One of the distinguishing features of the Brazilian private
equity environment is the significant number of private equity
funds in which the investors have decision-making powers with
respect to the fund's investments through a seat in the
From a regulatory standpoint, the presence of an investment
committee is optional. Most Brazilian private equity funds are
structured as "FIPs"1 and, as such, they are
not obligated to have such a governing body. There is also
flexibility in establishing the composition of the investment
committee: members can be primarily appointed by the GPs or by the
investors. Although the role of an investment committee can vary,
it will usually have the final say on the investments – and
divestments – proposed by the GPs. In some cases the
committee will also monitor the GPs' activities and have veto
power over certain matters along the investment process. The rules
governing the existence, composition and functions of the
investment committee will be set forth in the FIP's
At first glance, one could find some similarities between the
investment committee so often used in Brazil and the advisory board
common in more developed PE&VC industries worldwide. However,
the role of the advisory board is essentially focused on advising
and supporting funds in their investment activities rather than on
actually making investment decisions.
The reason behind the widespread use of investment committees is
usually attributed to the profile of Brazilian investors. The main
private equity investors in Brazil are institutional investors,
such as pension funds, and they customarily require a seat –
or in many cases the majority of seats – in the investment
committee to closely oversee the investment strategies of the GP
and to be able to block any investment they deem to be too risky or
overvalued. The participation in the investment committee, some
investors argue, also enables them to develop an expertise in
private equity investing, which is useful for the selection of GPs
in future rounds of investment.
Advocates of the investment committee contend that a balanced
and well-structured committee can greatly improve the fund's
governance. It would encourage investors and GPs to foster a closer
business relationship, increase transparency and thus lead to
better qualified investment decisions.
Not everyone shares this opinion, though. Investment committees
– as structured in Brazil – are subject to much
The main point of criticism is not the actual existence of the
investment committee, but its functions and composition. Many
market players point out that investors should not have the
majority of seats in the committee, nor the power to block
important decisions. They stress that the whole purpose of private
equity investing is to enable investors to benefit from the
experience of independent GPs with strong financial incentives to
make the best decisions on behalf of the fund. After all, would it
make sense to agree to a sophisticated compensation package for the
GPs but afterwards leave final investment decisions with the
investors? Additionally, the predominant presence of investors in
an investment committee can slow down the fund's
decision-making process. And, in some extreme situations, cause the
fund to lose good business opportunities. An investors-controlled
investment committee would also be an obstacle for raising capital
from investors located in the United States or other countries
where investors normally do not take part in the fund's
In light of such criticism, corporate governance advocacy groups
argue that rather than allowing investors to interfere in key
business decisions, funds should improve their corporate governance
standards to provide more comfort and transparency for investors.
Their message may be getting through. The creation of compliance
committees responsible for overseeing the conformity of the
fund's activities and observance of its by-laws, instead of
investment committees, has become a more frequent phenomenon in the
Brazilian PE&VC environment.
It is perhaps too soon to determine whether an
investors-controlled investment committee is a permanent feature or
merely a phase in the development of the Brazilian private equity
industry. In such a rapidly evolving industry, any prediction must
be viewed with caution. But it does seem that, as Brazilian
investors accumulate positive experiences from private equity
investing and start to rely more on GPs' track records, they
will probably feel less need to have a final say on funds'
1 Please refer to Issue No 4 of our newsletter for an
overview of the tax advantages of the FIP. Available at
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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