First published in Valor Econômico May 2023
On December 23rd last year, the Brazilian Securities Commission (CVM) delivered domestic investors and fund managers an early Christmas present: the news that Brazil’s fund market would become truly cross border for the first time. The legislation – CVM Resolution No.175 – will also see sweeping changes to the market structure and asset types available to domestic investors as well as the rules around liability and responsibility.
These reforms are all geared towards bringing Brazil’s already impressive domestic fund market in line with the world’s leading mature markets.
A sleeping giant
The Brazilian domestic fund market is already big business, with 27,000 [1] funds, 25 million shareholders and over USD $1 trillion AUM, making it one of the largest fund markets in the world. However, it has always been an almost entirely domestic market with institutional investors only permitted to invest up to 20% of their net asset value overseas, with retail investors not permitted to access foreign funds at all.
As of October 2023, however, that will expand to 100% – for all investor types. This is a huge opportunity for Brazilian investors and fund managers, allowing them to access an entirely new set of products, funds and currencies and diversify their portfolios in previously impossible ways. Despite the impressive size of the Brazilian domestic fund market, the variety of products available offshore greatly expand the universe of opportunities. Now, for example, Brazilian investors, institutional or retail, can access a UCITS fund in Luxembourg with relative ease.
For fund managers in particular, this is a two-pronged opportunity. Not only can they access foreign funds but foreign retail investors can access their domestic funds directly for the first time too.
Furthermore, fund managers can now begin marketing receivables investment funds (FIDC) to retail investors, opening up a whole new consumer group. In the past, only institutional investors with over BRL 1 million invested could access these funds.
CVM Resolution No.175 goes well beyond just expanding the Brazilian fund market. It’s reworking the entire regulatory infrastructure so that the permitted structure of funds will match up with what’s available to fund managers elsewhere. This is a testament to the rigorous research the CVM have carried out in the last few years, where commission delegates have met with leading industry figures from the world’s biggest markets.
This structural change is most apparent in the introduction of share classes to the Brazilian market where, before now, the concept simply didn’t exist. Now the existence of different classes of shares with segregated assets for each class in the same portfolio is permitted, allowing for different shareholder profiles to exist within the same fund. All of this grants managers far greater diversification opportunities than they had before, while providing retail investors with exposure to assets previously beyond them.
The third most notable change relates to investor protection and, in particular, ‘limited liability’. Now, all investment funds that offer limited liability must make that clear by adding ‘limited liability’ as a suffix to their corporate name. If the fund instead opts for unlimited liability, shareholders must sign an agreement that states they’re fully aware of the risks.
Getting to the starting line
CVM Resolution No.175 is the latest in a number of recent changes. However, the fact that it was announced with a five-month lead time (the majority of the changes were originally set to come into effect in early April) and not the customary couple of weeks highlights the scale of change and the opportunity it presents. This was further enforced when the April start date was pushed back to October as the industry realised the scale and breadth of the changes.
Even with this additional time, there’s a clear advantage for managers in building the infrastructure early. A number of funds we work with are already priming to launch as soon as legislation allows.
But what does being prepared look like? There are three main facets. The first, for managers and administrators at least, is making sure they’re compliant. The legislation now defines both as ‘essential service providers’, giving them additional responsibilities when acting as structuring advisers to the formation of receivables funds, and when they carry out due diligence reviews over the portfolio of receivables to be acquired by said fund.
The second is marketing. The change in legislation opens up funds to a vast new audience, both at home and abroad. Retail investors can now put their capital in places they couldn’t have dreamed of just 12 months ago, while investors overseas can now access all that the Brazilian market has to offer. Managers need to start making noise about this.
The third is access to funds. Simply put, it’s impossible for fund managers to capitalise on these rule changes without it. This requires a technology infrastructure that matches their overseas counterparts and, more importantly, connectivity with the global market. At present, this level of connectivity isn’t there for most Brazilian funds. This is where Calastone can help. We’re the largest global funds network. With over 3,600 institutional clients in 54 countries and territories benefitting from our services, we process USD $300 billion of investment value each month. We’re already operating in Brazil, helping early movers make global connections and automate real-time pricing, reconciliations and more.
For Brazilian fund managers and investors, CVM Resolution No.175 is the announcement that many have been waiting for. Brazil’s already impressive domestic fund market could soon be a genuine global player. Managers and administrators now have a few more months to get ready but October will come around quick. The question now is, who is going to utilise that time to be best prepared when the starting pistol fires?
[1] https://thelawreviews.co.uk/title/the-asset-management-review/brazil
