i Deal activity

Economic growth slowed in Brazil in recent years while the country suffered a period of political instability. Because of the political and economic crisis, major projects across numerous sectors were put on hold and domestic companies faced a credit crunch. However, this scenario seems to have been changing since the new government, led by the right-wing President Jair Bolsonaro, came into power in January 2019. A positive, yet cautious, attitude has possessed investors with this change in government after more than a decade under a left-wing government marked by corruption and fraud scandals.

President Bolsonaro has gained support for his campaign promises to fight corruption, privatise state assets, reduce bureaucracy and change the public pension system. According to market analysts, the promises made by the new government have encouraged purchases in the stock market and investors are awaiting the implementation of the new government's proposals. Although Brazil's currency, the real, has experienced smooth appreciation in the past few years, the currency's hefty devaluation in 2019 against the US dollar, the UK pound and the euro, and the reduction of interest rates, along with Brazil's competitive potential and vast market, means the country remains an attractive destination for international private equity investment.

Not surprisingly, a year after the implementation of the new government, 2019 saw signs of a potential effective economic recovery, with an increase of 17 per cent in the number of mergers and acquisitions (M&A) compared with 2018. The growth was most noticeable in the areas of information technology and financial and insurance services.2

Another indication of the positive environment of the new government and of the economy's recovery was a sensitive increase in the number of initial public offerings (IPOs) in 2019, to five, compared with three in 2018.3 In addition, according to the CEO of B3,4 20 to 30 Brazilian companies could be ready to go public in 2020.5

The first year of Bolsonaro's government was also marked by the approval of important economic and legal measures, such as the social security reform and Brazilian Law No. 13,874 of 20 September 2019, also known as the Brazilian Economic Freedom Law, which has also created a positive scenario for investment in Brazil. New rules brought by the Economic Freedom Law have, among other provisions, introduced the legal grounds for the regulation of investment funds by the Brazilian Securities Commission (CVM) and have allowed:

  1. the creation of segregated assets for each class of shares of equity investment funds (FIPs);
  2. the possibility of the establishment by the FIP's by-laws of limitation to the liability of the FIP's shareholders to the value of their shares and also to the obligations attributable to the class of shares held by the shareholders;
  3. the possibility of the establishment by the FIP's by-laws of limitation to the liability of the funds' service providers (e.g., administrators and portfolio managers) to the obligations to be complied with by each of them (without being jointly liable), provided that the rules enacted by the CVM are also complied with; and
  4. the exclusion of the necessity of registration of the FIP's by-laws with the registry of instruments and documents.

These new rules play an important role in the development of the Brazilian private equity industry by bringing internal practices closer to international practices and represent a safer, cost effective and more attractive environment for FIP investors and service providers.

According to a report prepared by the Transactional Track Record, the total aggregate value of private equity transactions in Brazil in 2019 represented an increase of more than 27 per cent compared with 2018, reaching a record value of US$6.5 billion.6

2019 was also marked by the beginning of a divestment process conducted by the federal government, by means of privatisations of companies and their subsidiaries previously controlled by the federal government. This was the case in the sale of some of the power distribution companies held by Eletrobras (Companhia Energética do Piauí, Companhia Energética de Alagoas, Companhia de Eletricidade do Acre, Centrais Elétricas de Rondônia, Boa Vista Energia and Amazonas Distribuidora de Energia).7 Petrobras had its divestiture plan approved by means of the sale of its shares in BR Distribuidora8 and Refinaria Pasadena,9 as well as the sale of 90 per cent of its stake in Transportadora Associada de Gás SA (TAG), a major natural gas transmission company, to ENGIE, a French-based energy and solutions company that is the largest private power producer in Brazil, and Caisse de dépot et placement du Québec, a Canada-based fund. These transactions were all concluded in 2019.

In this context, it is also worth mentioning that the Brazilian government is promoting the transition to an open and competitive market. This has been demonstrated by the recent enactment of Resolution No. 16/19 of the National Council for Energy Policy, which promotes principles, guidelines and recommendations for the transitioning to the 'new gas market'. Although there are many regulatory and economic issues to tackle, specialists in the oil and gas industry are certain that the natural gas supply will grow over the next decade, accompanied by investments related to the integration of this sector with the electric and industrial sectors.

In relation to the aviation market, recent amendments to Rule No. 7,565/1986 (the Brazilian Aeronautical Code), introduced by means of Rule No. 13,842/2019, have increased the equity participation that foreign entities may hold in the capital stock of Brazilian airline companies from 20 per cent to 100 per cent. With the opening up of the aviation market, Brazil expects to see an increase in foreign investments in local airline companies, which, in turn, will represent an increase in the airline services offered in Brazil, the creation of new employment opportunities and growing competition in the airline sector.

ii Operation of the market

Brazilian practice draws a distinction between the portfolio manager and the administrator of an investment fund. The activity of both entities, regardless of the level of effort made in raising resources, is subject to the rules issued by the CVM. The operation of private equity funds is thus subject to the rules of the CVM.

Foreign private equity funds are not subject to the rules of the CVM when investing in Brazil. They are simply classified as foreign investors, and as such are subject to the general rules issued by the Central Bank on registration of capital invested in Brazil. As The Private Equity Review covers other jurisdictions, we focus here on private equity activities in which the portfolio manager is located in Brazil.

Brazilian private equity funds are subject to registration with the CVM and must have a portfolio manager, and a fiduciary administrator that must be a legal entity that is authorised to carry out all activities directly or indirectly related to the functioning and maintenance of the securities portfolio and that complies with the requirements established by CVM Instruction No. 558/15, as amended by CVM Instructions Nos. 593/17 and 597/18.10 The portfolio manager exercises the most relevant function, as it is directly responsible for managing the portfolio, including taking investment and divestment decisions. The administrator and the manager can be the same entity, as long as they comply with the requirements established by the CVM (such as, for instance, the appointment of an officer exclusively responsible for the activity of fiduciary administrator).11

According to data published by the Brazilian Association of Financial and Capital Market Entities (ANBIMA),12 in November 2019, the largest private equity fund managers in Brazil in terms of assets were BB DTVM SA, Itaú Unibanco SA, Bradesco, Caixa and Banco Santander (Brasil) SA.

The CVM's rules basically allow an administrator and manager to obtain remuneration in two formats, through administration and performance fees, to be divided between the administrator and manager as agreed between them. The administration fee is charged on a monthly basis as a percentage of the net assets. The performance fee, in turn, is only paid by the investor at the moment of redeeming an investment, as a percentage of the gain, calculated according to the criteria established at the time of registering the fund with the CVM.

In general, the manager's remuneration is substantially higher than the administrator's, given that the latter usually only distributes the shares and takes care of treasury matters, while the former manages the portfolio by making the investment and divestment decisions.

Average administration fees are historically around 2 per cent a year of the net assets or committed capital. In turn, the performance fees can vary considerably, but they are commonly around 20 per cent of the profit generated above a benchmark rate of return set in the fund's by-laws. These fees are paid at the time of redeeming the investment, after adjusting for inflation.13

In many cases, the fund names a representative to hold an executive position with the most important investee companies. In this situation, the person in question can receive a stock option plan or other incentive, with the cost in the final analysis passed through to the fund's investors in proportion to the holding in the company in question.

With respect to the purchase or sale of an equity stake, the standard procedure includes the following steps:

  1. negotiation of the terms of the deal, with the signing of a memorandum of understanding or term sheet;
  2. the carrying out of a due diligence process by the potential buyer; tax and labour liabilities are usually the most sensitive concerns;
  3. negotiation of the definitive documents, including the share purchase agreement and shareholders' agreement (as the case may be);
  4. signing;
  5. submission to the Administrative Council for Economic Defence (CADE) if the deal is subject to antitrust notification; and
  6. closing.

This process can vary according to the complexity of the deal and other particularities. The average time between the issue of the term sheet and the closing of the transaction is around four months if the deal is not subject to approval by CADE. The CADE rules are broad enough to cover a good number of private equity transactions and, where CADE rules apply, the acquisition documents are signed on condition that the deal can only be closed after approval by CADE.

Another common way to sell a corporate stake when there are various interested parties is by competitive bidding. In this case, the negotiation starts with several interested parties, who analyse the preliminary data on the company and submit proposals. Those with values below the expectation of the sellers are eliminated from the running, after which only the prospective buyers with the highest valuations continue the negotiation process, until a final buyer is identified.


i Acquisition of control and minority interests

Private equity funds domiciled in Brazil are set up in the form of FIPs and are subject to the regulations of the CVM.14

FIPs must invest their assets in shares, subscription warrants, debentures (convertible or non-convertible into shares) and other securities convertible into or exchangeable for shares of corporations, both listed and unlisted, as well as securities that represent equity participation in limited liability companies, which is the most common company type in Brazil, especially for start-ups.

Since FIPs are subject to the regulations of the CVM, they must submit all relevant documents, such as balance sheets and portfolio composition, and report any intention to issue new fund quotas, replace the administrator or amend the by-laws, and report any pending spin-off, merger, consolidation or liquidation.

Historically, the rules on FIPs have required their active participation in the decision process of the portfolio companies, with them having effective influence in defining management strategy and policy. This is generally achieved by appointing members to the board of directors. The right of the FIP to take part in the decision-making process can also occur in one or more of the following ways: by holding shares in the controlling block; through a shareholders' or voting agreement; or by any other agreement that ensures the fund has effective influence. The investee companies must also satisfy certain corporate governance requirements.15

Therefore, the standard investment model of the FIP is to acquire shareholding control or a relevant stake in the controlling block. Control in Brazilian law is defined as holding rights that ensure having, on a permanent basis, the majority of the votes in the decisions of the general meeting and the power to appoint the majority of the administrators (directors and officers). Participation in the controlling block is defined as being a party to a shareholders' or voting agreement that guarantees influence in the decisions of the company.

Nevertheless, according to CVM Instruction No. 578 of 30 August 2016, FIPs are exempted from the requirement of participating in the decision-making process if the investment is reduced to less than half of the original amount invested and constitutes less than 15 per cent of the company's corporate capital; or if the book value of the investment is reduced to zero, and is approved by a shareholders' resolution by the majority of shareholders present at the meeting, if a higher quorum is not established in the FIP's by-laws.

Foreign private equity funds can set up a FIP in Brazil as a vehicle to make investments. As with any other foreign investment, the capital must be registered with and follow the rules of the Brazilian Central Bank.16 Income arising from investment in FIPs, and gains arising from the sale or amortisation of FIP quotas by non-resident investors that are not resident or domiciled in a favourable tax jurisdiction,17 are currently taxed at zero per cent,18 provided that the following requirements are met (the FIP Requirements):

  1. the non-resident investor19 does not hold, individually or with related parties (as defined by the applicable legislation), 40 per cent or more of all shares issued by the fund (the shareholding test)20 or does not have the right to receive 40 per cent or more of the total income generated by the fund (the economic test); the ultimate beneficial owners must be identified to the National Registry of Legal Entities in accordance with the Brazilian Federal Revenue (RFB) beneficial-owner requirement;21
  2. the fund does not have in its portfolio, at any time, debt securities in an amount exceeding 5 per cent of its net worth, unless the securities correspond to convertible debentures, subscription warrants or public bonds;
  3. the fund is compliant with additional portfolio requirements provided by the CVM regulations, which currently require at least 90 per cent of the FIP portfolio to be composed of shares, subscription warrants, simple debentures or other securities convertible or exchangeable into shares issued by corporations and either closely held or publicly held companies, as well as securities representing equity participation in limited liability companies, provided that the FIP participates in the decision-making process of the investee companies, with effective influence on the definition of their strategic policies and management; and
  4. in addition to the provision mentioned in item (c), above, at least 67 per cent of the FIP's portfolio is composed of shares of corporations, or debentures that are convertible into shares and subscription warrants (allowed assets).

Additionally, under another tax incentive regime,22 and provided that all quota holders are exclusively non-residents, all gains, including capital gains paid, credited, delivered or remitted to beneficiaries resident or domiciled outside Brazil (unless situated in a favourable tax jurisdiction) that are produced by investment funds are exempt from income tax if the following general cumulative requirements are met (but an analysis per asset to be invested is advisable):

  1. the quota holders must be exclusively non-residents; and
  2. the fund regulations must provide that its fund application is made exclusively in:23
    • assets required by tax legislation;
    • cash deposits;
    • assets that are also exempt from income tax, or taxed at a zero per cent rate, when the beneficiaries of the gains derived from those assets are residents or are domiciled outside Brazil (unless situated in a favourable tax jurisdiction); or
    • assets traded in financial and capital markets that are exempt from taxation, provided they are negotiated by the funds under the same terms and conditions set out by law to qualify for the tax exemption.

In addition, foreign exchange transactions carried out in Brazil are subject to the tax on financial operations regarding exchange agreements (IOF) for inflow and outflow. The standard rate is currently 0.38 per cent for most foreign exchange transactions. IOF is levied at a zero per cent rate on the inflow and outflow of remittances into related investments made by non-Brazilian residents in the Brazilian financial and capital markets. There are other specific rates or exemptions that may apply to certain transactions. Although unlikely in the current economic scenario, the IOF rate, because of its regulatory rather than budgetary purpose, may be increased at any time to a maximum of 25 per cent by the government.

Notwithstanding the tax benefits listed above, the requirement to engage an administrator and manager approved by the CVM to structure a local FIP prompts most international private equity players to choose an offshore structure to invest directly in Brazil, outside the capital market. This means that the investment will be classified as a foreign direct investment, regulated by Law No. 4,131/62. A foreign direct investment can occur by incorporating a new company or investing in an existing one (a limited liability company or corporation). In some cases, the direct investment involves setting up a joint venture with a Brazilian company or other investors, and the signing of shareholders' agreements, investment agreements or loan contracts, among other mechanisms. In addition, for foreign direct investment, both the foreign investor and the receiving company in Brazil must be registered with the Central Bank.

Recent amendments introduced by the RFB by means of Rule No. 1,634 (IN 1,634/2016), further replaced by Rule No. 1,863 (IN 1,863/2018), as amended,24 governing the registration of national and foreign entities with the National Registry of Legal Entities, have established the obligation for foreign shareholders of Brazilian entities, and also for Brazilian entities, to provide the RFB with information on the relevant corporate chain, including trusts and foundations, up to the individuals deemed the ultimate beneficial owners, with a few exceptions, defined as (1) the individual or individuals who either directly or indirectly own, control or significantly influence25 the legal entity; or (2) the individual under whose name a given transaction is performed. This obligation must be complied with during any update of any of the Brazilian or foreign entity's RFB registry data or, in case of a new entity, up to 90 days from the date of registration before the RFB.26

There are two bills currently with the Brazilian Congress (Federal Government Bill No. 10,638/2018 and Senate Bill No. 336/2018) that may introduce substantial changes to the procedures relating to applicability of income tax due on certain financial investments and the tax treatment of certain Brazilian investments funds. Neither bill has yet been (and may not be) converted into law.

These bills aim to close a loophole that allows investors to use FIPs as if they were holding companies (property funds) for tax deferral purposes only. To try to close this tax-planning loophole, both bills focus on qualifying FIPs according to CVM regulations to establish their tax treatment.

In this sense, FIPs not qualified as investment entities but known as property funds should be taxed as legal entities and subject to corporate income tax of 34 per cent and social contributions of between zero and 9.25 per cent on gross revenues27 (effective taxation depends on the tax regime and the kind of revenue or gain), in which case the fund administrator is liable for the fulfilment of all tax obligations (including ancillary obligations). However, earnings accrued by such FIPs prior to 2 January 2019 will be considered as paid and subject to a 15 per cent withholding tax at the investor level.28

The rationale of these new rules seems to be to tax only the FIP in the case of property fund FIPs, and only the investor in the case of investment entity FIPs, but not both the FIP and the investor. However, this is not so clear in the legislation (i.e., it is unclear whether property fund FIP distributions will still be considered tax-exempted dividends) and we must await changes in the bills or RFB regulations for further clarification.

However, the earnings from FIPs organised and held exclusively by non-resident investors not located in favourable tax jurisdictions and investing under National Monetary Council Resolution No. 4,373/14 in FIPs that follow the FIP Requirements would remain subject to the tax-exemption rules mentioned above,29 but it is unclear whether a FIP that qualifies as a property fund FIP according to CVM regulations would actually be taxed as a legal entity.

ii Fiduciary duties and liabilities

FIP administrators and managers must observe the standards of conduct established by the CVM and are liable for losses caused to investors when they act with intentional misconduct or culpability (defined as negligence, imprudence or malpractice) in violation of the law, the CVM rules or the FIP's by-laws. The CVM has also issued specific rules for portfolio managers of funds,30 and any infractions subject them to penalties if they are found guilty in an administrative sanction proceeding conducted by the CVM. In this regard, it is important to mention that the recently enacted Brazilian Economic Freedom Law has set forth the possibility of establishing, in the FIP's by-laws, limitation to the liability of the funds' service providers (e.g., administrators and portfolio managers) to the obligations to be complied with by each of them (without being jointly liable), provided that the rules enacted by the CVM are also complied with. Likewise, pursuant to the new provisions of the Brazilian Economic Freedom Law, it is now also possible to establish, in the FIP's by-laws, limitation to the liability of the FIP's shareholders to the value of their shares.

As a complement to the CVM rules, the Brazilian Private Equity and Venture Capital Association (ABVCAP) and ANBIMA have issued their Regulation and Best Practices Code31 for the FIP market with the aim of raising fiduciary standards and promoting best practices, and to allow the gradual integration of the Brazilian investment fund market with the international private equity market. Adherence to this Code is mandatory for those members of ABVCAP and ANBIMA engaging in administration and portfolio management activities.

Representatives of the manager named as directors, officers or other executive positions in the investee companies also have the duties to the company required of administrators in general by the Law of Corporations. Accordingly, they must employ, in the exercise of their functions, the same care and diligence employed by all active and honest people in handling their own affairs, following the law and the company by-laws; they must always act in the company's best interests; and they must satisfy the greater public good and the social function of the company.

The fund administrators or managers must also observe the duties attributed by the Law of Corporations to shareholders. Accordingly, they must exercise the right to vote in general meetings in the interest of the company and can be held liable for any damages arising from the exercise of this voting right.


i Recent deal activity

Despite 2018's economic and political instability, 2019 marked the recovery of the Brazilian economy with important deals being carried out.

In this context, the Brazilian healthcare market has sustained great investment levels and an astounding record of 80 M&A deals in 2019, which is almost double the quantity of the previous year.32 In addition to the M&A deals, there is a verticalisation process in progress in the healthcare market: healthcare operators are building their own hospital network. Many of the highest-valued transactions of 2019 were backed by private equity funds, as was the case in the sale of São Francisco Saúde Group (which had a private equity fund managed by Gavea Investimentos as one of its shareholders) to Hapvida, one of Brazil's largest healthcare operators, for over US$1.2 billion.33 Similarly, in early 2020, Rede D'or São Luiz SA, one of Brazil's largest hospital groups, concluded all the transactions it announced in 2019 (i.e., the acquisition of 100 per cent of the quotas issued by Casa de Saúde Laranjeiras Ltda (which was the owner of a maternity unit network called Perinatal),34 Unidade Neonatal da Lagoa Ltda and Cia de Serviços Especiais e Unificados Ltda, strengthening its portfolio in Rio de Janeiro. Rede D'or also acquired 100 per cent of the shares issued by Hospital Santa Cruz (operator of the healthcare plan Paraná Clínicas).

Furthermore, one of the restructuring transactions that the market is eagerly anticipating is the joint-venture deal of the Boeing Company, the world's largest aerospace company, and Embraer SA, the Brazilian business conglomerate that manufactures commercial and military aircraft (which is one of Brazil's leading exporters). This partnership was valued at US$4.2 billion and contemplates the constitution of (1) a commercial aviation joint venture, in which Boeing will hold 80 per cent of the shares and Embraer will hold the remaining equity participation of 20 per cent, and (2) a KC-390 joint venture, in which Boeing will hold 49 per cent of the equity participation and Embraer will hold the remaining 51 per cent.35 Although negotiations began in 2018, there are still some steps pending to be complied with before the closing of the transaction. While Embraer's board of directors, shareholders' and CADE approved the deal,36 the analysis is still in progress before the European Commission, which has opened an in-depth investigation into competition issues.37

Another example of the Brazilian market recovery in 2019 was the increase in the number of Brazilian companies, including Loggi, Gympass, QuintoAndar, Ebanx and Wildlife Studios, that were added to the list of global 'unicorns' (start-ups valued at over US$1 billion).38 At the very beginning of 2020, another Brazilian start-up company, Loft, which focuses on the acquisition of real estate for refurbishment and subsequent sale, was also consolidated as a unicorn, after a new round of investment led by US funds Vulcan Capital and Andreesen Horowitz, in the amount of, approximately, US$175 million.39

In addition, the practice of corporate venture capital (CVC), which is the investment by well-established institutions in early stage companies (that are outside the investing company's corporate chain), is also progressively gaining strength in Brazil. The main purpose of CVC investment is for the well-established company to develop a new product or specific market upon investment in an early stage company, rather than by setting up an internal research and development (R&D) department, as the R&D route may prove to be more costly, time-consuming and demanding than investing in an early stage company. CVC goes beyond a customary M&A transaction, although the process and the documentation involved may be similar. In CVC transactions, the investing company and the target company establish certain common goals so that the investment may be successful. The investing company may also provide the target company with management and marketing expertise, strategic direction or a line of credit, or a combination of these.

Many Brazilian companies have embraced CVC investment for innovation purposes, including Embraer SA (the Brazilian business conglomerate that manufactures commercial and military aircraft, among other things), banks Banco de Brasil, Banco BMG, Itaú and Santander, manufacturers Gerdau, Votorantim and Natura (a cosmetics manufacturer), and retailers Pão de Açúcar and Magazine Luiza.

ii Financing

The scenario for financing of private equity changed substantially in 2016 with the issuance of CVM Instruction No. 578,40 which aimed to unify and modernise the rules on incorporation, operation and management of FIPs, and also consolidated previous amendments to the provisions on the structure of, and guidelines for, FIPs.

The main changes introduced by CVM Instruction No. 578 include FIPs now being able to:

  1. invest in limited liability companies and in non-convertible debentures;41
  2. invest up to 20 per cent of their net equity in offshore private equity assets, as long as the foreign assets have the same economic nature of the assets that may be part of a FIP's portfolio in Brazil; and
  3. have authorised capital, which means that the administrator may issue new quotas in FIPs without requiring investors' reapproval.

CVM Instruction No. 578 also created different categories of FIPs, such as the Seed Capital FIP, which allows the use of a FIP, under certain conditions, as a vehicle to invest in start-up companies. Furthermore, the administrator may create different classes of shares, which may have different rights, permitting differentiation as to, among other things, hurdle rates; management fees and performance fees; the timing of capital calls, amortisation and redemption; and veto rights and the appointment of committee members. According to the recently enacted Brazilian Economic Freedom Law, it is now also possible to create segregated assets for each class of shares of the FIP.

To harmonise Brazilian accounting principles with international standards, FIPs qualified as investment entities must mark portfolio assets according to their fair value, while FIPs that do not qualify as investment entities must register their investments in accordance with the rules applicable to affiliates of publicly traded companies, and are now required to prepare and submit audited financial statements whenever there is a material change in the fair value of the investment company during the fiscal year. In this regard, CVM Instruction No. 579 was issued on 30 August 2016,42 creating new rules for the provision of financial statements of FIPs, outlining the accounting methods for the classification of assets and liabilities.

iii Key terms of recent control transactions

Acquisitions of control are characterised by the signing of documents that protect the purchaser from possible liabilities not reflected on the balance sheet at the time of closing, including instruments to adjust the price, escrow accounts and similar arrangements. Additionally, with the alteration of the rule for prior submission of transactions involving a change in control to CADE, the moment of closing now occurs in some cases several months after execution of the binding documents. This makes it more necessary than ever to include protective clauses covering price adjustment and material adverse change.

Where a particular shareholder has great importance in the development of the company's business plan, a lock-up clause can be used, preventing this shareholder from selling the relevant shares during a certain period, to assure that the transition to management by the new controllers will proceed as smoothly as possible.

In transactions involving listed corporations, the transfer of control can only be contracted under the condition that the purchaser launches a public tender offer to acquire the shares of the other owners.43

iv Exits

2018 saw divestments in the amount of, approximately, US$3.39 billion.44 The data for 2019 are not available at the time of writing; however, experts expect an upward trend in this period.45

Divestment by way of an IPO is a typical exit strategy in the Brazilian market. One example is the investment made in 2012 by FIP Carlyle Group to acquire 85 per cent of the stock issued by Ri Happy, Brazil's largest toy retailer. In 2018, Carlyle Group demonstrated its intention to launch the IPO of the company and use the funds raised to open new stores. However, the IPO that was scheduled for 2018 was postponed because of low demand from investors.

2019 was also marked by the beginning of a divestment process conducted by the federal government, by means of divestments and privatisations of companies and their subsidiaries previously controlled by the federal government. The total amount of such transactions in 2019 was equivalent to, approximately, US$24.9 billion,46 from which:

  1. US$12.65 billion related to privatisations (including, among other transactions, the sale of TAG and BR Distribuidora);
  2. US$9 billion related to divestitures, such as the sale of the majority of the federal government's shares in the reinsurer IRB Brasil Resseguros and the sale, by means of an IPO, of the shares held by the state-controlled bank Banco do Brasil SA in the Brazilian power utility company Neoenergia SA; and
  3. approximately US$3.27 billion related to the sale of oil fields by Petrobras.47

In addition to these transactions, another important transaction in the oil and gas sector was the investment of a private equity fund managed by Starboard Asset in the oil company 3R Petroleum, aiming for the acquisition of an onshore oil field from Petrobras in the amount of approximately US$191.1 million. Upon the fulfilment of certain conditions precedent, the acquisition will mark the first time a private equity fund will take over the operation of an onshore oil field.


Private equity deals can be carried out by means of offshore structures, with capital raising and legal structuring done outside the country, resulting in a foreign direct investment from the standpoint of the Central Bank; or through transactions carried out by funds domiciled in Brazil, subject to the rules of the CVM.

As well as issuing rules on the capital market and investment fund industry, the CVM oversees the activities of players and enforces rules through investigations and administrative proceedings. Punishments for wrongdoing range from a formal warning to the application of fines and even a prohibition on operating in the capital market.

In addition, many sectors of the Brazilian economy are subject to the specific oversight of regulatory agencies, some of which regulate M&A transactions, enforce technical, legal and financial requirements to be observed by the parties involved, and have to be consulted before changes of control are concluded. This means, in effect, that their approval must be obtained before closing a deal and, where this is the case, both the regulatory agency and CADE have the power to block transactions.


Companies, financial institutions and investors are waiting for the continued implementation of the proposals submitted by the new Brazilian government, which aim to rebalance the public accounts and, consequently, attract new investment.

Moreover, the private equity industry in Brazil has been growing strongly in the past couple of decades, and there is great demand for investment in various sectors; in particular, in Brazil's infrastructure and in oil and gas, given the potential for privatisation of state-owned companies.

The private equity investment environment has also been continuously modernising and adjusting to the environment of international markets. Other measures to expand the private equity market are being put in place, such as specific rules for investments in special segments or in organised over-the-counter markets.

Although the right-wing administration of the new government elected in 2019 has shown a tendency for flexibility in, and relaxation of, certain rules applicable to the private equity industry in Brazil, by means of the approval of important economic and legal measures, such as the Brazilian Economic Freedom Law, there are still major challenges to be overcome before investments can be made in the country, such as the complex and burdensome tax system and the high level of regulation of the economy. It is, therefore, necessary to retain the advice of specialist advisers before investing in Brazil.


1 Marcus Vinicius Bitencourt and Alex Jorge are partners, Renata Amorim and Marcelo Siqueira are senior associates and Ana Paula Casalatina is an associate at Campos Mello Advogados in cooperation with DLA Piper.

4 B3 SA – Brasil, Bolsa, Balcão is the securities, commodities and futures exchange operating in Brazil, which resulted from the merger of BM&FBOVESPA SA Securities, Commodities and Futures Exchange with Cetip SA – Mercados Organizados in March 2017.

9 ibid.

10 CVM Instruction No. 558/15, as amended by CVM Instructions Nos. 593/17 and 597/18, also establishes the possibility of a legal entity that is not a financial institution to require the registration as fiduciary administrator, as long as it complies with some requirements established by the CVM.

11 CVM Instruction No. 558/15, as amended by CVM Instructions Nos. 593/17 and 597/18, has introduced new rules on the activities related to securities portfolio administration in general.

12 ANBIMA, Ranking de Gestão de Fundos de Investimento, November 2018. Available at https://www.anbima.com.br/pt_br/informar/ranking/fundos-de-investimento/gestores.htm. Accessed on 14 January 2020.

13 'Performance of the Private Equity and Venture Capital Industry in Brazil', Brazilian Private Equity and Venture Capital Association (ABVCAP), Insper and Spectra report: September 2018. Available at https://www.insper.edu.br/wp-content/uploads/2018/09/Performance-private-equity-venture-capital-industry-Brazil.pdf.

14 CVM Instruction No. 578, mentioned below.

15 Namely, they may not issue founders' shares or have any similar securities outstanding; they must call for a unified term of up to two years for all directors; they must disclose to the shareholders the terms of contracts with related parties, shareholders' agreements and stock options and other similar programmes; they must pledge to resolve corporate disputes by arbitration; in the event of going public, they must give an undertaking to the fund to adhere to a trading segment of an exchange or organised over-the-counter market that requires enhanced corporate governance, in accordance with the preceding items; and their annual financial statements must be audited by an independent auditor registered with the CVM.

16 Resolution No. 4,373 of 29 September 2014, issued by the National Monetary Council (CMN).

17 Brazilian law defines more than one concept of a favourable tax jurisdiction. However, the concept that matters for this particular analysis relates to foreign investments in the Brazilian financial and capital markets pursuant to CMN Resolution No. 4,373/14. Accordingly, the applicable concept of a favourable tax jurisdiction relates to countries that do not tax income or that tax income at a rate lower than 20 per cent, or do not provide information regarding the equity partners of legal entities, their owners or the beneficial owners of income paid to non-residents. The threshold of a standard tax rate of 20 per cent used to identify privileged tax regimes is reduced to 17 per cent if the country follows the international standards of tax transparency (Ordinance MF No. 488/14), as established by the Brazilian Federal Revenue.

The Brazilian tax authorities have listed some jurisdictions as favourable tax jurisdictions. Historically, the tax authorities have viewed this list as being a numerus clausus list; namely, any jurisdiction not appearing on the list will not be deemed a favourable tax jurisdiction. In 2017, Costa Rica, Madeira and Singapore were removed from the list.

18 Section 3 of Law No. 11,312/2006.

19 The FIP may also have Brazilian resident investors, but they will not benefit from this tax incentive.

20 The 40 per cent ceiling applies to the following parties related to individual FIP investors: (1) relatives up to the second degree, (2) companies controlled by the investor or by any of the investor's relatives up to the second degree, and (3) partners or managers of companies controlled by the investor or the investor's relatives up to the second degree. Where the investor is a legal entity, the ceiling applies to any entities that are the investor's controller, or are controlled by or affiliated to the investor.

21 Based on the literal wording of the law, one could conclude that the 40 per cent test for fulfilling the FIP Requirements is to be observed solely by the direct investors of the FIP, and not by their shareholders, partners or members (except where the shareholders, partners or members are also direct investors of the FIP), and that there is no need to account for any indirect interests. However, any analysis of the shareholding test and the economic test may be controversial, and one should consider an indirect approach and a 'substance-over-form' analysis. The rationale is to avoid using related parties (close individuals and group companies) to circumvent the ceiling of not having 40 per cent or more quotas of the FIP.

22 Section 97 of Law No. 12,973/2014.

23 If the fund regulations restrict its quota holders to non-resident individuals only, the fund is also allowed to invest in assets whose gains will be exempt from individual income tax under Section 3 of Law No. 11,033/2004 (e.g., certificates of real estate receivables, and real estate investment funds).

24 IN 1,863/2018 was amended by Rules Nos. 1,895 of 27 May 2019, 1,897 of 27 June 2019 and 1,914 of 26 November 2019, and also by COCAD Declaratory Executive Act No. 2 of 30 December 2019, issued by the RFB.

25 Pursuant to IN 1,863/2016, a significant control or influence is presumed whenever the individual holds, directly or indirectly, (1) more than 25 per cent of the entity's corporate capital, or (2) the power to control the entity's corporate decisions and to appoint the majority of its managers.

26 IN 1,634/2016 Brazilian Federal Revenue Rule No. 1634 of 6 May 2016 initially established the deadline for the submission of information on ultimate beneficial owners as 31 December 2018. However, IN 1,863/2018 (which revoked Federal Revenue Rule No. 1634) extended the deadline to 26 June 2019 (180 days from the publication of IN 1,863/2018).

27 Corporate income tax (IRPJ/CSLL) and social contributions on gross revenues (PIS/COFINS) will be due by the FIP.

28 Sections 5, VII, 8 and 9 of Bill No. 10,638/2018.

29 Section 5, IV of Bill No. 10,638/2018.

30 CVM Instruction No. 558/15, as amended by CVM Instructions Nos. 593/17 and 597/18, has introduced new rules on the activities related to securities portfolio administration in general.

31 ABVCAP–ANBIMA's Regulation and Best Practices Code: Private Equity and Venture Capital Funds.

35 'Apresentação Parceria Estratégica Update – Investors Day NY', January 2019. Available at https://ri.embraer.com.br/list.aspx?idCanal=LZlAqj3bYzacxzxEd8rruA==. Accessed on 14 January 2020.

37 Available at https://ec.europa.eu/commission/presscorner/detail/en/ip_19_6007. Accessed on 12 January 2020.

38 Available at https://www.cbinsights.com/research-unicorn-companies. Accessed on 10 January 2020.

40 Although CVM Instruction No. 578 was enacted in August 2016, the FIPs had until August 2017 to adopt the new rules.

41 Previously, according to CVM Instruction No. 391, FIPs could only invest in corporations and not in limited liability companies. Additionally, FIPs could not invest in non-convertible debentures, only in convertible ones.

42 CVM Instruction No. 579 applies to accounting periods initiated on or after 1 January 2017.

43 Article 254-A of the Law of Corporations determines that the buyer must launch a public tender offer to acquire the voting shares owned by the other shareholders at a price per share of at least 80 per cent of that paid for the shares in the controlling block. In the case of companies listed in the Novo Mercado and Level 2 trading segments of BM&FBOVESPA (the top two enhanced governance segments), the public offer must target all the remaining shares, for the same price paid to those of the controlling block, to assure equal treatment between minority and controlling shareholders.

44 These monetary values have been converted from Brazilian reais to US dollars at the exchange rate on 31 December 2019, as published by the Brazilian Central Bank. See 'Consolidação de Dados 2019; Indústria de Private Equity e Venture Capital no Brasil', KPMG and ABVCAP.

46 These monetary values have been converted from Brazilian reais to US dollars at the exchange rate for 31 December 2019, as published by the Brazilian Central Bank.