The largest listing in the world this year, BB Seguridade Participações’s 11.48bn reais ($5.34bn) initial public offering was the brainchild of neither an international investment bank, nor an established local player. Instead, the idea to spin off the insurance arm of Banco do Brasil, the country’s largest bank, came from a relatively small, new firm, Brasil Plural. This is a point of particular pride for Sebastien Chatel, the firm’s co-head of equities and chief executive of its securities business. One of Mr Chatel’s colleagues, Pedro Guimarães, formerly of BTG Pactual, had a long-standing relationship with Banco do Brasil and retained it when he joined Brasil Plural at the end of 2011.
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In an increasingly competitive Brazilian market, relationships are crucial. Brasil Plural, for example, was set up by former BTG Pactual executives Rodolfo Riechert and André Schwartz in 2009. Banco Pactual, as it was originally known, was sold to UBS in 2006 and then in 2009 sold again to BTG, a firm created by other Pactual bankers.
Some of Pactual’s bankers left around that time to set up Plural Capital, which was renamed Brasil Plural a couple of years later. It initially operated as an asset manager, but once the non-compete agreement with the bankers’ former employer ended in 2012, Brasil Plural began to function as an investment bank.
At the time of gaining the investment banking licence, Mr Riechert and Mr Schwartz said in an interview with news agency Reuters that the firm would deploy more capital to help fund clients with which it would work in mergers and acquisitions and capital markets advisory. And so it did, suggesting the BB Seguridade deal to Banco do Brasil.
Over the past few years, while many foreign investment banks have been dealing with problems at headquarters and adjustments to their international strategy, Brazilian players have gone from strength to strength. And as the local market develops – despite the current issues facing Brazil, such as social unrest and a slowing of the economy – greater opportunities are available, not just to the local champions but also to new entrants. Brasil Plural will naturally work with new issuers, says Mr Chatel, where it can add greater value, both in the equity space and in fixed income.
Investor uncertainty
Brasil Plural is determined to take the first-mover advantage in as many markets and products as possible, as it seeks to take advantage of concerns over Brazil’s sluggish economic growth, which is deterring foreign investors. “Many investors are underweight in Brazil, given what’s happening in the macroeconomic picture, and investors are certainly concerned with [the protests],” says Mr Chatel, referring to June’s protests triggered by bus fare increases.
“If you look at the latest opinion polls, [president Dilma Rousseff’s] popularity has plummeted, which might be good or might be bad. It certainly increases uncertainty. It’s unclear who the beneficiaries of [these protests] will be – if it will lead to a more market-friendly vision from the current government or if it will lead to a more populist stance. [The government scrapped] fare increases for bus fares, for toll roads. This is not particularly encouraging for investors, particularly investors that are planning to invest in long-term projects,” says Mr Chatel.
Protests over bus fare rises in June quickly became a nationwide movement against anything that was perceived as bad by the political classes, from corruption to the misuse of public funding, to the rising costs of hosting the football World Cup next year. This came at a time when Brazil’s lacklustre economic performance was already alarming investors.
Gross domestic product grew by a mere 1% last year, and a disappointing 2.7% in 2011, while the central bank’s projection for this year have been lowered to 2.7% from 3.1%. These figures are a far cry from the 7.5% of 2010, and from what investors would expect from an ‘elite’ emerging market such as a BRIC country – the group formed by Brazil, Russia, India and China.
Concerns over government interference in certain economic sectors have also contributed to a disappointing stock market performance. Only smart stock-pickers have had a good year, says Mr Chatel. “A lot of people have done very well in Brazil, if they’ve been good stock-pickers. Out of all the markets globally, Brazil has been one of the best for stock-pickers because you had some real outperformers.” Overall, however, Brazil’s equity market has disappointed and there exists uncertainty in the debt market as well. After winning its first international bond mandate around May, Brasil Plural had to delay the issuance to later in 2013. The name of the client is still confidential.
First-mover advantage
So where does a new entrant such as Brasil Plural plan to gain that first-mover advantage? The wealth management space is looking very interesting, says Mr Chatel. The lowering of the country’s traditionally high interest rates has made the hugely popular government bonds less appealing, generating demand for better yielding debt, as well as for new investment products. Recently, however, the central bank increased its inflation forecast for 2013 to 6% from 5.7%, signalling potential interest rate rises.
The expansion of Brazil’s middle classes is also creating potential new clients for the wealth management sector. Brasil Plural’s asset management division now has about $12bn of assets under management and includes Geração Futuro, the business it bought in 2012 that targets retail clients.
“Our focus is on finance as a whole, not just investment banking. There are areas where you can still make lots of money if you are smart,” says Mr Chatel. “Making money in equity offerings has become much harder than it was. Structurally, it’s going to be more competitive, but you have new opportunities, such as setting up real-estate trusts for international investors [where we’d have] first-mover advantage. There are huge savings currently in fixed-income government securities that ought to go somewhere else. And it’s already changing, which is why you see real-estate products doing so well.”
Regulatory changes in local real-estate trusts, or fundos imobiliários, which are similar to real-estate investment trusts, seem bound to attract a great deal of international interest. Recently, the tax breaks granted to local investors on these trusts have been extended to international buyers too. “We’ve been active structuring fundos imobiliários; there is an active pipeline there. It is an interesting product for domestic investors looking for tax-efficient yield and also now for international investors,” says Mr Chatel. “Hopefully we’ve created a platform that makes us nimble enough. We have enough fingers in different pies [and] many of them will prove to be flavourful.”
The firm acquired Flow Corretora de Mercadorias, a local broker dealer, in 2011 and received approval to operate as broker dealer in the US in August 2012. Flow partners include Jorge Felipe Lemann, the son of entrepreneur Jorge Paulo Lemann.
Multi-talented
Diversification is a smart strategy as the local investment banking market is becoming increasingly tougher as larger numbers of bookrunners work on each deal and therefore take smaller shares of the fee wallet.
“Investment banking has become much more competitive,” says Mr Chatel. “I came from UBS and Credit Suisse. Back in 2004, up to 2007, we were with Pactual, the only game in town. There were lots of issuances, lots of fees to be made, it was a good time to be in Brazil. Now Americans have made a better effort at putting people on the ground, the Brazilians have beefed up substantially – initially Itaú BBA, then Bradesco and now Banco do Brasil. There are many more competitors fighting for a smaller fee pool.”
With the right business model, Mr Chatel is optimistic there are great opportunities in Brazil’s finance world. He is also optimistic about the country’s long-term prospects. “The fundamentals in Brazil overall are still very good. Apart from anything else, you have wonderful demographics, which is something that’s very hard to screw up over time,” he says.
