By Alexander Kliment
FT Tilt

May 10, 2011 – Brazil’s massive state pension funds are limiting growth potential in the booming private equity industry by demanding seats on the boards of investment committees, according to a report by the Latin America Venture Capital Association (LAVCA.)

While Brazil’s funds have played a crucial role in developing the domestic PE industry by backing local managers, their insistence on having a seat on the investment committees of funds they support creates governance conflicts that deter international partners, argues LAVCA’s 2011 Scorecard, which ranks the region’s private equities industries based on indicators reflecting corporate governance standards, regulatory environment, and capital markets development.

As a result, Brazil’s score dipped three points to 72 out of 100 this year. Regional leader Chile, which posted a score of 75, also lost one point this year, on account of reported difficulties in opening funds and investing abroad from funds based in Chile. The third place country, Mexico, held steady at 63.

Still, despite the slight deterioration in the two leading scores, Latin America’s private equity and venture capital industry raised a record $8.1bn in 2011. The report notes that Brazil is “setting the pace for the industry in the region” and focuses particular attention on a new industry governance code that went into effect on 1 March 2011.

Here’s the ranking table of the 12 Latin American countries surveyed, along with the four foreign benchmarks that LAVCA uses: UK, Israel, Spain, and Taiwan.