Sie sind auf Seite 1von 17

Venture Capital Vol. 10, No. 2, April 2008, 111–126

Venture Capital Vol. 10, No. 2, April 2008, 111–126 Private equity and venture capital in an

Private equity and venture capital in an emerging economy:

evidence from Brazil

Leonardo de Lima Ribeiro a * and Antonio Gledson de Carvalho b

a Center for PE/VC Research at Fundac¸ a˜o Getulio Vargas; b Fundac¸ a˜o Getulio Vargas School of Business at Sao Paulo

(Accepted 20 December 2007)

The Private Equity and Venture Capital (PE/VC) financial model was initially developed in the US and, therefore, designed for the US institutional environment. The degree to which the US PE/VC model can perform in other institutional environments is an interesting question. This article is based on data supplied by all of the 65 PE/VC organizations with offices in Brazil in 2004. Comparing Brazil and the US, we found that the main similarities are: an industry composed mostly of independent organizations, managing capital coming mostly from institutional investors; capital is heavily concentrated regionally and in few organizations; investments are made within a close geographical distance; and software and IT are preferred sectors. The main differences are that for Brazil: investments are concentrated in more advanced stages of corporate development; since credit is scarce, few LBOs take place; low levels of sector specialization (PE/VC investing in a broad variety of industrial sectors); firm concentration in Sao Paulo’s financial district suggests a quest for commercial partners and strategic buyers for portfolio companies; and Brazilian PE/VC regulation recognizes the inefficiency of the legal system and forces the use of arbitration. We also discuss possible reasons for these adaptations.

Keywords: private equity; venture capital; emerging market; institutions

Introduction

The Private Equity and Venture Capital (PE/VC) financial model was first developed in the US where it attained outstanding success in fostering the entrepreneurial sector. This success encouraged several countries to develop their own PE/VC industry. During the 1970s and 1980s, PE/VC financial technology spread out around the world. However, the prevailing model for PE/VC was tailored for the US institutional environment. As Gompers and Lerner (2002) state, a natural question concerns the degree to which the US venture capital model can be successfully adapted to other countries. We examine this question by exploring the PE/VC industry in Brazil. As a leading country in Latin America and part of the BRICs (Brazil, Russia, India, and China) group of rapidly developing countries, Brazil provides a good setting to examine the evolution of this financial technology in an emerging economy. Moreover, the Brazilian PE/VC industry has accumulated more than two decades of experience, making it possible to examine the industry at the end of a complete PE/VC investment and exit cycle.

112

L.L. Ribeiro and A.G. Carvalho

Empirical evidence has shown that the PE/VC industry has evolved very differently across countries (Jeng and Wells 2000) and within countries (Gompers and Lerner 1998). The relative size of the industry ultimately depends on the supply of funds from investors (factors that push investors into the PE/VC asset class) and on the deal flow for PE/VC (factors that affect the number and quality of ventures seeking capital). Gompers and Lerner (1998), Jeng and Wells (2000), and Romain and Van Pottelsberghe (2004) investigated the determinants of the PE/VC industry’s size across countries. These studies found that the most significant factors that explain the deal flow are: (1) reduction in the capital gains tax (over time); (2) entrepreneurship activity; (3) innovative efforts (i.e. overall R&D expenditure, stock of knowledge and patent fillings, especially when the workforce is mobile and the entrepreneurial activity exceeds a certain level); (4) GDP growth (in countries with low market rigidity); (5) labour market rigidities (mainly for the high-skilled workers, with a stronger effect over early stage investment); and (6) interest rates (with a positive rather than negative effect). With respect to the supply of funds, the main factors are: (1) allowance for pension funds to invest in the asset class (e.g. ERISA in the US); (2) growth of the private pension market (explains variability over time but not across countries); (3) reputation of the established PE/VC firms; (4) quality of accounting standards; and (5) long-term against short-term interest rates. Other important factors are the volume of initial public offerings (IPOs) (with stronger effect over later stage investment); stock market capitalization; and government programmes (with an important role in both setting the regulatory framework and galvanizing investment during downturns). Some other studies investigated the determinants of the PE/VC industry’s structure. Megginson (2004) found that the differences in the design and the degree of development of the PE/VC industry are due to institutional factors, with the country’s legal system being paramount. Cumming and MacIntosh (2002) observe that PE/VC managers operating in countries where rights are efficiently enforced have a greater tendency to: (1) invest in high-tech SMEs; (2) exit through IPOs rather than buybacks; and (3) obtain higher returns. Cumming, Schmidt, and Walz (2004) further examined legal system effects and found that in better legal systems: (1) the faster the origination and screening of deals; (2) the higher the probability of syndication; (3) the less PE/VC managers tend to use capital from different funds to invest in the same company; (4) the easier the board representation of investors; (5) the lower the probability that investors require periodic cash flows prior to exit; and (6) the higher the probability of PE/VC investing in high-tech companies. Lerner and Schoar (2005) found that: (1) in a bad legal environment, PE/VC managers tend to buy controlling stakes, leaving entrepreneurial teams with weaker incentives early on; and (2) valuations tend be positively correlated with the quality of the legal environment. Kaplan, Martel, and Stro¨mberg (2003) found that: (1) rights over cash flows, liquidation and control, as well as board participation, vary according to the quality of the legal system, the accounting standards, and investor protection across countries; (2) more sophisticated PE/VC managers tend to operate in the US style irrespective of local institutional concerns; (3) managers operating with convertible preferred stocks are less prone to failure (as measured by survivorship rates). The results in Kaplan, Martel, and Stro¨mberg (2003) are interesting because they suggest that the US contractual style can be efficient in different institutional environments. Finally, Bottazzi, Da Rin, and Hellman (2005) corroborate some of the previous results and obtain further evidence on the home- country effect (the tendency of PE/VC managers operating abroad to maintain the investment style used in their home country). This home-country effect is observed in managers based in both good and bad legal environments.

Venture Capital

113

While cross-country studies shed light on some important issues, they usually have the caveat of treating each sample country superficially (i.e. only few available variables are considered, samples are generally incomplete, and so on). To fully observe the richness of a country’s PE/VC model, one must understand the local institutional environment thoroughly and gather a dataset rich in terms of variables and coverage. This focused but comprehensive approach has gained attention. For instance, Kuemmerle (2001) shows that Japan and Germany share similar institutional traits that really set their model of PE/ VC apart from the US one. Bruton, Ahlstrom, and Yeh (2004) show how PE/VC has adapted to the Asian culture, regulations, and institutions. Dossani and Kenney (2002) discuss policies for the development of PE/VC in India. While there is considerable evidence about PE/VC in the US, Europe and Asia, very little is known on its development in Latin America. To our knowledge, Pereiro (2001) did the first systematic data collection in Latin America. The author surveyed 23, and did an in-depth interview with seven, of the 39 PE/VC firms that were acting in Argentina by August 1999. The main finding is that operational parameters of formal PE/VC funds in Argentina are in line with international standards: (1) the expected return was around 25% to 35% yearly; (2) in spite of the relatively thin stock market in Argentina, the preferred exit route was either the IPO (69.6%) or the trade sale (60.9%), after a holding period of three to seven years; (3) similar to what happens in the US, only 1% to 2% of proposals analysed would turn into investment; (4) only 30.4% of firms surveyed preferred to invest in majority positions (i.e. 51% or more of voting shares); (5) virtually all firms (95.7%) were said to have strategic and operational involvement with their portfolio companies. The peculiarities of the Argentinean PE/VC industry were that most investments were directed to companies in late stage. Just a few firms were aiming at early stage financing, but only after an angel investor provided the initial financing. Also, given the lack of protection of minority investors under the local business law, several PE/VC firms avoided investing in a minority position. While this study gives a good overview of the Argentinean PE/VC industry in August 1999, it does not properly show how the PE/VC model was adjusted to operate in the local institutional environment. This is so because formal PE/ VC started in Argentina only after 1998 and a great part of the firms surveyed by the author were actually headquartered in the US and rather than focusing in Argentina, they were operating in Latin America as a whole. With respect to the Brazilian PE/VC industry, we are not aware of any other systematic data collection. Using secondary information, Checa, Leme, and Schreier (2001) provide a history of a nascent PE/VC industry in Brazil and draw a Porter’s five- force analysis to foresee how the industry would develop. Mariz and Savoia (2005) also focus on the prospects for the industry’s growth. Ribeiro and Almeida (2005) find evidence that the exit strategy has an influence on the whole investment cycle and that trade sale is the preferred exit strategy in Brazil (but in a period in which the IPO market was closed). Pavani (2003), based on interviews conducted with five managing organizations, describes the critical factors for the development of the industry. Using a sample of 20 VC-backed companies, Botelho, Harckbart, and Lange (2003) examine the value-adding role played by venture capitalists as board members. Our study is based on data supplied by all the 65 PE/VC managing organizations with offices in Brazil (a full census of the industry). The analysis focuses on the industry’s size and structure. We also relate the industry’s structure to economic and institutional factors and provide international comparison (especially with the US, Europe and other BRIC economies). For structural comparison, we refer mostly to Sahlman (1990) and Bottazzi, Da Rin, and Hellman (2004, 2005). Our results suggest that the size of the

114

L.L. Ribeiro and A.G. Carvalho

Brazilian PE/VC is restrained by the local economic and institutional idiosyncrasies prevalent in Brazil. International comparison between the Brazilian PE/VC industry with the US and Europe shows that, even though there are significant similarities with the US PE/VC model, the Brazilian model has been adapted to function in the idiosyncratic local environment. The main differences are related to the stage focus of investments, avoidance of leveraged transactions, lack of sector specialization, concentration of managing firms in the country’s financial district, and the forced use of arbitration for dispute settlement. The rest of this article is structured in the following manner: Section 2 describes the data; Section 3 describes the Brazilian institutional idiosyncrasies; Section 4 concerns the relative size of the Brazilian PE/VC industry. Section 5 presents an overview of the Brazilian PE/VC industry. Section 6 concludes.

Data sources

Our study is based on information provided by all of the 65 domestic and international PE/VC managing organizations 1 that were operating and had offices in Brazil 2 (a full census). As far as we know, there is no other history of a full census of PE/VC in Brazil or elsewhere. This study considered only funds/managing organizations that (1) invest through equity or quasi-equity (e.g. convertible debt); (2) target mostly non-listed companies; (3) actively monitor portfolio firms and exert influence on corporate strategy; (4) invest with exit perspective; and (5) have a team of professional managers. The data collection occurred around the end of 2004 and beginning of 2005 and answers were given for December 2004. While the 65 managing organizations were responsible for 94 investment funds, 3 information was gathered for only 90 of them. Our dataset is based on two extensive questionnaires, one organization-specific and another fund-specific, covering (1) structure of funds and management organization; (2) the investment process, from origination to exit; (3) governance between investors and management organizations; (4) governance between investment funds and portfolio companies; and (5) compensation to the managing organizations. The two questionnaires were crafted to keep a parallel with Sahlman (1990) who describes the US VC model in terms of those topics. In this paper we focus only on the first two topics (Carvalho, Ribeiro, and Furtado 2006, present descriptive statistics on all five topics).

Institutional environment and idiosyncrasies

Sahlman (1990) describes the structure and governance of venture capital organizations in the US as mechanisms to deal with information and incentive problems. The efficiency of particular mechanisms depends on institutions. In this way, local institutional idiosyncrasies may force changes to the US model of PE/VC, generating different models of PE/VC. This dynamic is explained by Leeds and Sunderland (2003) who observed that pioneers obtained mediocre returns in emerging markets and, because of this, PE/VC managers in these markets had to review their investment model in order to continue operations. The Brazilian institutional environment is notoriously different from the North American and the other BRIC economies. Table 1 depicts some of the economic and institutional variables that should affect the size and structure of the PE/VC industry for Brazil, the US and other BRICs. In general, Brazil has a large economy with severe wealth distribution issues and institutional shortcomings. Until 1994, the country experienced a

 

Venture Capital

 

115

Table 1.

Economic and institutional indicators.

 

Indicator

Description

Year

Brazil

Russia India

China

US

Income and consumption GDP per capita Total entrepreneurship activity Growth Growth Inflation Real interest rate Creditor protection Investor protection Enforcement of contracts Enforcement of contracts Legal environment Cost of capital

Richest 20% (%)

2003

62.1

46.6

43.3

50

45.8

PPP US$1.000

2005

7.9

9.8

3.0

5.4

38.3

Index (%)

2005

12.4

2.5

17.9

12.9

11.9

% of GDP % of GDP (%) (%) Index (0 to 4) Index (0 to 10) Time (days)

1990–2000

2.9

74.7

6

10.6

3.5

2000–2004

2

6.1

6.2

9.4

2.5

2004

7.6

11

2.6

3.9

2.7

2004

43.2

75.6

5.4

71.2

1.7

1

4

1

2005

5

3

4

4

7

2005

566

330

425

241

250

Cost (% of claim)

2005

15.5

20.3

43.1

25.5

7.5

Index (0 to 10) Index (0 to 10)

5.75

8

10

2005

1.8

4.29

5.33

5.13

7.37

hampers

business

Starting a business

Cost (%) (income/ capita) Time (days) Time for export (days) Time for import (days) Time (years) (cents/dollar)

2005

11.7

6.7

49.5

14.5

0.6

Starting a business Trading across borders

2005

152

36

89

41

5

2005

39

29

36

20

9

Trading across borders

2005

43

35

43

24

9

Closing a business Closing a business:

recovery rate Bureaucracy Corruption Paying taxes Total tax rate Informality Internet users Internet cost

2005

10

1.5

10

2.4

3

2005

0.2

48.4

12.5

35.2

68.2

Index (0 to 10) Index (0 to 10) Time (hours) % of profit % of GDP (per 1000 people) Cost for 20 hours (USD) Km (million) (%) Km (thousand)

2005

1.45

0.97

2.69

1.94

3.37

2005

3.7

2.4

2.9

3.2

7.6

2005

2600

256

264

584

325

2005

147.9

40.8

43.2

46.9

21.5

2000

39.8

46.1

23.1

13.1

8.8

2005

195

152.3

54.8

85.1

439.4

2003

28

10

8.7

10.1

14.9

Routes Paved routes Railroads Crimes hamper firm activity Labour market rigidity Firing workers

2003

1.7

0.5

3.8

1.8

6.3

2003

5.5

67.4

62.6

79.5

58.8

2004

30.4

85.5

63.2

61

141.9

%

of answers

2005

52.2

9.3

15.6

20

Index (0 to 100) Costs (weeks of wage) % of GDP Index (0 to 10)

2005

72

27

48

30

3

2005

165

17

79

90

8

Market capitalization Capital markets accessibility R&D expenditure Enrolment in higher education

2003

47.6

53.5

46.5

48.1

130.3

2005

5.8

3.25

6.68

3.68

8.51

% of GDP

2003

0.98

1.28

0.85

1.31

2.6

%

gross

2005

16.1

71

11.4

20.3

82.7

116

L.L. Ribeiro and A.G. Carvalho

vigorous inflation process that used to blur market competition. Since the stabilization, high interest rates have prevailed and growth rates have been mediocre when compared to other developing economies (e.g. India and China). This has translated into fewer opportunities for business creation and development, and a weak competitive position in terms of attracting foreign capital. The country features high entrepreneurial activity. However, very few entrepreneurs can be classified as ‘high-expectation entrepreneurs’ (Reynolds et al. 2003). The country presents high labour market rigidity even when compared to other BRICs economies (72 in a scale from zero to 100). Workers tend to stick to their jobs and entrepreneurs assume great liabilities when employing workers. Bureaucratic procedures are an endemic problem in Brazil. Usually it is worse than in other BRIC economies. This can be observed, for instance, through the difficulty to start and close a business, obtain construction licences, pay taxes, as well as export and import goods (Table 1). According to Kaufmann, Kraay, and Mastruzzi (2003) bureaucracy and corruption are strongly correlated. Delays and bribery impose direct and indirect costs for businesses. These costs tend to be higher for smaller enterprises, penalizing early-stage investments. The tax burden in Brazil is extremely heavy for companies. Tax procedures are complex and the government has difficulty enforcing correct tax payments. Consequently, 40% of the economy is informal. Companies with hidden fiscal and labour liabilities present increased risks for PE/VC managers and their investors. Their financial reports are not reliable and the monitoring process can be quite difficult to outside investors. Thus, PE/VC managers tend to overlook some industrial sectors or development stages in which informality prevails. Brazilian law is weak in terms of protecting creditors and investors. Besides that, the judicial system is quite inefficient at enforcing the law. Consequently, capital is expensive and very few companies have access to external capital. Since PE/VC portfolio firms’ access to leverage is very limited, buyouts (e.g. MBOs) are rare. In a bad legal environment, the complex contracts used in PE/VC deals are difficult to enforce. While legislators are working to solve the main regulatory issues, the real problem seems related to the judiciary, which should ultimately enforce laws and contracts. Fortunately, the recognition of arbitration has brought some relief, by allowing some disputes to be settled privately. Several PE/VC funds already stipulate arbitration in their bylaws and all funds established under the local security and exchange commission (CVM) regulation number 391, enacted in 2003, must indicate an arbitration court to solve potential conflicts between managing organizations and portfolio companies. This marks a sharp difference with the US, where parties decide whether or not to rely on arbitration or court decisions for dispute settlement. The existence of infrastructure is an important element for the PE/VC industry. If the right infrastructure is in place, businesses of all sizes can build on it, creating investment opportunities. Otherwise, building and maintaining infrastructure (e.g. routes, railways, ports, sanitation and energy) require large sums that could be provided by PE/VC and covered by government guaranties in public private partnerships (PPP) schemes, similar to the English private finance initiatives (PFI). Brazil has a relatively small stock market, suggesting the existence of high direct and indirect costs for raising capital directly from investors. The stock market has taken important steps to increase its quality and accessibility (see Carvalho and Pennacchi 2007). In the period 2004–2005 the market was buoyant. The 2004 offerings represented 1.5% of GDP, while contemporaneous US IPOs raised 1.0% of GDP. According to Gompers and Lerner (2002), healthy stock markets are essential for PE/VC investment funds to exit their investments while providing the entrepreneur with the option to regain control.

Venture Capital

117

The relative size of the Brazilian PE/VC industry

Even though the first PE/VC organizations were created in Brazil in the early 1980s, this industry did not reach significance until the mid 1990s after the Brazilian currency stabilization. By the end of 2004 this industry had accumulated US$5.07 billion in capital under management (i.e. capital already invested plus capital available for new investments), representing 0.84% of GDP. Table 2 presents the evolution of the committed capital between 1999 and 2004. Fundraising was low in the 2001 to 2003 period, but resumed in 2004 when it reached US$473 million. Compared to the size of the economy, the fundraising figure is modest, only 0.08% of GDP in 2004. In some developed countries it can reach more than 1.0% of the GDP (OECD 2002). However, in Brazil it has never been greater than 0.2%.

Table 2.

Capital flows in the Brazilian PE/VC industry and exit activity.

Capital (US$ million)

1999

2000

2001

2002

2003

2004

Avg.

Under management

3583

4778

4846

4553

4577

5071

4568

[0.67]

[0.79]

[0.95]

[0.99]

[0.90]

[0.84]

[0.86]

Raised

1.212

290

260

159

473

479

[0.20]

[0.06]

[0.06]

[0.03]

[0.08]

[0.09]

Invested

456

379

281

261

256

253

314

[0.08]

[0.06]

[0.05]

[0.06]

[0.05]

[0.04]

[0.06]

Divested

203

282

65

41

52

261

151

[0.04]

[0.05]

[0.01]

[0.01]

[0.01]

[0.04]

[0.03]

Exit mechanisms (Number of deals)

1999

2000

2001

2002

2003

2004

Total

IPO

9

9

(29.0)

(5.6)

Trade sale

4

13

8

6

6

15

52

(57.1)

(39.4)

(21.6)

(24.0)

(27.3)

(48.4)

(32.1)

Secondary sale

16

1

1

4

2

24

(48.5)

(27.0)

(4.0)

(18.2)

(6.5)

(14.8)

Buyback

3

1

8

3

9

8

32

(42.9)

(3.0)

(21.6)

(12.0)

(40.9)

(25.8)

(19.6)

Write-off/down

3

20

15

3

4

45

(9.1)

(54.1)

(60.0)

(13.6)

(12.9)

(27.8)

Total number of exits Partial exits

7

33

37

25

22

38

162

1

3

6

5

2

4

21

Notes: Aggregated values of capital under management, funds raised, investment and exits for the 65 firms. Funds raised were calculated based on the increase of capital in each firm from one year to the next. Since the series starts in 1999, this year’s figure is unavailable. Figures in brackets are percentages of annual GDP. GDP figures obtained from the Brazilian Central Bank. Investment figures are underestimated since eight of the responding firms did not provide this information. Capital under management is more precise, as only two small-size firms did not provide this information. Exits are measured in number of transactions made annually, by mechanism. Full exit means sale of all the stock owned by the PE/VC fund in a specific firm, or a complete liquidation of its assets. Where exit took place by means of several partial exits, the last transaction is regarded as a full exit and all prior ones are classified as partial exits, except for IPOs, since the listing represents a liquidity event. IPO: initial public offering. Trade sale: sale of all the stock to a strategic buyer, generally an industrial group interested in the vertical or horizontal integration of the target firm. Secondary sale: means the sale of shares to a temporary investor. Buyback: means the stock repurchase by the business owner or entrepreneur. Write-off/down means full liquidation of the firm’s asset and implies termination of operations. Partial exits: includes secondary sales, buybacks and amortization of convertible debt. Average divestment is the value of divestments to number of full and partial exits (except write-offs/down). Figures in parentheses stand for percentages of the total.

118

L.L. Ribeiro and A.G. Carvalho

Table 2 also shows that the investment rate has been less volatile than capital commitment. It reached a maximum of US$456 million in 1999 (0.08% of GDP). Since then, it has stabilized between US$200 million to US$300 million annually. Investments made by the Brazilian PE/VC industry average 0.06% of the country’s GDP. On the other hand, divestments increased significantly over time, reaching US$261 million in 2004 (0.04% of GDP). 2004 is the first year in which exit proceedings surpassed investment amounts. This reveals a very positive exit window, as experienced in 1999 and 2000 during the Internet bubble. A comparison with other developing economies shows that Brazil leads Latin America. However, its numbers are modest when compared to East Europe and Asia: in 2004 Brazilian PE/VC organizations raised US$473 million, representing 0.08% of GDP. In this same year, in terms of GDP, Chile raised 0.07%, and Argentina and Mexico nearly 0.05% (WorldTrade Executive 2005). Some East European countries have raised more capital (EVCA 2005), especially Poland (0.16% of GDP) and Hungary (0.14%). Some other European countries have lagged behind Brazil (e.g. the Slovak Republic at 0.02% and the Czech Republic at 0.01%). While fundraising figures were unavailable for Asian countries, 2004 investment values for China, South Korea and India were at 0.10%, 0.37% and 0.13%, respectively, well above Brazil.

An overview of the Brazilian PE/VC industry

This section offers an overview of the Brazilian PE/VC industry and also provides international comparison.

Organizational structure

In 2004 the Brazilian PE/VC industry was composed of 65 managing organizations with offices in the country. Most were independent: 42 representing 64.5% of the total number of organizations and 53.6% of the total capital committed (Table 3). There were 17 organizations affiliated to financial institutions, representing 26.2% of the number of organizations and managing 36.8% of that capital. There were only four corporate ventures with offices in Brazil, managing 6.6% of capital. Finally, there were two institutions with governmental affiliation managing only 3% of the total capital. This distribution puts Brazil on a par with Europe, where 66% of the 750 firms surveyed by Bottazzi, Da Rin, and Hellman (2004, 2005) were independent. However, captives of financial institutions are less common in Europe (representing only 19% of the organizations), while corporate venture and government-owned firms are more numerous (representing 8% and 7%, respectively). One should note that even though the role of the Brazilian government as PE/VC manager in terms of capital committed is discrete, it is significant in terms of firms funded: 15% of the number of PE/VC-backed companies. Moreover, it also acts as investor in several independently run funds. Even though PE/VC has its roots in the US, Brazilian organizations make up the majority of the industry: 47 organizations, representing 72.3% of the total of orga- nizations and 59.7% of the total capital under management in the country (Table 3). The US comes as the second most common origin, with 10 organizations, representing 15.4% of the total of organizations and 34.7% of the capital. Altogether, these two groups manage 94.4% of the capital committed. This reveals the close ties between the US and the Brazilian PE/VC markets, with possible implications for investment style (see Kaplan, Martel, and Stro¨mberg 2003).

 

Venture Capital

119

Table 3.

Survey selected variables.

 

Affiliation

Independent

Organizational structure Financial institution 26.2 (36.8) US 15.4 (34.7) Inactive/Active

Corporate

Government

64.5

(53.6)

6.2 (6.6)

3.1 (3.0)

Origin

Brazil

Europe

Other

72.2

(59.7)

6.2 (1.8)

6.2 (3.8)

Investment

Inactive/Inactive

Active/Active

Inactive/

activity

Undecided

 

10.8

(n.a.)

10.8 (7.9) Sa˜o Paulo (Faria Lima/Berrini) 40.9 (66.8) 10 biggest (68.6) [348]

76.9 (80.3) Rio de Janeiro

1.5 (n.a.)

Geographic

Sa˜o Paulo (Total)

Other

concentration

 
 

67.9

(79.9)

24.6 (18.7)

7.5 (1.4)

Capital

5 biggest

15 biggest

50 smallest

concentration

(50.5) [513]

(79.9) [270]

(20.1) [23]

Job title

Managing partner

Human capital Manager 87 (19.0) MBA/LLM 123 (57.7) CEO/Entrep./Angel 74 (35.0) x 15

Analyst 135 (18.1) Specialization 31 (14.6) Consulting 39 (18.5) x 10 38.5 (49.0)

Other 108 (35.0) College or less 51 (23.9) Other 23 (10.9) x 5 75.4 (92.7)

 

128

(27.9)

Education

Ph.D.

8 (3.8)

Experience

Financial

75

(35.6)

Years of

x 20

experience

12.3

(21.3)

29.2 (37.4)

 

Portfolio companies

Investment type

Independent

Syndicated (lead)

Syndicated non-lead

223

(70.8)

42 (13.3)

50 (15.9)

Geographic

Southeast (Total)

Southeast

South

Other

distribution

(Sa˜o Paulo)

 

171

(65.0)

100 (38.0)

67 (25.5)

27 (9.5)

Industry

Software/Internet

Industrial products

Biotech/Pharma

Other

68

(22.1)

23 (8.7)

13 (4.9)

161 (60.8)

Stage

Seed & start-up

Expansion

Later stage

Other

108

(41.1)

98 (37.3)

42 (16.0)

17 (5.7)

 

Investors

Investor

Pension funds

Corporations

Banks

Other

category

17.2

{24.0}

15.9 {43.0}

10.3 {78.0}

56.6 {83.5}

Notes: In Organization structure, numbers represent percentage of firms and capital under management (in parentheses), except for Capital concentration, where the numbers in brackets mean the average fund size. Activity refers to the actual/intended investment activity. In Human capital, figures represent the number of professionals or managers and percentage of the total (in parentheses). Job title presents statistics on all professionals while other variables refer to managers only. In Experience, the job as CEO of a financial institution was categorized as financial. Years of experience refer to the number of firms with at least one manager with the accumulated experience, and the percentage of capital under management at these firms (in parentheses). In Portfolio companies, numbers presented in Investment type refer to deals. All other variables consider only invested companies individually. In Geographic distribution, Industry and Stage, the two portfolio companies for which we have no data were considered as Other. In Investors, the numbers refer to the percentage of capital under management and the percentage of foreign capital (in braces). Unidentified sources of capital were included in Other.

Out of the 65 firms examined, 50, with US$4.07 billion in capital committed (80.3% of the industry’s capital), were actively investing by December 2004. The other 15 were inactive and only managed their existing portfolio. However, seven of these 15, with US$0.4 billion in capital (7.9%), stated their intention to resume investment activity in Brazil. The low abandonment rate reveals a maturing industry and suggests that necessary conditions are already in place to allow adequate PE/VC investing and exiting.

120

L.L. Ribeiro and A.G. Carvalho

In terms of regional distribution, the industry is highly concentrated: PE/VC organizations with headquarters in the States of Sao Paulo and Rio de Janeiro represent 98.6% of the capital committed to PE/VC (Table 3). Moreover, 66.8% of the whole capital is managed by no more than 27 organizations located in Faria Lima and Berrini avenues (two avenues in the financial district of Sao Paulo). Regional concentration is typical of the PE/VC industry. For instance, in the US, technology clusters such as Silicon Valley and Route 128 receive 34% and 15% of all venture capital investment, respectively (PWC, Venture Economics and NVCA 2005). In India, the industry is mostly concentrated in Mumbai (financial cluster), with 31 organizations, followed by New Delhi and Bangalore with 10 and 8 organizations respectively (Dossani and Kenney 2002). The clustering of Brazilian PE/VC firms seems related to the geographic concentration of service providers to assist in closing deals, as well as potential partners and acquirers for portfolio companies. As Ribeiro and Almeida (2005) show, Brazilian PE/VC managers tend to spend considerable amounts of time networking with potential acquirers and analysing their strategies, besides interacting with their own portfolio companies. The capital is also concentrated within a few managing organizations: the 10 largest organizations manage 68.6% of all capital in the industry. On the opposite side, the 50 smallest organizations manage 20.1% of the capital. Data from the North American Venture Capital Association (NVCA 2005) suggests that capital concentration is similar in the US, but on a different scale. Among the 476 NVCA members, 62 have more than US$1 billion under management (and up to US$6.5 billion). The smallest 247 firms have less than US$100 million each.

Human capital

The profile of PE/VC managers is a key element in the analysis of a PE/VC industry, as it influences the type of company that receives funding and the intensity of monitoring undertaken (Bottazzi, Da Rin, and Hellman 2004; Cornelius 2005). In terms of staff, the Brazilian PE/VC industry is quite parsimonious (Table 3). The 65 managing organizations had only 458 professionals divided into 215 managers 4 and 243 staff personnel (e.g. analysts). Sixty per cent of managers are partners in their firms, and thus have long-term commitments with the organization. Brazilian PE/VC managers are highly qualified: 76.1% have graduate degrees (3.8% are PhDs, 57.7% are MBAs or LLMs). This number is similar to what Bottazzi, Da Rin, and Hellman (2004, 2005) found for Europe: two-thirds of European PE/VC managers have graduate degrees. However, the prevalence of Doctorates within Europe is much higher at 16%. While 35.6% of Brazilian PE/VC managers have their most relevant professional experience in the financial sector (e.g. investment banking), more than half (53.5%) have amassed experience more closely related to the formation and execution of business strategies (e.g. CEOs, entrepreneurs, consultants and angel investors). Only 10.9% of them come from the government, academia or law firms. Cornelius (2005) shows that the share of non-financial executives acting as PE/VC managers varies across countries. Bottazzi, Da Rin, and Hellman (2004) find that non-financial executives prevail in the US, while financial sector executives are predominant in Europe (especially among the new entrants). It is important to highlight that 25 firms, with 49.0% of the committed capital, have at least one manager with 10 or more years of PE/VC experience. This number reaches 92.7% when we consider tenure of five years or more (Table 3). Generally speaking, the experience of Brazilian PE/VC managers is similar to what Sahlman (1990) found in the

Venture Capital

121

US in the early 1990s: 68% of independent firms had at least one manager with five or more years of PE/VC experience and one-third (with 60% of the capital) had at least one manager with more than 10 years of experience.

Portfolio companies

In December 2004, 77 out of the 90 investment funds managed by the 65 PE/VC organi- zations had an aggregated portfolio of 265 invested companies. The other 13 funds for which we gathered information were still originating their first deal. Because of syndica- tions, these 265 companies represented a total of 315 deals. From the total, 233 companies had only one PE/VC investor, while the remaining 32 had between two and five co-investors (Table 3). Consequently, less than 30% of deals in Brazil were syndicated (92/315), while the comparable figure can reach 50% in Europe (Bottazzi, Da Rin, and Hellman 2004). In fact, two-thirds of European organizations have already taken part in syndications. The comparison suggests that PE/VC organizations in Brazil cooperate little. Possibly, fierce competition for deals and reputation building promotes independent action. Owing to the geographical concentration of PE/VC organizations in Sao Paulo and Rio de Janeiro, 65% of portfolio companies are located in the Southeast region (Table 3), which encompasses the States of Sao Paulo, Rio de Janeiro, Minas Gerais, and Espirito Santo. In fact, almost 90% of portfolio companies are located in the cities where the PE/VC firms have offices. While IT and electronics (especially software) are preferred investment sectors (Table 3), the Brazilian PE/VC portfolio is fairly dispersed across industrial sectors, covering both high technology and traditional industries. In 19 out of 29 countries compared by the OECD (2005), at least 40% of investments go to IT, telecom, biotechnology and healthcare. In Ireland, Canada and the US, these sectors receive more than 70% of PE/VC investments. On the opposite side of the spectrum, PE/VC firms in Spain, the Slovak Republic, Portugal and the Netherlands have less than 25% of their investments in these sectors. While we have no data on the amount invested in each sector in Brazil, we compare the number of portfolio companies in different sectors with Europe. The analysis shows that 30% of European PE/VC-backed companies are in the software and Internet sectors (Bottazzi, Da Rin, and Hellman 2004). In Brazil, 22.1% are in these sectors. Industrial products represent 11% of the European portfolio and 8.7% in Brazil. The main difference between European and Brazilian portfolios is in the biotech and pharmaceutical industry: these sectors constitute 14% of the European portfolio, but only 4.9% of the Brazilian PE/VC- backed firms. According to Sahlman (1990), PE/VC firms tend to specialize according to industrial sectors. However, the three sectors that receive the most deals in Brazil represent only 45% of the portfolio. This number reaches 55% in Europe, suggesting that PE/VC managers in Brazil take a more generalist approach towards industry sector specialization. Sahlman (1990) describes venture capital as a mechanism designed to finance companies in the early stages of development, when little or no track record has been built, few tangible assets are in place, and negative cash flows prevail. Depending on their growth potential, firms in more mature stages can also be considered for PE/VC investments. In Brazil, 41.1% of portfolio companies received their first PE/VC injections in the form of seed capital (13.7%) or start-up capital (27.4%), both considered as early- stage investments. However, the majority of the investments (37.3%) were in expansion deals. Later-stage portfolio companies represented 16% of investments made. Other stages, such as acquisition finance, manager buyout/in, bridge financing and turnaround accounted for only 5.7% of the deals. According to Bottazzi, Da Rin, and Hellman (2004),

122

L.L. Ribeiro and A.G. Carvalho

the European PE/VC industry is more reliant on early-stage deals, as 42% of PE/VC- backed companies were start-ups and 17% received seed capital. In the US, PE/VC is also inclined to finance early-stage companies. In a recent survey, NVCA (2005) discovered that their members were expecting 51.5% of deals to be made in early-stage companies. The focus on advanced stages is similar to what Pereiro (2001) found for Argentina.

Investors

Pension funds are the main investors of PE/VC in Brazil, representing 17.2% of the capital committed (Table 3). When the roll of investors is broken into international and domestic, one observes that 78% of the domestic commitment comes from pension funds (Table 3). Corporations are the second main investors with 15.9% of the commitments (43% of which is of foreign origin). Banks come next with 10.3% of the commitments (most of which come from international banks). The Brazilian government, through its several arms, 5 has fostered the PE/VC industry by investing in 30 different funds (its whole contribution amounts to 6.4% of the capital committed). A similar role has been played by multilateral agencies 6 that contributed 3.3% of the industry’s capital by investing in 20 different PE/VC funds. The other relevant investors are fund of funds, trusts, endowments, wealthy individuals, international PE/VC funds, insurance firms, and partners. Megginson (2004) reports that pension funds are the main investor in the US PE/VC industry, while the European PE/VC industry relies more on banks, insurance firms and government agencies. According to Sahlman (1990), managing partners in the US usually invest 1% of the funds in order to align their interests with investors. In Brazil, the management team is responsible for an average 5% of the funds. However, this share can reach 14.5% in the 27 funds in which both outside investors and managing partners are shareholders. The difference between the US and Brazil suggests that in a maturing PE/VC industry, in which managers have not yet amassed a solid track record, and where enforcement of rights are weaker, managers may have to contribute with more resources in order to attract investors to their funds.

Exits

The history of investment exiting by the Brazilian PE/VC industry between 1999 and 2004 is reported in Table 2. As one can see, until 2004 IPOs were not used as an exit mechanism for PE/VC investments. Most exits performed in Brazil between 1999 and 2004 were realized through trade sales and buybacks. The divestment reached its peak in 2000 with US$282 million. The years of 2000 and 2001 were intense in write-offs (most likely due to the investment cycle of the Internet bubble). The lack of IPOs until 2004 was not specific to the PE/VC sector because there were practically no IPOs in Brazil (Table 4). In 2004 and 2005, 16 Brazilian companies went through IPOs at the local stock exchange (BOVESPA), raising approximately BR$10 billion (nearly US$3.6 billion). Remarkably, nine issuers 7 had received PE/VC capital. These nine IPOs were responsible for more than 50% of the funds raised. This is an important signal that the Brazilian PE/VC industry has the capacity to perform the whole investment cycle. In the US, IPOs tend to occur more often than trade sales, while European PE/VC firms usually have 30% of exits performed through trade sales and only 5% through the stock market. The recent trend in the Brazilian IPO market may lead exits in Brazil to be more IPO oriented, with positive consequences to the whole PE/VC investment cycle.

Venture Capital

123

Table 4.

IPOs in Brazil.

Year

Number of IPOs

Amount issued (R$ mil.)

1995

2

185

1996

0

0

1997

1

100

1998

0

0

1999

1

434

2000

1

33

2001

0

0

2002

1

351

2003

0

0

2004

7

4803

2005

9

5348

Source: BOVESPA.

Conclusion

This paper offers a first description of the Brazilian PE/VC industry in terms of size and structure. It also compares the Brazilian PE/VC industry with that of the US, Europe, and other developing countries. Most specifically, this study identifies differences and similarities between the US and the Brazilian PE/VC models. Similarities were expected since PE/VC was imported from the US and most managers have close ties with their US peers. Some differences were also expected because of the specificities of the Brazilian institutional environment. In terms of describing PE/VC in Brazil, some of our main results are:

(1) The Brazilian PE/VC industry is relatively small compared to the size of the Brazilian economy. Nevertheless, the industry has proven economically relevant, bringing several companies to the stock markets. (2) The industry is concentrated: geographically (around Sao Paulo and Rio de Janeiro) and in terms of capital committed (just a few organizations representing the bulk of capital committed). (3) The Brazilian PE/VC portfolio is fairly dispersed across industrial sectors. (4) The managing organizations are quite parsimonious in terms of personnel and managers are highly educated. (5) Trade sales have been the main mechanism for exiting investments, but a recent trend indicates that in the near future IPOs will become a major exit mechanism. (6) The majority of the industry is composed of independent organizations. (7) The industry has a modest but important participation in government and multilateral organizations.

Comparing the Brazilian PE/VC industry and the North American one, we find that the main similarities are:

(1) The managing organizations are mainly independent and manage capital that comes mostly from institutional investors. (2) Capital is heavily concentrated regionally as well as in few organizations. (3) Investments are made within a close geographical distance from firms.

124

L.L. Ribeiro and A.G. Carvalho

(4) Software and IT are preferred sectors; and (5) Managers are highly qualified.

The main differences are that for Brazil:

(1) In line with a lack of high-expectation entrepreneurship, there is a tendency to invest in more advanced stages of corporate development. (2) Since credit is scarce, few LBOs take place. (3) Low levels of sector specialization (i.e. PE/VC investing in different sectors) suggest few opportunities within each sector. (4) The concentration of firms in the Sao Paulo financial and business district suggests a quest for commercial partners and strategic buyers for portfolio companies; and (5) Brazilian PE/VC regulation recognizes the inefficiency of the legal system and forces the use of arbitration.

In the past decade many important developments have improved the economic and institutional environment for business in Brazil. Some of these developments should contribute to the Brazilian PE/VC industry development. Among them we list:

(1) Pension funds are now allowed to invest up to 20% of their assets in PE/VC. They have quickly become the major PE/VC investors in Brazil. As private pension schemes become more popular, their share of committed capital should increase. (2) The resurgence of the market for IPOs showed that the stock market is a viable and profitable exit mechanism. As the literature shows, IPOs encourage more fundraising. (3) Interest rates are declining and are expected to further decline against short-term rates, making PE/VC more attractive to investors and reducing the cost of credit, thus encouraging leveraged buyouts. (4) Brazil is on the verge of obtaining investment grade; this change in status will possibly bring investments from several international investors that are currently impeded from investing in the country. (5) The PE/VC regulation is sound and protective of institutional investors and individuals. (6) The Brazilian legal system has recognized arbitration as a mechanism to solve conflicts. (7) The stock market has established mechanisms to differentiate companies with good corporate governance practices and promote SME listings. (8) The lack of infrastructure, transportation services and security continues to represent long-term investment opportunities. (9) The new bankruptcy law is expected to decrease procedural time, thus facilitating turnarounds. (10) Tax authorities are now considering PE/VC funds as closed-end funds for tax purposes. (11) Capital gains tax was reduced from 22% to 15%, with full exemption to foreign investors. (12) The new corporate law increased investor protection. Nonetheless, the business environment could still be significantly improved with reforms such as simplification of tax procedures, reduction of the tax burden on formal companies, and enforcement of rights.

Venture Capital

125

Acknowledgements

This project was made possible with the full support of FGV Center for PE/VC Research and its sponsors. The authors acknowledge the important contribution given by Professor Cla´udio Vilar Furtado and the institutional support for data collection provided by the Brazilian Private Equity and Venture Capital Association (ABVCAP), Sao Paulo Stock Exchanges (BOVESPA), the Emerging Markets Private Equity Association (EMPEA), Brazilian Ministry of Science and Technology’s Financing Arm (Finep), Endeavor, and the International Finance Corporation (IFC). Ribeiro received grants from the National Council for Scientific and Technological Development (CNPq) and the National Association of Investment Banks (ANBID). Carvalho received grants from the State of Sa˜o Paulo Research Foundation (FAPESP) (Project 03/08825-7), CNPq (Process 477572/2003-0), GVpesquisa and GVcepe. Comments from Andre´ Aquino, Rodrigo Bueno, Tiago de Melo Cruz, Joubert Castro Filho, Janine Gonc¸alves, Elizabeth Johnson, Isak Kruglianskas, Roger Leeds, Keith Nelson, Fernando Ruiz, David Stolin, Isaias Sznifer and Vitaly Vorobeychik are gratefully acknowledged. Gisele Gaia and Fa´bio Barreto provided invaluable assistance. An earlier version of this paper has been presented at the 2006 Babson College Entrepreneurship Research Conference (BCERC). It derives from Ribeiro’s MSc. thesis: O Modelo Brasileiro de Private Equity e Venture Capital.

Notes

1. In fact we also collected data for six PIPE organizations (organizations that make private investment in public equity), but for the sake of international comparison, they had to be excluded from the sample, leaving us with 65 organizations.

2. To identify the population of managing organizations in Brazil, we relied on the following sources: (1) Endeavor’s guide; (2) Brazilian Venture Capital Association (ABVCAP) members’ list; (3) list of funds regulated by Comissa˜o de Valores Imobilia´rios (CVM), the local securities and exchanges commission; (4) IFC’s annual report; (5) Ministry of Science and Technology’s (FINEP) internal address book; (6) list of firms in Johnson and Pease (2001); and (7) analysis of news in the media.

3. In Brazil, PE/VC funds can take different legal forms such as holding companies, limited partnerships, investment funds regulated by the local security and exchanges commission, etc. Also, a PE/VC organization can manage one or more PE/VC funds.

4. Managers are those with decision power over at least one phase of the PE/VC cycle.

5. FINEP, BNDES, SEBRAE, Banco do Nordeste, etc.

6. Inter-American Development Bank, International Finance Corporation, Overseas Private Investment Corporation, the Netherlands Development Finance Company, etc.

7. Namely: Natura (cosmetics), Gol (low cost/low fare airliner), ALL (railways and logistics), DASA (laboratorial services), CPFL (power generation and distribution), TAM (airliner), Submarino.com (internet retailer), Localiza (car rental) and UOL (Internet service provider).

References

Botelho, A., G. Harckbart, and J. Lange. 2003. Do Brazilian venture capitalists add value to their portfolio companies? In Frontiers of entrepreneurship research, ed. W.D. Bygrave, http://www. babson.edu/entrep/fer/BABSON2003/III/III-S2/II-S2.html. Wellesley, MA: Babson College. Bottazzi, L., M. Da Rin, and T. Hellman. 2004. The changing face of the European venture capital industry: Facts and analysis. Journal of Private Equity 8, no. 1: 26–53. ———. 2005. What role of legal systems in financial intermediation? Theory and evidence. Working Paper, European Corporate Governance Institute. Bruton, G., D. Ahlstrom, and K. Yeh. 2004. Understanding venture capital in East Asia: The impact of institutions on the industry today and tomorrow. Journal of World Business 39, no. 1: 72–88. Carvalho, A.G., and G. Pennacchi. 2007. Can a stock exchange improve corporate behavior? Evidence from firms’ migration to premium listings in Brazil. Working Paper, Social Science Research Network. http://ssrn.com/abstract ¼ 678282 (accessed December 2005). Carvalho, A.G., L. Ribeiro, and C. Furtado. 2006. Private equity and venture capital in Brazil: The first census. Sao Paulo: Editora Saraiva. Checa, G., E. Leme, and C. Schreier. 2001. The venture capital and private equity industry in Brazil. Journal of Private Equity 4, no. 4: 46–67.

126

L.L. Ribeiro and A.G. Carvalho

Cornelius, B. 2005. The institutionalisation of venture capital. Technovation 25: 599–608. Cumming, D., and J. MacIntosh. 2002. A law and finance analysis of venture capital exits in emerging markets. Working Paper, University of Alberta. Cumming, D., D. Schmidt, and U. Walz. 2004. Legality and venture governance around the world. Working Paper, Center for Financial Studies, CFS Working Paper Series, no. 2004/17. Dossani, R., and M. Kenney. 2002. Creating an environment for venture capital in India. World Development 30, no. 2: 227–53. EVCA. 2005. Final activity figures for 2004. Brussels, Belgium: European Venture Capital Association. Global Competitiveness Yearbook (online database). 2005. Lausanne, Switzerland: IMD. http:// www.imd.ch/research/publications/wcy/wcy_online.cfm (accessed December 2005). Gompers, P., and J. Lerner. 1998. What drives venture capital fundraising? Brookings Papers on Economic Activity: Microeconomics: 149–204. ———. 2002. The venture capital cycle. 2002. Cambridge, MA: MIT Press. Jeng, L., and P. Wells. 2000. The determinants of venture capital funding: Evidence across countries. Journal of Corporate Finance 6, no. 3: 241–89. Johnson, H., and R. Pease. 2001. Latin American private equity review & outlook. Wellesley, MA:

Asset Alternatives. Kaplan, S., F. Martel, and P. Stro¨mberg. 2003. How do legal differences and learning affect financial contracts? Working Paper, National Bureau of Economic Research. Kaufmann, D., A. Kraay, and M. Mastruzzi. 2003. Governance matters III: Governance indicators for 1996–2002. Washington, DC: World Bank Policy Research Report Series. Kuemmerle, W. 2001. Comparing catalysts of change: Evolution and institutional differences in the venture capital industry in the US, Japan and Germany. In Research on technological innovation, management and policy, ed. R. Burgelman and H. Chesbrough, 227–61. Greenwich, CT: JAI Press. Lambsdorff, J. 2005. Corruption perception index. Transparency International and University of Passau. Leeds, R., and J. Sunderland. 2003. Private equity investing in emerging markets. Journal of Applied Corporate Finance 15, no. 4: 8–16. Lerner, J., and A. Schoar. 2005. Does legal enforcement affect financial transactions? The contractual channel in private equity. Quarterly Journal of Economics 120, no. 1: 223–46. Mariz, F., and J. Savoia. 2005. Private equity in Brazil: A comparative perspective. Journal of Private Equity 9, no. 1: 74–84. Megginson, W. 2004. Toward a global model of venture capital? Journal of Applied Corporate Finance 16, no. 1: 8–26. Minniti, M., W.D. Bygrave, and E. Autio. 2006. Global entrepreneurship monitor 2005 executive report. Babson Park, MA: Babson College and London: London Business School. NVCA. 2005. NVCA year in review. Arlington, VA. OECD. 2002. Venture capital: Trends and policy recommendations. Paris: OECD. ———. 2005. Developments in venture capital and private equity since the end of the ‘tech bubble’. 2005. Paris: OECD. Pavani, C. 2003. O Capital de Risco no Brasil: Conceito, Evoluc¸a˜o e Perspectivas. Rio de Janeiro, RJ, E-papers. Pereiro, L. 2001. Tango and cash: Entrepreneurial finance and venture capital in Argentina. Venture Capital 3, no. 4: 291–308. PWC (PriceWaterhouseCoopers), Venture Economics and NVCA. 2005. Moneytree survey: Full year and Q4 2004 results – US report, http://www.pwcmoneytree.com Reynolds, P., M. Hay, W. Bygrave, S. Camp, and E. Autio. 2003. Global entrepreneurship monitor:

2003 executive report. London: Babson College and London Business School. Ribeiro, L., and M. Almeida. 2005. Estrate´gia de Saı´da em Capital de Risco. Revista de Administrac¸ a˜o da Universidade de Sa˜o Paulo (RAUSP) 40, no. 1: 55–67. Romain, A., and B. Van Pottelsberghe. 2004. The determinants of venture capital: Additional evidence. Deutsche Bundesbank, Studies of the Economic Research Centre, 19. Sahlman, W. 1990. The structure and governance of venture-capital organizations. Journal of Financial Economics 27, no. 2: 473–521. World Bank Development Indicators (online database). 2005. Washington, DC: World Bank. http:// www.worldbank.org/data/ (accessed December 2005). World Bank Doing Business Survey (online database). 2005. Washington, DC: World Bank. http:// www.worldbank.org/data/ (accessed December 2005). WorldTrade Executive. 2005. Venture equity Latin America 2004 year end report. Concord, MA.