should decide if
approve or not the investment;
b)
If the investment is approved by
the foreign vehicle, FIP and the
foreign vehicle invest in the target
company.
(a)
Foreign Vehicle
Abroad
Brazil
Local Pension
(3)
GP
Funds
(a)
Investment
Committee
investment
(2)
(b)
FIP
(1)
(b)
Investment opportunities
Structure 2 – Foreign Investors and Brazilian Pension Funds
a) LP invests in a FIP;
LP
b) Brazilian Pension Funds invests in a FIP;
Abroad
Brazil
(c)
Local Pension
Funds
GP
(2)
Compliance
Committee
(3)
(1)
FIP
(d)
(b)
(a)
c) Creation of the Compliance Committee
composed by Brazilian Pension Funds,
responsible to verify the ongoing and
compliance of the investment process. GP
is responsible to approve investments or
exits;
1) GP analyzes investment opportunities;
2) GP
submits
opportunities
Committee;
selected
to
the
investment
Compliance
3) If the Compliance Committee does not
make any exceptions regarding the
compliance rules (not merit), the
investment is made.
Investment opportunities
d) FIP invests in the target company.
MAIN TERMS AND CONDITIONS REQUIRED BY BRAZILIAN PENSION FUNDS
IN PRIVATE EQUITY FUNDS
Fund Period
• 8 to 10 years
Investment Period
• 5 years
• No-Fault Suspension Clause – Qualified Quorum
• Investment Period Extensions – Qualified Quorum
Capital Calls (After
the Investment
Period)
• Follow on investments
• Fund Expenses
• Investments approved before the end of investment period
Corporate
Governance
•
•
•
•
•
Fundraising
• Fund GP can only create similar funds if he has invested at least 80% of the Committed Capital or
after the investment period its over
• In case of a new fund, the older one has preference rights in a new investment
GP Contribution
• Interests alignment
• 1% to 5% of GP contribution to the fund committed capital
Key-person
Provision
• (i) Reduction of the time dedicated to the fund; (ii) Termination of the employment relationship
• GP appoints substitutes subject to LP approval
• While the approval does not occur: (i) Suspension of the investment period; (ii) Suspension of the
management fee payment; (iii) In case of tree refusals of the members appointed by the GP – for
cause divorce.
Quotaholders General Meeting
Inexistence of veto power for any LP
Investment Committee
Compliance Committee
Advisory Board
MAIN TERMS AND CONDITIONS REQUIRED BY BRAZILIAN PENSION FUNDS
IN PRIVATE EQUITY FUNDS
•
Management Fee: (i) Percentage of the committed capital vs. budgeted fees; (ii) Investment Period – structured as a
percentage of the committed capital (ex: 1,7%); (iii) After the end of the Investment Period – structured as a
percentage of the invested capital.
Transaction fees, consulting fees – Fund Right.
Carried Interest
•
•
•
•
•
•
“Deal by Deal model” versus “End of the Fund”.
Brazil adopted European model.
No catch up
20% after Invested Capital and Preferred Return are fully paid.
Preferred return (hurdle) – (ex: IPCA + 8%).
Possibility of an increase on the percentage depending on the Fund success.
Quotas
•
•
•
Right of first refusal
Each quota gives a vote right on the investors meeting
Different quota classes: (i) Especial political rights on the fund; (ii) Different economic and financial rights.
•
•
•
Investment Commitment
Capital Call with advance notice
Default – Penalties: (i) Suspension of the Political and Economical; (ii) Penalties; (iii) Quotas transfers; (iv)
Compensation on future distributions
Divorce Clauses
•
•
•
Resignation
CVM Disqualification
GP Removal: (i) For cause divorce; (ii) No fault divorce.
For Cause Divorce
•
•
•
(i) Fraud, disrespect of the law or the corporate document; (ii) Key Person change;
Qualified Quorum (75%)
Fees: (i) Management Fees until the divorce day; (ii) No Carried Interest.
No Fault Divorce
•
•
•
•
Qualified Quorum;
Substitute must acquire the other quotas;
Management fee until the substitution;
Carried Interest – pro rata die.
•
Management Fees
Capital Calls
Fund Classification
 Restrict – 50% or more of its quotas owned by only one investor
 Diversified – Several investors
Type
Investment Committee
Advisory Board
Type 1
Investors
Optional
Type 2
Professionals appointed
by the GP
Mandatory
Type 3
Inexistent
Optional
WHY MOTTA, FERNANDES ROCHA ADVOGADOS?

Founded in 1956, Motta, Fernandes Rocha Advogados - MFRA was one of the first
law firms to create a private equity group, providing a combination of deep
local knowledge and international experience in the Brazilian and Latin American
markets.

Luiz Leonardo Cantidiano, MFRA’s founding partner and former president of
the CVM (Brazilian Securities and Exchange Commission), signed the CVM’s Rule
that created the Private Equity Fund (“FIP”) and FIC-FIP in Brazil.

Knowledge of the Terms and Conditions required by Brazilians pension funds
to invest in a private equity fund.

Responsible for a leading project to structure a private equity fund of
funds as a Fundo de Investimento em Cotas de Fundos de Investimento
em Participações (FIC-FIP) to an international player and participation
at Inovar Project. Active participation in the discussion with Brazilian
pension funds to invest in a FIC-FIP.

Close relationship with Pension funds and institutional investors.

Relevant experience in bid projects as Projeto Inovar.

Active member of ABVCAP (Brazilian Association of Private Equity & Venture
Capital).
Overview of MFRA’s Recent Private Equity Experience
The group manages and has
advised on a combined total of
over USD 21 billion in private
equity and real estate funds
over the world.
GG Investimentos – Brazilian
Private Equity Fund.
BR Educacional – Private
Equity Fund focused on the
education sector (R$ 400
million).
US$ 130 million investment by
Fundos Gávea in Cosan
Limited.
FIP Terra Viva – Private Equity
Fund focused on the sugar
cane and ethanol sector (R$
350 million).
FIP NSG Brazil Metal – Private
Equity Fund (R$ 600 million).
Acquisition of Zamprogna.
Advice Logística Brasil –
Private Equity Fund focused on
the transportation and logistics
sector (R$ 400 million).
Brazilian Fund focused on IT
market.
Overview of MFRA Recent Experience in M&A Transactions
 Advice to state-owned oil company Petrobras in the pre-salt capitalization carried out
through a public offering of shares and ADRs (US$70 billion deal);
 Advice the US$1.16 billion merger between two of Brazil's largest pulp businesses,
Votorantim Celulose e Papel and Aracruz Celulose;
 Representing Madeira Energia, a consortium led by Brazilian group Odebrecht and
Furnas in the concession to build and operate a US$5.6 billion power plant alongside
the Madeira River in the north of Brazil;
 Advice a state-owned oil company Petrobras in a consortium to buy Ipiranga Group
(US$4 billion deal);
 Representing Braskem, Unipar and other sellers in the sale of the majority stake of
Petroflex (a Brazilian synthetic rubber producer) to a German Chemical company
Lanxess in the amount of R$526,680.000.00;
Overview of MFRA Recent Experience in M&A Transactions
 Representing Brazilian asset manager Gávea Investimentos in the acquisition of
US$130 million in common shares of the sugar and ethanol producer Cosan;
 Representing Mongeral Seguros e Previdência in the joint venture with the Aegon
Group;
 Advice on the acquisition of Light S.A.;
 Acquisition of Zamprogna by FIP NSG – Brazil Metal and disposal to Usiminas (2009)
CONTACT
SÃO PAULO
DANIEL KALANSKY
[email protected]
Alameda Santos, 2335 – 10º , 11º e 12º Floor – Jardim Paulista
CEP 01419-002
São Paulo SP Brazil
Tel: +55 (11) 3082-9398 | +55 (11) 2192-9300
Fax: +55 (11) 3082-3272 | [email protected]
Av. Brasil, 1.030 – Jardim América
CEP 01430-000
São Paulo SP Brazil
Tel: +55 (11) 3069-4300 | Fax: +55 (11) 3069-4301
RIO DE JANEIRO
Almirante Barroso, 52 – 5º Floor – Centro
CEP 20031-000
Rio de Janeiro RJ Brazil
Tel: +55 (21) 2533-2200 | +55 (21) 3257-2200
Fax: +55 (21) 2262-2459 | [email protected]
Copyright 2012 Motta, Fernandes Rocha Advogados. All rights reserved.