In a highly anticipated move that is full of disruptive potential, the Brazilian Securities and Exchange Commission (CVM) launched a public consultation at the end of December to review some of the rules applicable to Private Equity Investment Funds (FIPs). Public Consultation SDM No. 03/24 proposes a true modernization of Annex IV of CVM Resolution No. 175, potentially redefining the dynamics of the FIPs market and significantly increasing its accessibility and flexibility.
One of the main points of the CVM’s proposal is to expand the target audience of FIPs, allowing retail investors to finally have access to these products, which until now were reserved for qualified and professional investors. If this change goes ahead, a new range of opportunities (and risks) will open, requiring greater discernment and sophistication on the part of ordinary investors. To mitigate the complexities involved, the draft proposed in the Public Consultation imposes some strict conditions and safeguards applicable to the classes intended for retail investors, such as the prohibition of capital calls and the need to trade retail shares in organized markets with market makers.
Another controversial point of the proposal is the elimination of the current classifications of FIPs, replacing them with a system of suffixes to identify FIPs focused on innovation, infrastructure and research. This represents a significant change in the way these funds are understood, and could both simplify communication with the market and generate uncertainty regarding the specific investment policies of each FIP.
The CVM also proposes granting greater freedom to FIP managers, eliminating regulatory barriers and relaxing the requirement of “effective influence” on the decision-making processes of invested companies. This raises a fundamental question: will this freedom open space for more dynamic and profitable management or could it result in less protection for investors and greater vulnerability to excessive risks?
Perhaps the most audacious point of the draft is the permission for FIPs to assume capital risk, something that was previously prohibited. This measure could bring FIPs closer to international Private Equity funds, allowing financial leverage and more aggressive strategies. However, it also exponentially increases risk exposure, making highly qualified management essential to avoid catastrophic losses.
Another critical aspect is the proposal to allow the manager itself to calculate the fair value of the assets used to pay for the shares, eliminating the requirement for an independent report. While this speeds up the process and reduces costs, on the other hand, it could create loopholes for subjectivity and conflicts of interest in the pricing of asset.
Finally, the CVM intends to improve transparency in the sector by introducing mandatory periodic updates on the performance of FIPs and creating new standardized forms for informational reports. In this sense, the CVM proposed that managers start providing FIP quotaholders, in the manner to be provided for in the respective regulations, periodic updates of studies and analyses that allow monitoring of investments made, objectives achieved and profitability prospects. This is an essential measure to balance increased flexibility with the need for more rigorous monitoring.
Notwithstanding the above, it is important to emphasize that the Public Consultation does not aim to exhaust and update all possible topics related to the regulation of FIPs provided for in Annex IV of RCVM 175, but only to expose certain topics that, in the view of the CVM, are the main points to be considered by market participants who wish to present their contributions.
The public consultation is open until March 28, allowing the market to express its opinion on these revolutionary changes. It remains to be seen whether this reform will be the boost needed to improve FIPs or whether it will bring unforeseen challenges for investors and managers.