RIO DE JANEIRO, Brazil - Brazil's biggest pension funds are entering the private equity fund arena, but cautiously.
A few large pension funds have invested about $450 million of their assets - less than 1% of the total $52 billion in all Brazilian pension fund assets - in four domestic private equity funds since they were first allowed to in 1997.
Those investing include: the Fundacao dos Economiarios de Seguridade Social, or Funcef, the pension fund of the federal savings bank; Fundacao Sistel de Seguridade Social, or Sistel, the pension fund of recently privatized telecom company Telebras; the Fundacao de Assistencia e Previdencia Social do BNDES, the pension fund of the government's Development Bank; Previ-Caixa de Previdencia da Fundacao do Banco do Brasil, or Previ, the pension fund of the state-owned Banco do Brasil and Brazil's largest pension fund; Fundacao Banco Central de Previdencia Privada, or Centrus, the pension fund of the Central Bank; and Fundacao Petrobras de Seguridade Social, or Petros, the pension fund of the state oil monopoly Petrobras.
Funcef, Brazil's second-largest pension fund, has invested only a small part of its $3.7 billion in assets in private equity: $63 million in CVC/Opportunity Equity Partners, a joint venture between the local Opportunity Asset Management firm and New York's Citicorp Venture Capital that has $160 million in commitments, and $5.2 million in a fund by Credit Suisse First Boston-Garantia. The CSFB-Garantia fund, formed when CSFB bought the local Banco Garantia, has $160 million in commitments.
"What's really attractive about private equity are the returns it promises, which are higher than traditional variable-income (equity) investments," said Humberto Jose Teofilo Magalhaes, Funcef's financial director. "Still, as it's a new type of investment for us, we're investing cautiously and waiting for results."
Promise of more
Brazilian pension fund participants, guaranteed a 6% minimum fixed return on their contributions, have been receiving an average 9% return, with the assets invested mainly in fixed-income instruments and equities and real estate investments. Private equity fund managers promise far greater returns of at least 20% to 25% a year.
This is why Sistel, Brazil's third-largest pension fund, has invested a small part of its $3.15 billion in assets in private equity - $52 million in the CVC/Opportunity fund and $26 million in the CSFB-Garantia fund.
"We are looking for a minimum of 18% a year returns from our (private equity) investments, which is considerably higher than our average returns, and is no riskier than investing in stocks," said Wilson Delfino, the manager of Sistel's investment and analysis department. "So we're willing to risk making a small investment to see how it does."
Silvio Araujo, which invested $4 million of its $680 million in a $40 million private equity fund run by Banco Patrimonio di Investimento SA, a local investment bank, said pension funds are investing only small amounts in funds because of the drawbacks.
"Those pension funds that want to significantly boost returns are mostly increasing their investments in Brazilian stocks with good liquidity because, in general, stock prices are low," said Mr. Araujo. "Pension funds see private equity as a longer-term investment, with no immediate liquidity, whose ability to generate high returns hasn't been proven. That's why pension funds are only making `trial run' investments in private equity."
Managers of private equity funds say they can get only small amounts from pension funds for several reasons, the key one being that pension fund executives don't like the idea that they can't monitor the investment returns.
"One of the main reasons that pension funds don't invest more in private equity is that, because commitments aren't listed and because fund net asset values don't change, pension funds can't measure the impact of investments on their short-term performance," said Miguel de Braganca, head of investment banking for Sao Paulo-based Banco Santander de Negocios. Santander Investments, the investment banking arm of Banco Santander, has $85 million in commitments in its Brazilian fund.
Alvaro Goncalves, who recently started Stratus Investimentos, a Sao Paulo-based private equity boutique agreed: "Pension funds would invest more ... if they could monitor fund returns, as they can other variable-income investments."