Brazilian P.E. No Bed of Roses –

RIO DE JANEIRO – CVC Opportunity Equity Partners, which operates the largest private equity fund in Brazil, has found that sheer size sometimes fails to smooth bumps in the road. The fund has come under fire recently from its limited partners, most notably Brazilian pension funds, as well as telecom partners Telecom Italia and TIW.

CVC Opportunity is the only private equity house that has raised a significant amount of capital locally, according to its own figures. Almost 60% of its portfolio is in telecom, right now one of the hottest sectors in Brazil. Moreover, the fund is the third largest investor in telecom in Brazil after Telecom Italia and Telefnica, according to the company.

Founded by Citicorp Venture Capital and Opportunity Asset Management, CVC manages the $1 billion CVC Opportunity Equity Partners LP fund, which is almost fully invested.

Several Brazilian corporate pension funds, including Previ, the pension fund of Banco do Brasil, Funcef of Caixa Econmica Federal, Petros of Petrobras, Telos of Embratel and Forluz and Sistel committed $481 million to the fund. In addition, CVC’s parent company, Citibank N.A. contributed $500 million to the fund, and an undisclosed affiliate threw in another $100 million.

The troubles with the LPs stem from a desire on the part of these LPs to assume the management and actively participate in the control of the fund’s portfolio companies. Daniel Dantas, who heads up CVC Opportunity, has stated he has no intention of fighting with the pension funds.

The situation came to a head recently when Canadian company TIW, together with pension funds Previ, Petros, Telos and Funcef, filed a lawsuit against CVC Opportunity that, if they win, will permit the funds to have a direct vote in the operation of Telemig Celular and Tele Norte Celular. Insiders say they expect this to be settled out of court.

Alvaro Goncalves, partner of Stratus Investimentos, said the conflicts between CVC Opportunity and the pension funds that invested in the firm is freezing the market in terms of potential pension fund activity.

Stratus is an independent private equity firm that specializes in developing capital investment projects in Brazilian companies with high growth potential.

“Though [in general] activity is not high, there is restricted demand [for private equity] that is ready to be explored [in Brazil],” Goncalves said. “Pension funds are under pressure to re-allocate assets. There’s clearly room for venture capital to expand into pension funds. This is the best news we’ve seen locally, [as] international money is still being kept out of the country. Normally this should cause a new series of funds to be raised locally over the next 12 months.”

The general belief, however, is that that the pension fund managers of those who have invested in CVC Opportunity are feeling jaded, while the pension funds that have not are casting a wary look at the world of private equity investing.

On top of that, the track record for all private equity in the region is still unclear with the initial series of funds, which puts a ceiling on activity, and there is fear that the macroeconomic problems in Argentina will spill over into Brazil, also damaging potential investment activity.