PrivatePrivate EquityEquity FundsFunds

in Brazilin Brazil

Fundo de Investimento Fundo de Investimento

em Participaem Participaçções ões -- FIPFIP

Luiz Otávio P. Villela

June 2011

Brazilian PE Fund (“FIP”)General Information

• Closed-end mutual fund

• At least 90% of fund’s assets must be invested in

stocks, debentures, subscription warrants and other

securities issued by a special purpose company

(SPC) which qualifies as a target for the FIP.

• Mainly ruled by CVM Instruction nº 391 (2003) and

the Infrastructure FIP by CVM Instruction nº 460

(2007) which mirrors Law nº 11.478/2007.

Brazilian PE Fund (“FIP”)

General Information

• Most suitable vehicle in Brazil for Venture Capital

and Private Equity projects

• May be used in tax plannings to reduce the taxable

income in sale of assets

• May be used in insolvency restructuring processes

• FIP’s allocation can be made by business sector,

multisector, single SPC or by other criterion.

• Fund raising through registered public offerings or

limited efforts’ offering exemption (similar to a

private placement)

Brazilian PE Fund (“FIP”)General Information

• Fixed maturity subject to extension for a pre-

established period of time

• May adopt different types of quotas with

distinguished seniority claim levels, which are held

either in electronic scrip or book-entry

• Investors: financial institutions, insurers, pension

funds and other qualified investors holding other

investments exceeding R$ 300,000

• FIP’s minimum investment value: R$ 100,000

• FIP shall exert active influence over the

management of the invested SPC.

Brazilian PE Fund (“FIP”)General Information

• Allows channeling funds into specific sectors or

projects which meet certain parameters.

• An “Investment Committee” formed by members

indicated by the fund’s manager and its top

investors according to the fund’s internal rules

may be adopted to decide on the allocation of

fund’s assets.

Brazilian PE Fund (“FIP”)General Information

• FIP must be audited by an independent auditor

• Charges: Management Fee (%) varies according to

the FIP’s assets. Extra performance fee may be

charged upon achievement of benchmarks.

Custody and other fees may also apply.

• FIP does not qualify for the guarantee of the

Brazilian deposit guarantee fund (FGC)

• Pre-established investment and desinvestment

periods are usual

• Desinvestment occurs through IPO, secondary

market sale or repurchase.

Brazilian PE Fund (“FIP”)Pension fund Investment Limit

Pension fund and official funds investment limits:

• Pension Fund:

� May invest up to 20% of its assets in FIP’s

� The pension fund investment is limited to 25% of

the FIP’s cotas/assets

• Retirement institutes sponsored by federal, state

and municipal governments:

� May invest up to 5% of its assets in FIP’s

� The institute’s investment is limited to 20% of

the FIP’s cotas/assets

Brazilian PE Fund (“FIP”)Management and Governance of

Invested SPC’s

The fund may participate in the SPC’s decisions in any

of the following manners:

I. Relevant shareholding (corporate control block)

II. Shareholders Agreement

III. Appointment of Board members; and

IV. Other arrangement securing active influence on

the company’s strategy and management control.

Brazilian PE Fund (“FIP”)SPC’s Eligibility Criteria

Eligible SPC’s: Corporation, publicly-held or not, which:

- Has not issued “parte beneficiária” (profit-sharing

security)

- Adopts an uniform office term of 1 year for the Board

of Directors (or 2 years in case of a “FIP-IE”)

- Discloses contracts with related parties, Shareholders

Agreements, SOP’s and other relevant contracts

- Adopts arbitration clause for corporate disputes

- Balance sheets are audited by independent auditors

- Commits to join one of BM&FBovespa’s special stock

exchange segments if the SPC goes public.

Brazilian PE Fund (“FIP”)CVM Filings

CVM Filings:

1. The FIP requires a prior registration at CVM, which

is accomplished upon filing the documents listed in

CVM’s Instruction 391 (Meeting Minutes, FIP’s

Regulation (Charter), Affidavits etc.)

2. Each new offering also requires a registration

statement with CVM (except for public offerings

with limited efforts pursuant to CVM Instruction

476/09).

Brazilian PE Fund (“FIP”)Dropdowns and noncash withdrawals

Noncash payments:

CVM Instruction 391 allows creditors of an invested

company under reorganization to acquire FIP’s cotas

paying with assets or credit rights enforceable

against the invested company supported by a

valuation report. In practice, any investors may

acquire FIP cotas paying with any securities or credit

rights.

If the fund’s rules allow, the investors’ withdrawal

may also be made with assets and rights (including

securities).

Brazilian PE Fund (“FIP”)Chart Flow

QUALIFIED

INVESTORS

FIP ADMINISTRATOR

Securities Firm,

Bank etc.

CUSTODY

MANAGERSPC’s

Administrator may

also manage the

fund’s assets if

licensed by CVM

R$

Investors:

Asset Management

Custody, treasury

and back-office

may also be

discharged by the

Administrator

Brazilian PE Fund (“FIP”)Tax Matters

Tax Status (Law 11.312/06):

Upon repayment, Redemption value less Acquisition

value = taxable gain: 15% Income tax

(FIP must have 67% or more of its investments

composed of stocks, convertible debentures and

subscription warrants issued by Brazilian corporations)

No semestral share-deduction taxation

Dividend received by FIP from invested companies may

be rolled-over to investors, pro rata to their fund’s

cotas, totally tax-free.

Brazilian PE Fund (“FIP”)Tax Matters

Income tax rate for nonresident investors is 0% if:

(a) investor and related parties hold less than 40% of

the FIP cotas (or corresponding rights); and

(b) FIP’s investment has up to 5% in debt securities

(except convertible debentures and government

bonds).

This tax benefit does not apply to parties domiciled or

resident in “Tax Heaven” jurisdictions.

Brazilian PE Fund (“FIP”)Tax Matters

IOF on entry of funds from offshore investors:

Brazil levies an IOF tax on nonresident investments

in FIP’s at a 2% rate, which is due upon the FX

conversion into Brazilian currency after the funds

enter Brazil for credit into the fund account.

Brazilian PE Fund (“FIP”)Infrastructure FIP

Infrastruture FIP (FIP-IE): CVM 460/07 & Law 11.478/07

⇒ May qualify for credit support from Brazilian

development agencies (e.g. BNDES programs)

⇒ Within 180 days from incorporation, fund must have

95% of its assets invested in stocks or subscription

warrants issued by companies or projects of energy,

transportation, water and sewerage and irrigation

⇒ SPC’s project must have started after Jan 22, 2007

⇒FIP-IE must have at least 10 investors, each one

having 20% or less of the fund cotas or its

corresponding rights