July 10, 2013
Interviewed by: David Snow
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The Diverse Brazilian Investor

A conversation with Marcelo Moraes of Capital Dynamics, who details the landscape of Brazilian institutional investors and their growing participation in local private equity markets. Moraes discusses the different pools of capital in Brazil and their interest in going international and using funds of funds.

A conversation with Marcelo Moraes of Capital Dynamics, who details the landscape of Brazilian institutional investors and their growing participation in local private equity markets. Moraes discusses the different pools of capital in Brazil and their interest in going international and using funds of funds.

The Diverse Brazilian Investor

A Privcap Conversation with Marcelo Moraes of Capital Dynamics

Why do you think the private equity asset class is poised for so much growth among investors in Brazil?

Moraes: Basically what we have here in Brazil is three pools of money. The major is the pension funds, after that the defining contribution funds and the third pool of the high net worth individuals. Altogether we have more or less $800Billion dollars in assets under management to attract to this asset class. The pension funds have more or less 2.5% invested in alternatives. Out of it, just 1% invested in private equity. High net worth individuals is insignificant their percentage in product investments so there is a lot of room to attract these investors to private equity, even more because since last year we started a trend of declining interest rates that are obliging these investors to diversify their portfolios. So the name of the game right now is diversification. All of them are too much concentrated in fixed income instruments. For instance, the pension funds, 60% of all the money managed by the pension funds is more or less 325 billion dollars. 60% concentrated in fixed income. The high net worth individuals have more or less 50% in fixed income so diversification is the key word right now in Brazil for investments and private equity is one asset class interesting for this challenge.

Are Brazilian investors interested in domestic private equity funds or will capital flow to non-Brazilian funds as well? 

Moraes: Well right now the majority of the investors are looking for local opportunities. We have several local opportunities, infrastructure, services, consumer goods, we have middle class growing middle class that is enhancing their consumption, so the internal market gives the investors a lot of good opportunities. But I think that in two years more or less, horizon, they will start to look for investments abroad, Brazil, they will start to do investments in liquid assets first, and after that they will start to look for private equity abroad and this will take three years. Some of the more sophisticated investors are already studying these opportunities.

When will local investors become more active internationally?

Moraes: Some of the more sophisticated investors are already studying investments abroad, but the decision will take a while. It will come but I would say in a two-three year time frame.

What about the fund of funds opportunity in Brazil?

Moraes: The metaphor I used to say is that the fund of funds works very well for the individual that doesn’t know asset class and once you diversify the opportunity for this asset class and what I tell them is if you want to swim you are not going to start swimming in open sea. You go to swimming pool, you hire a coach, you learn how to swim, you create the muscles to swim, and after you feel comfortable swimming in the swimming pool you can go swim by yourself in the open sea. It is the same thing with a new asset class. If you don’t know private equity, it is better to start investing through a fund to funds, learn how to select the GPs, how to monitor their track record, their returns, and after that when you are locations started to get higher and you can go and invest by yourself in private equity so as I told you there is enormous room to increase the private equity as an opportunity for diversification of these pension funds. Only 30 out of 350 pension funds are right now investing in private equity in Brazil so 90%, 85% of the pension funds need some help, some structure to help them to invest in private equity and this structure is from the funds.

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