This content is from: Local Insights

Brazil: Funding growing companies

Antonio Felix de Araujo Cintra
The Brazilian Securities Commission (the CVM) and the Brazilian Government have recently proposed and enacted some regulatory changes aimed at incentivising the entry of small and medium-sized local companies into the stock markets. These efforts are the result of a long and focused campaign by several players who believe that the development of financing alternatives for small and medium-sized companies is key for the future development of the economy in Brazil.

Instruction CVM number 391, which governs the formation and organisation of private equity funds (Fundos de Investimentos em Participacoes, or FIPs), has been amended. The main change here will be an increase in investments by FIPs in companies listed in a special listing segment of the Brazilian Stock Exchange, known as Bovespa Mais, which is directed to small and medium-sized companies. The amended rule now provides that FIPs may invest up to 35% of their portfolio in companies listed in Bovespa Mais, without being subject to the general rules governing FIPs that require them to always ensure that they have an effective influence on the invested company's management.

This will facilitate the negotiation of investments by FIPs in such companies, because there will be no need to negotiate the often complicated shareholder agreements. The reasoning for this rule is the fact that companies listed in Bovespa Mais must agree with certain additional governance requirements that are not required by the corporate law. It is expected that this rule will create an incentive for companies to list in Bovespa Mais to receive investments from private equity investors in Brazil.

The CVM has also decided to simplify and reduce the costs related to offering securities in Brazil, by allowing companies to disclose some relevant information related to the offering through the internet (changing the former rule that required that notices were published in expensive print newspapers). This will certainly represent a meaningful reduction in cost, especially for small and medium-sized issuers. This change comes after similar rules that allowed listed companies to publish communications to the market (the fatos relevantes or relevant facts), which will also represent a reduction in ongoing costs for listed companies.

Another completely different approach taken by the government, also aimed at improving the environment for investments in small and medium-sized companies, was taken by BNDES (the Brazilian Development Bank, controlled by the Brazilian Federal government). This is the announcement made in April 2014 by BNDES that it will make investments in private equity funds and initial public offerings in Bovespa Mais.

BNDES will invest up to R$2 billion ($903 million) in the next two years in new private and venture equity funds, especially the ones involved in infrastructure, technology, education, healthcare and creative industries. Such funds will be chosen by BNDES through 12 public tenders that are expected to start in the next few weeks. BNDES expects that this initiative will bring an additional R$6 billion from private investors.

In addition, BNDES announced that it will invest R$1 billion in initial public offerings in Bovespa Mais, limited to 20% of each offer.

Antonio Felix de Araujo Cintra

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