BRAZIL Law and Practice Contributed by: Fernanda Levy, Aline Bauermeister, Rodrigo Menezes and Fabiana Fagundes, FM/Derraik
• accelerators and incubators; and • development agencies.
20” format, an expression that summarises the practice of charging 2% per year (calculated on the fund’s capital) as administration and management fees, and 20% of the profitability earned by the fund’s investors as a performance fee or carry. • Management fee: This fee is typically calcu - lated as a percentage of the capital com - mitments or the assets under management (AUM), paid to the fund principals for their role in managing the fund’s investments. The standard rate is around 2% per annum, though this can vary depending on the size of the fund and the reputation of the manage - ment team. • Performance fee: Also known as “carry” , this is the share of the profits that the fund principals receive from the investments made by the fund, serving as a performance incen - tive. “20% carry” is standard, meaning that the fund principals receive 20% of the fund’s profits after returning the original capital, and sometimes a preferred return to the investors. Other key terms developed as market practice include the following: • Co-investment opportunities: Fund principals, and sometimes employees, of the manage - ment company may have the opportunity to invest their own money alongside the fund in specific deals. This aligns their interests with those of the limited partners (LPs) by their having personal stakes in the success of the investments. • Hurdle rate or preferred return: This is a mini - mum rate of return (typically between 6% and 8%, as adjusted by inflation) that the fund must achieve before the fund principals can receive their carried interest. It is an inves - tor protection mechanism ensuring that LPs
Private equity funds ( fundos de investimento em participação – FIPs) are the most widely used types of investors and the main providers of funding to start-ups in the VC industry. FIPs are mainly governed by their related regula - tion ( regulamento ), which is registered at Brazil’s Securities and Exchange Commission (CVM). Such regulation forms the equivalent of a corpo - ration’s by-laws, containing the rights and obli - gations of the fund, decision-making processes and restrictions. There are two key and mandatory service pro - viders for FIPs: the administrator and the man - ager. The administrator is responsible for the legal representation of the fund and for all back- office activities (such as treasury and controller activities, bookkeeping, and compliance with legal requirements and internal policies). The fund manager has the essential roles of defining the fund’s strategy, deciding on and monitoring investments, and determining divestments (sup - ported or not by the investment committee). The regulation also requires auditing by inde - pendent auditing firms and the disclosure of relevant information. 2.2 Fund Economics Participation of Fund Principals in the Economics of VC Funds Fund initiators, managers or principals can par - ticipate in the economics of VC funds in several ways. Fund principals are mainly remunerated by management fees and performance fees. In VC, these fees are usually established in the “2 with
44
CHAMBERS.COM
Powered by FlippingBook