Brazil’s sovereign fund objectives unclear

Although investment guidelines have not yet been set, people familiar with Brazil’s proposed sovereign wealth fund say it may favour ‘politically related’ investment mandates over the alternative investment allocations embraced by peers.

Brazil’s $20 billion (€13 billion) sovereign wealth fund, proposed this month by the country’s Ministry of Finance, may not be the active alternatives investor many other sovereign wealth funds have proven to be.

“The government’s main objectives with this sovereign fund do not relate to the other countries’ sovereign funds,” Mauricio Folkerts, partner at Brazilian private equity firm NSG Capital told PEO.

Most sovereign wealth funds have stated their investment objectives are entirely returns, explicitly rejecting political motives. However, many of the Brazil’s fund’s “objectives explicitly state politically related motives, more [like the] philosophy of a development bank”, added Folkerts.

Members of the Brazilian private equity community, including Stratus Group managing partner Álvaro Gonçalves, have participated in initial consultations with the Ministry of Finance regarding the fund, although specific investment guidelines have not yet been determined. Before investment begins, a deliberative council will determine the forms, timing and nature of investments.

The Ministry of Finance has outlined a number of broad objectives for the fund including: supporting projects of “strategic interest” to Brazil, financing the international expansion of Brazilian companies, improving the returns of government-owned financial assets, creating additional government savings and absorbing fluctuations in economic cycles.

A particularly controversial aim of the sovereign wealth fund is to rebalance the exchange rate, John Lin of Brazilian firm Fama Private Equity told PEO. The Brazilian government intends to intervene in the foreign exchange markets to counter the appreciation of Brazil's currency, which is depressing exports.

The controversy is driven by those who, like Lin, believe that exports would be more effectively increased by investment in infrastructure. Insufficient infrastructure in Brazil contributes to high transportation and export costs, reducing the global competitiveness of Brazilian products, said Lin, arguing that infrastructure investment would increase competitiveness across economic cycles.

The sovereign wealth fund will manage all funds in excess of the budget. Brazil’s economic surplus of R$15 billion ($9 billion; €5.9 billion), deep sea oil reserves and a strong influx of capital supported by the country’s recent upgrade to investment grade lead Brazilian officials to believe that reserves are sustainable.

There are still hurdles to be overcome before the sovereign wealth fund can be created, said Lin. Gaining approval from congress will take from several weeks to several months and then the President must sanction the fund.

If approved, governance will be carried out by the Ministry of Finance and the resources will be operated by a federal governmental institution which will be The Brazilian Development Bank, Caixa Economica Federal or Banco do Brasil.