Biggest pension fund in Brazil turns into a $50 billion activist

When BRF SA, the Brazilian food giant that produces everything from chicken to chocolate pies, reported a record annual loss for 2017, it took less than 48 hours for its second-largest shareholder to act.

Previ, Brazil's biggest pension fund, sent a letter in February demanding BRF Chairman Abilio Diniz convene a shareholder meeting to remove the entire board, including himself. After a two-month fight, Previ got its way: Investors voted in five new directors and replaced Mr. Diniz with Pedro Parente, who's credited with turning around the country's state-owned oil company, Petroleo Brasileiro.

That success is just the latest example of how the pension fund, which counts more than 200,000 current and former employees of Banco do Brasil as participants, is using its 180 billion reais ($50 billion) in assets under management as ammunition in a minority-shareholder rights war.

"BRF kept showing successive results that were a concern for us as shareholders," Gueitiro Matsuo Genso, Previ's chief executive officer, said in an interview in Sao Paulo. "We decided to work together with other dissatisfied investors to intervene, but within what we believe was the best way — through the company's governance; in this case, the board."

As part of its new activism, Previ will stop participating in groups with controlling interests in a company, which limit the pension fund's ability to exit investments whenever it wants. It's seeking out companies that prioritize transparency, good governance and respect for minority shareholders' rights.

Previ created a governance rating that Mr. Genso said is the only one of its kind in Latin America. The rating considers such factors as a company's risk management and compliance policies, transparency, conflicts of interest, and involvement of management or shareholders in corrupt practices. The existence of independent internal auditing committees and other formal mechanisms for evaluating management and the board also are taken into account, Mr. Genso said.

As part of the strategy shift, Previ participated in the initial public equity offering of Petrobras's fuel unit in December, buying 10% of the roughly 5 billion reais raised. It was the second-biggest investor, partly because the company agreed to be listed on Brazil's "New Market," which demands a stricter set of governance rules, including a minimum free-float to help boost liquidity.

"It had been a long time since we participated in an IPO, but that was a good opportunity we couldn't miss," said Marcus Moreira de Almeida, Previ's chief investment officer. Since the IPO, Petrobras Distribuidora's shares have surged more than 30%.

Neoenergia, the power company in which Previ has a roughly 38% stake, is planning to go public on the New Market under the same corporate governance rules as the Petrobras unit. That IPO was planned for the end of last year but was postponed until market conditions improve.

"We like to get companies ready, so we can sell when you think it's best," Mr. Genso said. "If there's a good opportunity, all our investments are for sale; we don't love any assets."

With about 12 billion reais in annual disbursements to retirees, Previ needs to focus its investments in companies with high liquidity.

"With our size, we need a robust free float — considerable market cap — in order to manage a smooth way out when we decide to without having an impact on prices," Mr. Genso said. As a result, Previ won't participate in IPOs smaller than 3 billion reais.

Another example of Previ's influence came with its participation on the voluntary conversion of iron-ore producer Vale's non-voting shares into voting ones and the gradual unwinding of a controlling shareholders' agreement, Mr. Genso said. Investors owning more than 84% of the affected shares agreed to the conversion last year, well above the roughly 54% needed.

Previ plans gradually to sell its stake in Vale to raise cash. But there's no rush, according to Mr. Almeida. "Vale will be a great dividend payer this year, and that's perfect for a pension fund," he said.

After divestitures totaling 9 billion reais last year, Previ has a goal of reducing equity investments in its main fund to 30% in seven years from about 48% now, while increasing fixed-income holdings to 59% from 42% — another strategy aimed at boosting liquidity.

"Given our size and impact, we can help change Brazilian markets for the better," Mr. Genso said. "If big investors like us start to show they really demand good governance, management will be forced to deliver it."