By Christopher Witkowsky
April 4, 2011 – Brazil-based asset manager Rio Bravo is raising an energy fund, targeting up to $450m, that will have a mix of domestic and global LPs, a unique structure that could be the start of a trend for the emerging economy.
Traditionally, developed market general partners have stayed away from limited partners in Brazil because the institutions have demanded a seat on the investment committees of private equity funds.
This type of participation doesn’t sit well with GPs, and is also not something that international limited partners are willing to accept. LPs make their commitments to GPs based on extensive due diligence on the GPs’ abilities to make investment decisions and they aren’t prepared to have other LPs involved in investment decisions.
However, this practice could be changing. Rio Bravo, a large asset manager with about $2.5 billion under management, is raising a private equity energy fund targeting up to $450 million that will include domestic institutions in Brazil that are not sitting on the investment committee.
The firm has convinced a group of Brazilian pensions to commit to the fund and join a supervisory board similar to an LP advisory committee.
“With this fund, we’ve been able to take a great step forward for the industry,” said Russell Deakin, who was hired by Rio Bravo recently to run fundraising in the US. Deakin was careful to qualify his statement in that the pensions that agreed to sit on the supervisory committee are smaller institutions in Brazil. Larger pensions, he said, still require a seat on the investment committee.
“This is not an industry-wide practice. The structures between Brazilian private equity funds and international private equity funds are becoming more similar … I’m not saying all the pensions are doing it,” he said.
The structure is indeed a unique one but it is not clear yet what the impact will be on the rest of the industry, according to Cate Ambrose, president and executive director of the Latin American Venture Capital Association (LAVCA).
“It will be interesting to see how this will work out,” Ambrose said.
Diversifying the LP base
The fund, which will focus on investment strictly in Brazil, held a first close in October on $175 million from the local pensions. Rio Bravo wants to expand fundraising globally to diversify the LP base of the fund, which is expected to hold a final close in October.
Along with Deakin, who is based out of Miami, Florida, the firm has a team in São Paulo focused on Europe and Asia. Rio Bravo believes it can tap into a growing desire on the parts of international investors for exposure to domestic managers in the country.
“Brazil has caught the interest of many investors. It makes sense to dedicate the time and resources to develop long-term relationships,” Deakin told PEI in an interview.
Some investors who were preparing to make their first commitments to Brazil prior to the financial downturn shelved their plans in 2008, he said. As the markets have turned, and as Brazil’s economy proved to be resilient to recession, those investors are once again interested in building their exposure to the country.
Brazil also may look more attractive to institutions trying to build exposure to emerging markets, as China and India have become more crowded.
In 2010, managers raised a record $8.1 billion, a 122 percent increase over 2009, according to LAVCA.
All about relationships
Rio Bravo pursues venture capital and growth investing strategies and has funds for infrastructure, information technology, life sciences, regional development and energy. The firm also has been raising a public markets activist fund targeting $650 million. Rio Bravo also pursues real estate investments.
The firm was well positioned to negotiate with the country’s pensions to enter a unique fund structure in part because Rio Bravo’s partner and director of institutional clients, Fabio Ohara Ishigami, once worked within the government’s pension fund industry.
“It comes down to the relationships and the confidence we have among the pension funds,” he said.
Rio Bravo was launched in 2000 by Paulo Bilyk and Luis Claudio Garcia de Souza, former senior partners of Banco Pactual, now UBS Pactual, and Gustavo Franco, former governor of the Central Bank of Brazil.