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Special Situations: "Brazil can be the big beneficiary of this new moment", says Collier Added in 6/6/2023
ABVCAP approved statutory changes and created a committee to deal with the industry

The growth and sophistication of Special Situations led ABVCAP (Brazilian Private Equity and Venture Capital Association) to create a specific committee to deal with the topic. After a statutory change, the association now also includes these investments in its scope of action, consolidating its position as a representative of long-term investments in Brazil.
Focused mainly on shares in companies that are going through problems and on NPL (Non Performing Loan), when bank loans fail to be paid, the Special Sits already represent more than 10% of the long-term private capital that is coming into the country.

In this interview, Cesar Collier, coordinator of the Special Situations committee of ABVCAP and Managing Partner and Head of Latin America of Siguler Guff & Company, analyzes the market and the role of ABVCAP in improving and securing the growth of the industry in Brazil. 

How is the Special Situations industry structured nowadays and what changes in the follow-up of the theme by ABVCAP?

César Collier - It is an industry with many work fronts. In the last 15 years, it has gained strength in Brazil with the emergence of numerous managers who, in many cases, did things only within an organization. In the ABVCAP committee, we discuss the agenda and end up reflecting a lot of the discussions we have seen abroad, especially in the GPCA (Global Private Capital Association, formerly EMPEA). This name change is not by chance. What started 30, 40 years ago, in the United States, only as Private Equity, has been broken down into countless classes of private capital. A large segment that emerged was Venture Capital and then Private Credit, which is today the fastest growing segment in the world under the Private Capital umbrella. So, in our discussions, we concluded that we don't want to be an association of only Private Equity and Venture Capital. We embraced, back there, the Venture Capital industry, but we saw that ABVCAP should and could take care of and help, as an association, the Special Sits area.

And for this purpose committees were created in the association?

Collier - Yes, we created two committees: one for Private Credit and one for Special Sits. This unfolds from the same phenomenon, which leads us to say that all long-term capital investment is supported by ABVCAP. We changed the bylaws to reflect this, representing long-term investors in Brazil in general. 

Why do we have this growth of Special Sits in Brazil?

Collier - Who started doing Special Sits were some investment banks. With the emergence of new managers, they became houses very similar to those of Private Equity. Today, in Brazil, I estimate that up to R$50 billion are managed in Special Sits operations, but we will still have a study to gauge and update this number. And the growth in recent years is due a lot to a series of improvements in the country's legal infrastructure. We can cite new laws, such as the bankruptcy law, digitalized processes with more agility in the analysis, privatization, and concession laws. The legal framework has created tranquility for the industry, for example, to take a company under judicial reorganization and do a DIP financing on it, which in the past was almost impossible to do because the law mixed new and old investors. Several elements helped the various areas of Special Sits.
How can we divide the Special Sits areas, focusing on the most relevant ones currently in the Brazilian market?

Collier - One of them is corporate restructuring, where you get a company in trouble and create non-traditional instruments to help it. Another line is the NPL (non performing loan), which is basically formed by the debts that were not paid to the banks, already recognized by them as a loss, and that are sold to the Special Sits managers for a part of the total value, usually up to 4%. From that, the houses seek to recover part of that value. The third major category is judicial assets, formed by two modalities: the purchase of a judicial asset, when a lawsuit has already been judged on its merits and has become a court-ordered debt security, and the granting of loans that use the lawsuit as collateral, i.e., making an advance payment of the value of a lawsuit, which is then recovered when the lawsuit is actually paid. There are managers who do all three and those who operate in only one, such as legal claims.

What recent moments have been important for Special Sits?

Collier - We had three important moments for the industry: the global crises of 2007/08 and now with the pandemic, and the domestic crisis of 2015/16. Speaking of the most recent case, the inflationary crisis generated by the pandemic, many companies had serious billing problems, needed to lay off employees, problems with suppliers, among others. Nobody was prepared for the covid. It was a time when the Special Sits industry was very active, mainly in giving loans using legal claims, besides acting in the restructuring of many companies and in the purchase of overdue credit portfolios from banks. With interest rates rising, companies are having a very high finance expense and little access to credit. The Special Situations industry plays a key role in the economy, because we take complicated cases and manage to save companies, keep jobs, connecting with the ESG agenda mainly by this effort in maintaining a company and its workforce. 

What will be the role of ABVCAP for the industry?

Collier - ABVCAP can act on some fronts, such as protecting foreign investors, who are coming or thinking about coming here. There have been many misinterpretations by the IRS, in our view, such as in the classification of foreign investors. Another issue is about taking advantage of the opportunities of the global scenario. China, for various reasons, is no longer a major focus of the international investment community. Before, when we talked about emerging markets, Brazil was left with a small part. Today, India is already receiving more private capital in investments and Brazil can be the great beneficiary of this new moment. We have, of course, some homework to do, such as the progress of the fiscal framework, and ABVCAP has an essential role in this attraction of investors who are looking for markets other than the developed ones. Along with this, discussing the private credit issues, especially regarding the payment of capital gains. It is a discussion that we are having with the Government and Congress and that can change the level of credit coming into the country. So, basically, our work at ABVCAP is to think about how to bring more investments to the country.

Source: ABVCAP


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