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AgendaJune 1 2011

BTG Pactual riding high on Brazil's economic strength

Armed with new capital, BTG Pactual has been busy deal-making this year under the direction of CEO Andre Esteves. And while the bank has excess capital, flotation is not out of the question. 
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BTG Pactual riding high on Brazil's economic strengthAndres Esteves, CEO, BTG Pactual

With $5bn of equity capital and 1100 employees, Brazil’s leading independent investment bank BTG Pactual is reaching a size where, typically, the senior management forsake the trading floor to engage in C-suite strategy meetings. They need some hush to perfect 'their global vision' and to contemplate the purchase of their next Ferrari.

But that is not CEO Andre Esteves’ style. He believes in being close to the action and both he, and the rest of senior management, have their desks in the middle of the open environment of the trading floor. 

“You cannot have distance management in this business,” he says. “Either you manage the business very well or the business will manage you [not so] very well. We prefer the first approach so we stay close to the action and [make sure] we know everything that is going on. I don’t believe in any other arrangement for our business.”

Old-style banking

Mr Esteves’ track record suggests it is an approach that, had it been emulated by the major Wall Street and European investment banks, might have resulted in better decisions being made in the run up to the crisis. BTG Pactual is an old-style investment banking partnership where the partners' own money is at risk if something goes wrong. Many observers say that abandoning this model for one of public ownership and limited liability was why risk management in some of the major houses deteriorated.

By contrast, Mr Esteves has played the game almost to perfection over the past two decades, much to the irritation of his competitors. After rising up the ranks at the former Pactual to become managing partner in 2002, he profited handsomely in 2006 when UBS agreed to buy the bank, in which he then held a 30% stake, for $2.6bn.

He then held senior positions in UBS until leaving in 2008 to create BTG as an investment house with plans to develop the banking side as soon as non-compete clauses with UBS expired. In the end he did not have to wait long, as following the crisis UBS’ new CEO Oswald Grübel decided the best way to shore up capital was to sell an expanded Pactual business back to the former partners for the same price as agreed in the first deal three years earlier.

But BTG Pactual’s good fortunes and/or smart strategy did not stop there. In December last year, Mr Esteves and the other partners agreed to sell an 18.65% stake in the bank to a group of sovereign wealth funds, pension funds and private investors for $1.8bn, valuing the whole firm at $10bn – four times its value only two years ago.

The investors are the Government of Singapore Investment Corporation, China Investment Corporation, Abu Dhabi Investment Council, JC Flowers, RIT Capital Partners, the Ontario Teachers’ Pension Plan Board, Lord Rothschild’s family interests, the Santo Domingo Group, EXOR – the investment company controlled by Italy's Agnelli family – and Inversiones Bahia, the holding company of the Motta family also of Italy.

Time for an IPO?

The private placement was chosen as an alternative to an initial public offering (IPO), but an IPO is still a prospect as the firm continues to expand and needs more capital.

Mr Esteves says: “If you go back in history you will find Pactual didn’t use all of its capital because there were not enough opportunities. But more recently we found ourselves in the opposite situation whereby we were turning down opportunities because we didn’t have the capital.

“When we bought back the bank [from UBS] it came with $2bn of capital, which was the highest ever, but even so, given the stage of Brazilian economic development [with the economy growing at 7.5% last year], we had a lot of opportunities that we wanted to explore that we were not exploring.

“We could have done an IPO but we decided to do the private placement based on a simple assumption – we thought that the proposition of having investments in the bank from sovereign wealth, pension funds and family investors would be extremely attractive for both them and for us. It will create future strength for us to eventually do an IPO, which is still the intention. We are not obliged to do an IPO, but there is a strong base case and it is what out investors expect.

“In terms of governance it is more or less the same [between a private placement and an IPO]. You don’t have the stock price blinking on the screen every day but you need to give more information to the key investors than you would to the market if, for example, you advise on a big [mergers and acquisitions] deal.”

Mr Esteves says there is no prospect of an IPO before the end of the year while the firm still has excess capital. “As we are a profitable company we are accumulating capital. So we can manage the company without doing an IPO for a long period of time, but the opposite is not true, we cannot do an IPO with excess capital as we would be sitting in front of investors and it would be difficult to make the case. So we will be in the IPO zone when we have used up the current capital.”

Competing with the big boys

The additional capital allows BTG Pactual to compete on deals using its balance sheet to lend. “Part of the thinking behind the private placement was to give us a balance sheet so we can lend up to a certain point. With $5bn in equity we can lend up to $15bn and still have a low leverage balance sheet. It means we can compete against the big commercial banks,” says Mr Esteves. BTG Pactual’s competitors in Brazil include the investment banking arms of major commercial banks, such as Itaú Unibanco and Bradesco.

But Mr Esteves rejects the idea of the bank’s senior partners as rainmakers [a few highly talented individuals specialised in closing deals]. “We don’t like very much the idea of rainmakers. We see [everyone in the bank] as a rainmaker and we have a commitment to the clients all the way from giving the right advice to lending.”

Even so, the firm has its share of highly experienced partners, including some who have been with it from the early days and others who came from UBS. Its chairman of asset management, which produces 20% of the firm’s revenues, is Persio Arida, a former governor of the Central Bank of Brazil. Chief operating officer is Roberto Sallouti, who joined the firm in 1994 and became a partner in 1998. Huw Jenkins, the former CEO of UBS Investment Bank, is a managing partner based in London, as are Steve Jacobs, a former global head of infrastructure and private equity at UBS, and Roberto Isolani, former joint head of global capital markets at UBS.

As might be expected, armed with its new capital, BTG Pactual has been busy deal-making in the first few months of this year, including taking a 37.64% stake in mid-sized Brazilian consumer credit bank PanAmericano. PanAmericano ran into trouble through a mixture of high default rates and accounting irregularities discovered by Brazil's central bank. The country's federal savings bank, Caixa Economica Federal, has a 36.56% stake that it took before the accounting problems were discovered. Mr Esteves says the various parties involved needed “a creative solution” that BTG Pactual was able to provide. It will be run as a separate business from the rest of BTG Pactual.

Other recent landmark deals have been lead roles in the IPO for electronics and furniture retailer Magazineluiza, a share offering for steel-maker Gerdau and joint mandate for a $6bn Eurobond for Petrobras.

Career history

2008 – Left UBS to create BTG Pactual investment house, of which he is CEO

2006-08 – Chairman and CEO UBS Pactual. During this time he was appointed global head of fixed income in August 2007 and global head of fixed income, currencies and commodities in October 2007

2002 – Appointed managing partner, Pactual

1993 – Partner, Pactual

1989 – Joined Pactual

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