Venture capital (commonly known as capital de riesgo in Chile) relates to the industry focused on convertible debt financing of early-stage companies with accelerated growth potential that compensates investors for the increased investment risk. As for private equity itself, stands for the financing of growing companies through minority participation or a change in control or transfer of ownership. Private equity funds target companies that can be exploited through better management or transformation, with the expectation of a higher return.
It is also often said that private equity is also the gender that comprises different forms of financing, including seed capital and angel investors – when it comes to more limited amounts. In both cases, the investor always has in mind its return through the exit – when the company is finally sold or initiates its IPO, whether it is in Chile or abroad, depending on market or tax considerations.
The venture capital and private equity industry is one of the fastest expanding industries in Chile, driven by the latest regulatory changes in this area, which have allowed it to have a better regulatory framework and a highly regulated and sophisticated ecosystem.
The following investor profiles are distinguished in the industry:
FFF: Family, Friends and fools. Many successful ventures begin, due to credit constraints, raising capital through family or friends.
Angel investor: the well-informed, interested ones in innovation and technology on early-stage companies.
Venture capital companies: these are dedicated funds in permanent, professional search of new investments. This particular category of investor in Chile is currently experiencing a strong growth.
Finally, there are institutional investors: banks, insurance companies, pension funds (AFPs) – all of them with specialized teams. It is a category that is still not very commonly observed in Chile.
As for the amounts, seed capital operates on early stages, up to 50,000 dollars. Angel investors, at a more specialized level, reach amounts between 50 and 500 thousand USD. There are even search funds in more developed markets betting on many small investments. Venture capital investments range from 500 thousand USD onwards to approximately 10 million USD. Finally, in private equity itself, the 10 million mark is often exceeded. In larger amounts, there is the area of public financing: stock market opening, bond issuance and IPOs.
The first is through the contribution of capital, which is the traditional structure that operates in Chilean law, materializing the income to the property through an amendment to the articles of association – where restrictions are also usually established by means of shareholders’ agreements that protect the different actors involved. The second way is the entry through convertible debt, whose most relevant characteristic in comparison to conventional debt is the discount rate – between 15% and 20% of the valuation set by the market – which is obtained if new actors enter society. This debt is legally materialized through a contrato de mutuo (loan agreement) and the subscription of a promissory note.
In Chile, despite its low visibility, it is a highly regulated industry where its players are always under regulatory surveillance and scrutiny.
In the area of venture capital, there are Private Investment Fund Administrators (FIPs), closed stock companies without legal personality or object of their own, duly registered at the Financial Market Commission (CMF), formerly SVS, and to whom they report. Those who are under them and the holders of the rights at all times are the Private Investment Funds, which have a maximum of 49 contributors and through them the investment in target companies.
In the area of private equity, there is a more sophisticated structure. The place of the FIP Administrators is taken by the General Fund Administrators (AGF), special companies with the sole purpose of managing investment funds and portfolios. These companies apply to the CMF for authorization to exist, must have a minimum net worth of 10,000 UF – approximately USD 424,000 – and are subject to the regulations applicable to open stock companies and their reporting obligations.
Investment funds, whether public or private, are not subject to income tax in Chile.
Chile seeks to position itself as a regional platform for foreign fund investments based on national territory: if 80% of the capital is invested in foreign assets, rents and earnings from those investments does not pay taxes in Chile. If 90% is invested abroad, none of the investment is taxed in Chile.
Foreign contributors of public investment funds are taxed with a single 10% tax on dividends and capital gains, as opposed to the 35% general regime applicable to foreign investors.
The administrators, whether AGF or FIP, charge a commission which is subject to VAT. However, foreign investors benefit from an exemption proportional to the equity they own.
All things considered, along its more than thirty double taxation agreements, make Chile a major attraction in venture capital investments at a global level.