For many decades, Brazilian investors have limited their investments to government bonds, savings accounts and other fixed-income strategies. Retail investors were seen as unsophisticated and risk-averse agents, who were not used to trading in the stock exchange nor investing their money in alternative assets. However, recent developments have presented a new scenario for the institutional and retail investors’ market in Brazil.
Interest rates have been at their historic lowest, with the monetary policy interest rate of the Brazilian Central Bank (Selic) set at 2% per year at the beginning of August. Brazilian investors were forced to educate themselves about riskier investments, escaping the traditional fixed-income strategies that have not been offering interesting yield rates.
Moreover, the Brazilian Central Bank and the Brazilian Securities Commission have both encouraged the emergence of new agents, including through innovative regulation that focuses on creating legal certainty for new financial technologies (namely, cryptocurrency and crowd-funding), incentivising the decentralisation of credit (such as the “unbanking movement” of clients who want to steer away from big financial institutions) and liaising more directly with the market in order to understand the current needs of the Brazilian financial ecosystem (such as the creation of a Regulatory Sandbox Committee with the authority to grant temporary licences to agents focusing on developing new solutions for capital markets).
The scenario described above established a prolific environment for the rise of new products, targeting a public that is increasingly more sophisticated and eager for opportunities to allocate capital in more profitable investments. This is especially true for alternative funds in Brazil, in a broad range of industries that are highlighted as follows.
Independent Asset Managers
The Brazilian funds industry has seen an escalation of independent agents that are not backed by big financial conglomerates. These independent players seek to offer innovative solutions that are less bureaucratic and elude the negative reputation that many big banks have gathered in the past, particularly with investors in the younger ranges. This is also true for fund sponsors, with the arrival of internationally renowned asset managers to the country, as well as the expansion of new local independent managers. Both local and international houses have been empowered by the market with the confidence and expertise to develop financial products that are actively and discretionarily managed by the fund sponsors.
Likewise, the previously mentioned “unbanking movement” has opened the market for asset managers sponsoring credit funds that are able to offer alternative financing opportunities – which was also enhanced by the COVID-19 pandemic and the liquidity crisis that arose from it.
Listed funds have strongly increased their presence in the Brazilian stock exchange. Supported by tax benefits applicable to the revenue distributed by such funds to individuals, two specific industries are noteworthy:
The public offering and the listing of funds’ interests allow sponsors to reach a broader range of investors during fundraising, both retail and institutional investors, and support the creation of a liquid market in Brazil for such interests (boosting secondaries, as will be described further).
Private Equity and Venture Capital
Brazilian private equity (PE) and venture capital (VC) sponsors have traditionally targeted foreign (ie, non-Brazilian) and institutional investors, with a few exceptions of asset managers who have opened their products to Brazilian family offices and high net worth individuals. More recently, however, the PE/VC ecosystem has partnered with large platforms to distribute their funds to the general public, which has led to extremely successful fundraisings and contributed to the sophistication of the Brazilian retail market. This has created a new trend for PE/VC fundraisings that is not expected to fade in the near future.
Alternative funds have been historically perceived as an illiquid and long-term investment in Brazil. Nevertheless, secondaries have become more common in recent years. As previously mentioned, listed funds allowed for the emergence of a new type of investment focusing on the trade of interests in funds, which was also supported by tax benefits in certain industries. However, secondary transactions have correspondingly increased in non-listed products as well, such as PE/VC. Considering that retail investors have become active agents in this segment, there is a clear movement sprouting both GP- and LP-led (general partner and limited partner) secondaries.
Exchange Traded Funds – ETFs - play a central role in the current sophistication process of Brazilian investors. Even though the retail market is becoming more amenable to the idea of taking risks, investing in a stock exchange may still sound like a difficult and unattainable task to some people. For investors with a moderate risk profile that are willing to allocate a portion of their capital in riskier products, ETFs may work as their initial admission to the stock exchange environment; ETFs have been perceived as an uncomplicated way of entering the capital markets’ world. Consequently, Brazil witnessed a boom of ETFs in the past couple of years, investing in a broad range of different indexes.
FoFs and Feeder Vehicles
As a result of the tendencies described above, Brazilian investors are taking advantage of the new variety of investment offerings – they are searching for ways to lower their risk and diversify their portfolio, while keeping a higher yield than the one currently offered by Brazilian government bonds.
In this regard, Funds of Funds – FoFs - present themselves as an easy way of instant diversification, reducing investors’ risk and outsourcing investment decisions to a third-party asset manager. Brazilian investors have applied this logic not only to domestic investments, but also in their pursuit of international opportunities; as investing in the foreign markets demands a higher degree of sophistication and understanding of financial analytics, as well as a higher capital commitment from each investor, Brazilian funds' sponsors have offered local investors the option to invest in feeder vehicles that will allocate their capital exclusively in international funds and other non-Brazilian securities. The belief is that this may be the first step for the rise of Brazilian FoFs with a strong international presence, similarly to that which is seen in industrialised countries.
Sustainable investing is a worldwide topic of interest, and the Brazilian alternative funds industry has paid close attention to the recent global developments of Environmental Social and Governance – ESG - values. Aside from the politically agitated scene in Brazil, including with respect to statements made by the current federal administration in international forums about environmental and social matters, the Brazilian market (represented especially by public companies and asset managers) has increased its commitment to ESG practices by means of adhering to formal sustainable policies and launching products that are based on ESG values. Fund sponsors have been releasing reports of the ESG performance of their investments, publicly committing themselves to invest only in companies that adhere to minimum ESG practices and educating investors on the meaning of ESG policies and indexes.
More recently, major Brazilian asset managers have launched funds that will invest exclusively in ESG-oriented opportunities – although it is still too soon to comment on the performance of these funds, their acceptance by local investors was remarkable, culminating in a successful fundraising process. Furthermore, B3 – the Brazilian stock exchange – and S&P have launched a new Brazil ESG index, which will provide investors with exposure to the Brazilian capital markets while adding a new sustainable benchmark and enabling those investors to achieve their ESG investment goals.
Economic Liberty Act
In 2019, the Brazilian Congress enacted the Economic Liberty Act (Lei da Liberdade Econômica), which brought new standards for the interpretation of many concepts in the Brazilian legal system. The Act set forth a list of principles that must be followed by public administration in all dealings with the private sector, including the principle that governmental intervention in economic activities should be “subsidiary and exceptional.” Furthermore, the Act brought new standards that are applicable to:
The Act is an extreme innovation in Brazil's legal structure and represents the intention of bringing the Brazilian system closer to international practices and standards. For the first time in the history of Brazil, this new legislation has expressly established that investment funds may:
Because of these provisions, the Act is a new paradigm for all asset managers doing business in Brazil. The Brazilian Securities Commission is now in the process of editing new rules that will update the current regulation in view of the Act and, even though the provisions brought by the Act have not yet been tested in court, the new rules that are being prepared by the Commission will certainly be a game-changer in the industry of alternative funds in Brazil.
As summarised above, Brazilian alternative funds have gone through significant developments in recent years. While investors have become more sophisticated and engaged in the domestic and international markets, fund sponsors have actively met investors’ demand for new and modern financial products. Additionally, recent legislation is expected to boost this process in the near future, allowing for the alignment of the Brazilian market with international standards.