Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AmericasJanuary 31 2011

Wealth management boom in Brazil

Business is booming for the wealth management sector in Brazil. Large domestic banks still dominate the industry but international players have found plenty of scope to move in on this expanding market.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Wealth management boom in BrazilBrazil's increasing affluence is creating an expanding clientele for wealth management firms

Brazil's wealth-management industry grew by 15% last year and total assets under management reached 350bn reais ($209bn), according to industry estimates, making it one of the world's most attractive private banking markets.

Traditionally, Brazil's wealth management market has been dominated by the country's big domestic banks (Itaú Unibanco, Bradesco and Banco do Brasil) and, although these banks are still among the most important players, some international banks – including Credit Suisse (through its Hedging Griffo [CSHG] franchise), Santander and Citi – have been making substantial inroads into the market.

Taking note

During the past two years, Goldman Sachs, Royal Bank of Canada and Bank of America Merrill Lynch have also taken note of the importance of the Brazilian market, set up platforms there and hired senior bankers.

BTG Pactual, the independent domestic investment bank and asset manager, has also taken a considerable slice of the market, especially for ultra-high-net-worth clients, since BTG, an investment company founded by André Esteves, announced the repurchase of Pactual from UBS in March 2009.

A large number of domestic boutique wealth managers and family offices have also sprung up during the past few years. It is also understood that a number of Swiss private banks have recognised the significance of the Brazilian market and plan to open offices there this year.

Wealth generation

Brazil has witnessed tremendous wealth generation during the past five years and this is expected to continue, with signs that the initial public offerings (IPOs) and mergers and acquisitions (M&A) markets are picking up. Itaú BBA, part of Itaú Unibanco and Brazil's biggest investment bank, projects that Brazilian companies will undertake up to 25 IPOs this year, raising $20bn (there could be up to 15 follow-ons that would secure an additional $10bn, some believe). In 2010, 11 Brazilian companies conducted IPOs that raised $6.5 bn.

The Brazilian economy grew by 7.5% last year and is expected to expand by more than 5% this year, according to Goldman Sachs. Between 2000 and 2009, economic growth averaged 3.3%, according to the International Monetary Fund. Wealth management looks set to continue to be one of the fastest-growing areas of financial services in the country.

"Emerging markets in general, and Latin America specifically, are strategically important to Goldman Sachs, and Brazil is the largest economy in the region," says Beatriz Sanchez, head of private wealth management for Latin America at Goldman Sachs, whose platform in Brazil has a team of 25 professionals, including eight private wealth advisors (this year it plans to recruit more). She adds: "Political and economic stability, an increasingly sophisticated and well-regulated local capital market, a growing middle class, and a competitive corporate and industrial infrastructure have contributed to the attractiveness of Brazil for long-term investment.

"Goldman Sachs was one of the first firms in the world to recognise the potential of Brazil, having created the term BRIC [Brazil, Russia, India and China] almost 10 years ago."

Charles Ferraz, head of investments and wealth management at Itaú Private Bank, says: "The Brazilian wealth market has been expanding rapidly because of the country's strong economic performance during the past decade. We can see that just by the number of billionaires: a few years ago, they were not common but now there are a lot of them.

"Currently, there is a great deal of international liquidity and many private equity funds and global investors want a piece of the Brazilian pie," he adds. "This should lead to a high volume of IPO and M&A deals this year, which translates into greater wealth generation."

Itaú is the biggest wealth manager in Brazil and its assets under management (AUM) grew by 20% last year to reach 110bn reais. Today, it has 15,000 private clients and some 90 bankers. At the start of last year, it raised the minimum level of liquid assets required to become a private client from 1m reais to 3m reais.

Keen on fixed income

Traditionally, Brazilian investors have been keen on fixed-income products, especially certificates of deposit, because of the country's historically high interest rates of more than 15%. This is still the case – about 60% of the industry's AUM is allocated to fixed income – but clients are becoming increasingly sophisticated, especially higher-bracket ones, report bankers.

In July 2009, Brazilian interest rates fell to a record low of 8.75% and many analysts thought that this would help to encourage investors away from fixed-income to alternative products, such as hedge funds and private equity. However, since then interest rates have risen to the current level of 10.75% and are expected to rise further, as inflation hovers at about 6%. This has slowed down the movement to alternative investments but experts believe that interest rates will gradually start to match those of a more conventional economy in the longer term (in fact, new president Dilma Rousseff has set the goal of real interest rates of only 2% by the end of her four-year term).

"More sophisticated investors expect Brazilian interest rates to come down during the next five to 10 years," says Eduardo Castro, head of fixed income at Santander Asset Management in Brazil, whose wealth management arm has 10bn reais under management and employs 118 professionals. "There is growing interest in multi-strategy funds with more equities exposure, in structured products and in capital guaranteed products," he adds.

Multi-strategy funds in Brazil are not really hedge funds because they are much more regulated than such funds in the US or the UK and present much less risk. However, many of them adopt a macro strategy, allow arbitrage or are event-driven.

Marcelo Stallone, head of wealth management at Gávea Investimentos, a Rio de Janeiro-based fund manager whose wealth-management division has a total AUM of $2bn and 60 private clients, says: "I think it will be very hard for [Ms] Rousseff to complete her goal of real interest rates of 2% but, with fiscal discipline, she may be able to bring them down to 4%. That could give a huge boost to alternative investments such as private equity.

"Many Brazilian investors are already looking for alternative investments abroad. It is clear that the US has started to recover and I think [investors] are concerned that the real has become overvalued. They think it's the right time to get some more offshore exposure," adds Mr Stallone.

CSHG saw its AUM grow by 30% last year to 31bn reais and now has more than 1000 private clients. Today, it has a team of 39 bankers. "Interest rates are forecast to rise above 12% soon," says Marco Abrahão, head of CSHG Private Banking. "During the past few months, investors have become more conservative and Brazilian TIPS [treasury inflation-protected securities] have become more popular, for example. Investors with a moderate view towards risk have also started to invest in real-estate funds, similar to REITs [real-estate investment trusts] in the US. They have a number of tax advantages and are very attractive for certain investors."

BTG Pactual's wealth management division has a total AUM of 30bn reais and saw its assets grow by 94% between March 2009 and December 2010 (last year, its AUM was up by 50%). It has a total of 2000 private client groups (which can include several members from one family). A client must have a minimum of 1m reais in liquid assets, although the bank is targeting individuals with more than 10m.

"Our biggest 100 clients make up a significant proportion of the AUM," says Renato Cohn, BTG's co-head of wealth management. "The market in Brazil is transforming. Clients are becoming more and more interested in tax-exempt products, including real-estate funds. Recently, the government changed the rules to make it much more attractive for clients to invest in products related to infrastructure. I think many of our clients see that as key to Brazil's future and are very keen to invest in that type of product. Private equity will also become increasingly important to them."

Concern over conflicts

Safdié Private Banking, which has 1.5bn reais under management and 200 private clients, saw its AUM rise by 15% last year. Otávio Vieira, its director of investments, believes that one of the greatest trends in wealth management in Brazil has been a growing concern about conflicts of interest between the manager and the client.

Mr Vieira says: "Since the financial crisis, all houses have become much more transparent about the rebates they receive from the fund managers that they allocate to. During the crisis, some managers put restrictions on redemptions and this has made clients more cautious. The old model, whereby a manager would receive commissions but not charge the client an upfront fee, is dying out."

Mauá Sekular Participações, a fund manager that has raised $500m from eight private clients since its inception a year ago, feels that there is a big opportunity for boutique firms in the Brazilian market.

"A number of the big players in wealth management in Brazil are retail banks," says Fábio Vidigal, a director at Mauá Sekular. "Private banking is not their priority. Boutiques can offer a more specialised service that focuses on the client. Many of our clients have businesses too; part of our job is also to help them with their business strategy. We help them to meet up with commercial banks and guide them on the best way to handle the banks, for example."

Brazil is likely to have one of the hottest IPO markets in the world this year and yet again a great deal of new wealth will be created. Its wealth management market has become highly competitive during the past five years and it looks set to become even more so, as more and more wealth managers from around the world decide that they want a part of the action.

Was this article helpful?

Thank you for your feedback!