The Brazilian Securities and Exchange Commission (CVM) published Instruction CVM 406, dated April 27, 2004, which regulates a new investment fund. This is a hybrid fund combining private equity and debt. The rules have been designed specially to fit in the Bradesco-tailored investment fund (whose temporary name is Brazil Infrastructure Investment Fund - BIIF) whereby the Interamerican Development Bank (IADB) will investment US$ 500 million in Brazilian infrastructure projects this year.
From the few details of the forthcoming transaction published by the CVM President, it is undeniably an unprecedented financial structure. It is one of the largest risk capital investments ever to exist in this country and represents 10% of the total private equity funds in operation presently, apart from the portfolio of BNDES Participações S.A. (BNDESPar), the holding company of the National Bank for Social and Economic Development (Banco Nacional de Desenvolvimento Econômico e Social – BNDES), worth US$ 13 billion.
This is innovative in that private equity funds will be able to take loans directly from organisms, development agencies or banks limited to a 30% of their total assets. According to the new instruction, development organisms are multilateral organisms, development agencies or banks with resources deriving from contributions and quotas paid in dominantly from budgetary resources of a single or several governments, and controlled by one or several governments.
The BIIF (the name is yet to be confirmed) will have quotas with different economic-financial and/or political rights to be established in the fund internal regulation. The quotas will be senior or subordinate. Senior quotas will be subscribed by institutional investors, which will have the preemptive rights in the distribution of profitability and to withdraw from the condominium (resale of quotas), and their resources will be allocated to equity holdings. Subordinate quotas, in turn, will be subscribed by IADB as guarantee of liquidity to senior members.
The operation of these funds will be conditioned on a prior accreditation from CVM, which will be granted, pursuant to Instruction CVM 391, automatically upon delivery of a protocol since this is a product intended for eligible investors. The Instruction bars, however, the performance of all kinds of derivative transactions other than those aimed at protecting assets.
Several infrastructure projects are expected to be selected and pooled in the Federal Government’s Public-Private Program (PPP). This is the first tranche of the IADB investment, which may have an addition US$ 500 million worth tranche and the tenor of up to 15 years.
The passing of the new Instruction specially to allow the performance of this innovative transaction will certainly set an example for similar transactions.
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