no delinking from the global economy and there will be
volatility here like everywhere else
At the International Bar Association conference in Buenos
Aires this week, there is a discussion on Latin American
private equity and hedge funds. Christopher Meyn is a partner
at Brazilian firm Gávea Investimentos and is he speaking
at the session. Here, he previews what he is likely to add to
the debate and reveals reasons why he feels Brazil is the best
country in Latin America for private equity houses to invest
Have you had some pre-discussions about what you are going
to talk about in your session?
I'm going to talk generally about the private equity
environment in Brazil. There are two of us coming over from
Brazil and that is a pretty traditional speech topic. It's a
country that (right, wrong or indifferent) is perceived as a
bit buffeted and delinked from a lot of what we are seeing
right now globally. It's not true. It is a very attractive
market, and there are fundamental reasons why it has become
more attractive for private equity. But, like anywhere else, it
is not magic: there is no silver bullet, there is no delinking
from the global economy and there will be volatility here like
So I'm going to talk about Brazil what the
environment is like, what we see happening right now and what
we think the outlook will be for the next two or three years.
We have our own impression and people usually like to hear it,
but whether it's correct or not is up to the audience.
You mentioned existing legislation that makes Brazil
There are certain market friendly, investor friendly changes
that have been implemented over the last few years. You've got
to take them as a basket of positive regime changes any
one by itself is really not enough, but as a group the results
are interesting. Tax incentives for foreign direct investment,
including vehicles domestically and abroad that can be used to
reduce or eliminate taxes for foreign investors, including
private equity. The streamlining of capital flows back and
forth between countries has been important. Prior to the early
2000s, foreign exchange flows were processed with quite a lot
of bureaucracy arcane registration processes to get your
money flows approved. That led to some less than perfect
mechanisms for capital flows here it stimulated parallel
markets (as do the very high tax burdens in Brazil). But that
has all been simplified and it is now fluid. It is no different
having our money abroad and bringing it in than it is in any
other developed economy.
What rules in particular have helped?
Law 2689 allows for capital gains and financial transaction
tax exemptions on stock market investing for foreign
More importantly, for direct investing in companies such as
under private equity, you can use newly created and regulated
investment vehicles. For example, the FIP (Fundo de
Investimento em Participações a fund
of investments structured like a limited partnership or a
corporation) is a vehicle that investors can make investments
in private entities through on a capital gains tax-exempt
basis, including allowing for washing of gains and losses among
investments in the same fund.
These structures and vehicles are gaining popularity and the
lawyers involved do a good job. Tax haven domiciles change a
lot here and if you're not careful you can end up paying more
tax than the basic rate. If you find yourself in a locally
classified tax haven, capital gains are not exempt and in fact
increased from 15% to a 20% rate. You have to be in tune with
what is happening while you are structuring both the fund and
the investments. Some things are just irreversible, so you want
to avoid making mistakes by keeping your eye on the ball. We
certainly spend a lot of time on tax planning and investment
Have there been any developments in the capital markets
that have increased attractiveness of companies to
I would certainly point to the creation of the Novo Mercado,
which is the special listing designation within the Brazilian
Stock Market (Bovespa). It was created in 2000 and now there
are more than 100 companies listed. This designation is
reserved for companies with the highest level of corporate
governance and transparency within the stock market. So you can
file to become a Novo Mercado company, and you must meet an
advanced level of both shareholder friendly and market friendly
characteristics. Such as a minimum float of 25%, one class of
shares with tag along rights for all minorities, etc. So you
align interests of all shareholders, no longer having the game
of isolating minority shareholders or creating a control group,
an "us versus them" mentality inside the company.
And this is attractive to investors.
Yes, there has been a great premium for the companies that
have adhered to this set of requirements and you can actually
start tracking that. The companies that comply have performed
very well relative to the broader market. There has been, as I
recall up to a 30% average premium in valuation for Novo
Mercado companies. Whether that is statistically or purely
linked to the Novo Mercado, who knows. But it is the right kind
of movement for an investor it's a private equity
The transparency helps too. That has helped stimulate a
confidence that (and this goes hand-in-hand with a better macro
economic environment for the long term) a sense that the equity
markets are real. It's not just a capital game for the
controlling shareholders to play with and jam the little guy at
the end of the day. It has helped drive a lot of foreign
investment into the stock market here.
Have there been any new legislative changes that have
The relatively new bankruptcy law in Brazil has been quite
beneficial. It sounds crazy to say, as it does nothing more
than implement a European or American style bankruptcy system
where none existed before. But it does now provides a chance to
have a controlled recovery process versus an arbitrary
judge-ruled bankruptcy/ liquidation proceeding.
Before, you would be bankrupt and some guy without any link
to the business in some far away city would decide the life of
the company for debtors and creditors. And it wouldn't always
be rational. Today, creditor groups are formed, the recovery
plans are submitted and negotiated, and there is a waterfall of
seniority in claims. This gives you a clear and better judicial
system for resolving problems. There has always been a good
judicial system in Brazil, albeit a little bit slow; but this
has helped create certainty for investors.
And all of these things together add up to a better
environment for private equity investment?
Taken together as a whole, these legislative and structural
changes have created a much better investment environment over
the last five to seven years. None of these can match the most
important thing though simply a better economic
environment. Brazil has turned itself around and positioned
itself to be very, very stable for the long term, which hasn't
really happened since the seventies.
Why Brazil? It's a much bigger country, it's very western
thinking and consumption habits are very much American. That
can be good or bad. Good if you're selling Big Macs! Seriously
though, there is more of a habit of adopting credit and
therefore being a consumer in the truest sense. You will spend
your earnings, you will take on credit and you will increase
your consumption as your spending power increases. This is
something we are used to seeing in the western world, but we
don't really see it happening in the same model elsewhere in
emerging markets. Here, it is happening. So you can play themes
that work in other markets, you just need to time them
It's really hard to strip out one thing that has increased
Brazil's attractiveness, but high interest rates create
opportunity. They also create a challenge for private equity in
terms of more expensive capital, but it keeps valuations down.
So I view that as an opportunity if you are comfortable with
risk. Leverage is not a significant option with high rates and
because of that you are doing a lot of things on a pure equity
basis. Leveraged buyouts are tough to execute here and will
continue to be so until debt is more creative and cheaper.
Are there any structural differences to deals in Brazil
that make them stand out from other Latin American
I'm very Brazil-centric, but anecdotally I understand the
judicial system here is clear and direct. It works. It may not
work in the same time frame you were hoping it would, but it
works and there is clarity to the law.
There is political stability too. Historically, Brazil tried
all the tricks in the book to get itself out of problems. Price
controls, tax regime change, nationalisation of assets
none of it really works and the average Brazilian won't accept
any new gimmicks. So prudent politics, steady economic policy
and a very free media are certainly important contributing
Do you know of any future legal developments that will help
promote investment in Brazil?
I don't think we will see any significant legislative
changes in the near future. There is an election in a year and
a half and there is never a great urge to shake the tree. The
economy is humming along and so far any real softness in the
economy seems to be lagging the global crisis enough.
So, what you worry about here is a change in the
micro-environment in terms of capital markets and liquidity.
That's going to happen. I hate to tell everyone that, but it is
going to be rough for some folks out here in Brazil.
But you are confident of your long-term investments?
We have always had confidence in Brazil. A little patience,
a little cold blood and trying not to get emotional is the
On January 1 2009 some changes to the German Foreign Trade
and Payments Act (Außenwirtschaftsgesetz,
AWG) will come into effect that are likely to have a
significant impact on foreign investors wishing to invest in
German target companies. Under the new regime, any such
acquisition by foreign investors may trigger the right of the
German Federal Ministry of Economics to investigate and even
prohibit the transaction.
Who is affected?
Under the Foreign Trade and Payments Act, investors from
non-EC countries that do not belong to the European Free Trade
Association (EC plus Switzerland, Norway, Iceland and
Liechtenstein) and that acquire shares representing 25% or more
of the voting stock of a German company may have their
acquisition investigated by the Federal Ministry of Economics.
Shares held by companies controlled by the acquirer (by holding
at least 25% of the voting stock) are treated as if they were
held by the acquirer itself. Shares that are subject to voting
agreements are also assigned to the acquirer.
If the Ministry comes to the conclusion that Germany's
public order or national security are threatened by a
transaction, it may prohibit the acquisition. Unfortunately,
the Act does not contain any definition of public order or
national security, so the Act brings a certain degree of
uncertainty about which transactions fall within its scope. If
the Ministry decides that a transaction falls within the scope
of the Act, it may order that the acquisition (which may
already be consummated) be reversed. The Ministry may also
choose only to prohibit the exertion of voting rights of shares
held by the foreign investor, thus restricting the investor's
influence on the German target.
How long does it take to reach a decision?
Foreign investors are under no obligation to file their
transaction with the Federal Ministry of Economics. However,
they may do so after signing and will, in that case, receive a
final decision on whether the transaction will be prohibited
within one month. If the transaction is not filed with the
Ministry, it may start an investigation on its own account
within three months after the consummation of the transaction,
with the effect that the transaction is put under the condition
precedent of the Ministry's approval. The Ministry will
immediately inform the investor of its decision to investigate
the acquisition, which triggers the acquirer's obligation to
provide the Ministry with data. The acquirer will be informed
about the specific data required by the Ministry through an
announcement in the Federal Gazette (Bundesanzeiger).
The investigation must be completed within two months of
receipt of the transaction data.
Aims and criticism
The reform seeks to protect sensitive branches of German
industry such as the energy, telecom and military sectors.
Potential threats are perceived to come from state-controlled
funds (in particular from China, the Emirates and Russia) that
may be used to influence German politics via investments in
German key enterprises. State-controlled foreign corporations
have also been classified as potentially dangerous.
The reforms have attracted much criticism. For example, the
new powers granted to the Ministry of Economics are suspected
of infringing the freedom of capital movement as guaranteed by
Article 56 of the EC Treaty. The European Commission is
planning to examine the Act for its reconcilability with
Article 56 and the freedom of establishment (Article 49). Also,
the scope of the Act is considered to be unreasonable because
it not only restricts investment from foreign countries,
state-owned funds or state-controlled corporations but foreign
investors in general. Any private equity investor wishing to
invest in Germany may find his transaction being investigated
by the Federal Ministry of Economics.
The problem for foreign investors
The main problem is the legal uncertainty for foreign
investors. If an investor has successfully completed a
transaction, it may still be subject to investigation for a
period of three months after the closing date. A further two
months may pass until the Ministry has completed its
investigation. The result may be that the transaction is
prohibited and the acquisition must be reversed. This
uncertainty is unacceptable for the seller, buyer, target,
financing banks and employees of the target company.
Recommended course of action
Foreign investors wishing to acquire 25% or more of the
voting stock of a German company should therefore adhere to the
Informal enquiry before signing
A foreign investor can contact the Federal Ministry of
Economics before he signs a share purchase agreement on a
confidential and informal basis in order to find out if the
Ministry will investigate the transaction. A similar approach
is generally taken if a bidder wishes to know the position of
the German Financial Supervisory Authority (Bundesanstalt
für Finanzdienstleistungsaufsicht, BaFin) on a
takeover process. There are no guidelines on how such an
informal approach should be made, though any informal contact
bears the risk that information may be leaked. A seller is
therefore unlikely to agree to such contact.
Filing for investigation after signing
Therefore, a foreign investor should voluntarily file the
transaction with the Federal Ministry of Economics immediately
after signing a share purchase agreement. He should refrain
from filing only if he and the seller are in no doubt that the
transaction does not qualify for an investigation by the
Ministry. If the investor intends to file the transaction, the
share purchase agreement should contain a clause that makes the
clearance of the acquisition by the Ministry a condition
precedent for the obligation of the parties to consummate the
transaction. After the Ministry has received all relevant data,
it has one month to decide whether it will prohibit the
consummation. In order to speed up the process, the investor
should agree with the Ministry on which information it needs in
order to come to a decision as quickly as possible. It appears
likely that an investor will, in most cases, be able to get a
decision before the German Federal Cartel Authority
(Bundeskartellamt) has cleared the transaction.
Therefore, the filing of the acquisition should not lead to
delay in most cases.
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