October 1, 2011
Interviewed by: David Snow
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Brazil’s “Good Moment” For Private Equity

With $6.3 billion in assets under management, Brazil’s Fundação Vale do Rio Doce de Seguridade Social-Valia is one of many institutional investors to have embraced the private equity asset class. Given Brazil’s economy and rapid development, many in the private equity market are eyeing developments at institutions like Valia, hoping to discover investment partners and limited partners in Brazil.

Chief Investment Officer Mauricio da Rocha Wanderley discusses Valia’s view of private equity, its interest in partnering with overseas and local investors and whether Brazilian pensions will be able to invest beyond national borders.

With $6.3 billion in assets under management, Brazil’s Fundação Vale do Rio Doce de Seguridade Social-Valia is one of many institutional investors to have embraced the private equity asset class. Given Brazil’s economy and rapid development, many in the private equity market are eyeing developments at institutions like Valia, hoping to discover investment partners and limited partners in Brazil.

Chief Investment Officer Mauricio da Rocha Wanderley discusses Valia’s view of private equity, its interest in partnering with overseas and local investors and whether Brazilian pensions will be able to invest beyond national borders.

Mauricio Wanderley, Valia: Well, it’s very important, for an institutional investor in Brazil today, private equity. The first reason is that we have an expectation of a reduction of interest rates, and all the pension funds of Brazil will need to diversify their portfolio.  And so everybody has a huge allocation to fixed income, and there’s a natural process to increase the participation of your equity.

And private equity’s very interesting for us because we have a good moment.  We have a good perspective of growth in Brazil.  We have a good agenda for the next ten years. We have a World Cup in 2014, the Olympic Games.  We have pre-salt development that is led by Petrobras in Brazil.  So we have an infrastructure that’s very interesting.

And so we believe that investing in private equity would be the best way to access these opportunities in Brazil and to keep our returns in the level that we need to fulfill our obligations.

Brazil has a lack of savings, and to finance a Brazil acquisition would be a little bit expensive.  And private equity can give to the companies a long-term capital that’s necessary for this moment of Brazil.

We prefer to use funds, through funds.  We had some experience investing directly, but we prefer to use the core investment with the funds.  That’s the way we like to act in the private equity business.

Privcap: What do you look for in a GP?

Wanderley: The first is origination capacity.  That’s very important to us.  The quality of the origination is important.  The execution capacity of it, as managers, that’s another key issue for us because it’s not only to buy a company, give it capital, and forget about the business.  But there is an implementation of the strategy that makes sense when the investment was made.  And create value, that’s what we expect from the managers.

Privcap: When will Brazilian pensions be able to invest outside of Brazil?

The first movement of Brazilian pension funds is to diversify locally because, as I mentioned before, we have allocation, I think, above [what is] reasonable to fixed income.  And, after this diversification domestically, I think, that we start the process of looking for opportunities all over the world.  But it’s a matter of time.

Privcap: Would Valia consider investing alongside a foreign private capital firm in Brazil?

Wanderley: I think so.  I think so.  I think that a lot of opportunity will come in the future.  And, as I mentioned before, we have a very good agenda for the next year.  We will need a lot of money, and I think it makes sense that a local should do something for us to invest with another investor from all over the world.

Privcap: What do other Brazilian pensions ask you about private equity?

I think they try to learn from our experience, from the experience of the largest Brazilian pension fund, because most of them invest for a long time.  Valia, for example, invested the first fund in 1998, and so we can learn from our mistakes, and we can see what changed in the private equity business in Brazil.

But I think today it’s easier for smaller pension funds entering the market because it’s much more organized in the markets.  The Brazilian Private Equity and Venture Capital Association can give the support to the smaller pension funds.  And even the Pension Fund Association’s trying to take then the knowledge of the investment, this kind of investment.

But I think it’s important for just transitionally in Brazil because the reduction of interest rates in Brazil will make the pension funds change completely the asset allocation.  Today, in Brazil, fixed income, it corresponds to 73 percent of the asset location of pension funds.  That doesn’t make sense.  And its returns, of course, the system’s very healthy in the short term.  But our concern is to get sustainable for many, many years.  And so they have to find a way to match the obligations.

Today, our target allocation is 6 percent, and we have committed so far 5.2 percent.  And the idea is to increase the target allocation.  These allocations are for this year, and we have started discussing with our board our increase in this budget, and I think that we’ll increase in the next years.

Privcap: Will Valia increase its allocation to private equity?

It’s hard to tell, hard to tell because we don’t have a specific date to invest the money.  That’s the idea, commit the money.  The idea is to have a self-financed program well established in a very conservative way and that makes sense for us.

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