Offshore structures for Brazilian business: Brazil has gone global

Read our article in the Cayman Financial Review Magazine, eversion 

 

The Brazil economy has demonstrated resilience
since the global credit crunch in 2008. Having avoided the worst of losses primarily due to
conservative financial management, Brazil’s investment funds markets have
experienced enormous growth in recent years. Brazil now hosts the sixth largest
investment fund industry in the world.

In a 2007 survey of limited partners, the
Emerging Markets Private Equity Association revealed that 31 per cent of
private equity investors had money in Latin America. But by 2012, it is
projected that 64 per cent will have investments in the region, Brazil will
take half of that with the other half split between the remainder of Latin
America. Financial soundness, combined with domestic market and regulatory
changes, has also placed Brazilian investors and asset managers in a position
to seek opportunities outside of the country to expand their exposure to
international markets. As a result, the number of Brazilian investment funds
establishing offshore vehicles to invest overseas is expected to increase in
the near future.   

In 2007 and 2008 a
number of important steps were taken by the Comissão de Valores Mobiliários,
Brazil’s securities regulator, to remove restrictions subject to certain
conditions on Brazilian hedge funds from investing their capital overseas.
Understandably, during that period, very few Brazilian fund managers took advantage
of the rule change considering the financial instability of international
markets and Brazil’s historical focus on domestic investments due to local
fixed rate returns. Now, with the worst of the financial crises in the past, at
least in Brazil, combined with Brazil’s growth, recent regulatory and market
condition changes, and a gradual reduction of interest rates by the Brazil
Central Bank, Brazilian investors are poised to search for opportunities
elsewhere.  

The removal of the
overseas investment restrictions by the CVM show a recognition that, as the
domestic market continues to mature and interest rates in Brazil come down,
fund managers will need to look elsewhere to produce the high returns that are
demanded by sophisticated investors. International diversification is poised to
play a significant role in this. Fund managers and investors have and will take
advantage of the well established benefits offered by offshore financial
centres, such as the Cayman Islands, where funds can be set up with great
efficiency, flexibility and at a low cost. Investors investing out of Brazil
can also take advantage of the Cayman Islands’ neutral status permitting
international operations with no restrictions on the ability to transfer funds
in and out of a Cayman vehicle.  

The Cayman Islands
has tended to be the jurisdiction of choice for participants as a centre for
specialised investment funds and hedge funds. The Cayman Islands enjoys a
reputation as the leader of the international fund market. This, combined with
a related level of investor familiarity, enables the Cayman Islands to offer a
sophisticated and flexible investment funds product. The Cayman Islands also
has a developed communications and banking infrastructure, experienced service
providers and a robust and efficient legal system which is based on English
common law. Appeals ultimately go to the Judicial Committee of the Privy
Council in London.  

The Cayman route for
fund launches allows Brazilian clients to gain local support and expertise from
qualified lawyers and service providers in the Cayman Islands including
custodians and fund administrators. Investors and regulators such as the CVM
also will take comfort from anti-money laundering laws and regulations in the
Cayman Islands which impose owner verification requirements to record the
identity of investors and sources of investment commitments.

The Cayman Islands
has acceded to various international bodies, such as IOSCO and IAIA, and
entered into various tax information exchange agreements with other
jurisdictions, evidencing its commitment to the exchange of this information and
international transparency standards. More recently, the Cayman Islands
Monetary Authority entered into a Memorandum of Understanding with the CVM,
signed 24 February 2009. This follows from the MOU entered into by CIMA with
the Banco Central do Brasil, signed in 2009 and amended in 2006. In this way,
the information exchange process with the CVM and Banco Central do Brasil
becomes not only an efficient and workable process, it also has the benefit of
increasing confidence in Brazil that the Cayman Islands is a legitimate
jurisdiction in which to do business.  

Cayman law also enables the creation of
more specialised vehicles such as the segregated portfolio managed account
platform or fund. A Segregated Portfolio Company incorporated under the laws of
the Cayman Islands is a company which segregates the assets and liabilities of
different classes of shares from each other and from the general assets of the
SPC. Each investor subscribes into a separate segregated portfolio of an SPC
with each segregated portfolio then making direct investments or investing
through a separate master fund. The investment of each member is then protected
from each other member but the incorporation and ongoing costs at the SPC level
can be shared. The ability to use an SPC is very useful in investment fund
structures where the legal separation of assets is needed or desired within a
single investment vehicle entity.  

It is no secret that Brazil is and has
been on investor’s agendas. Direct foreign investment into Brazil has fuelled
the rapid growth of the Brazil funds industry. Brazil investment managers have
been targeting international investors via the establishment of funds in the
Cayman Islands for the simple fact that they are not only are well regarded by
international investors, but also allows for efficient and effective flow of
capital into Brazil. 

In time
however, Brazil investment managers will seek opportunities elsewhere. This is
not without its challenges. In the investment funds sphere, the strategies that
Brazilian managers employ will be constrained by local regulations as
international investments still need to fit within the CVM’s regulatory
framework. It is also expected that Brazil managers will require an education
period on offshore structures, service providers and strategies to grow
accustomed to and comfortable with the use of Cayman Island fund structures.

Nonetheless, Brazil is well placed to take advantages of international
opportunities and will benefit from using Cayman offshore structures, as other
markets have benefited from those structures for decades. 

Brazillian Business