The Role of Institutional Investors as Providers of Long-Term Financing in Brazil

Abstract

We analyze the role of institutional investors as providers of long-term capital resources in the Brazilian capital market. Since there is virtually only one provider of long-term financing in Brazil, BNDES - the National Bank for Economic and Social Development, and the fact that the domestic stock market is relatively small, Brazilian-based firms find themselves in dire straits when they need to raise capital. Since institutional investors are, in general, keener to invest on a longer-term basis than individual or speculative investors, they play a crucial role in the development of the country's private sector. However, we point out three major caveats hampering the institutional investor's role as suppliers of capital to the private sector: a) the extant regulatory restrictions on institutional investors' portfolios, which according to some empirical evidence leads to portfolios that might be situated off their efficient frontiers; b) the crowding-out effect put forth by government bonds against private securities (stocks and bonds), which inhibits the domestic private capital market; c) the political influence, including corruption, wielded by government-related political parties or politicians on pension funds of state-owned firms or public agencies, which leads to spurious economic decisions. Although institutional investor's assets have grown remarkably during the recent past, it is unlikely that the country will be able to tackle these problems in the foreseeable future.