Brazil: Pactual private placement taps interest in Brazil

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By:
Rob Dwyer
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Sovereign wealth funds buy in; Firm now valued at $9.7 billion

BTG Pactual completed Brazil’s largest ever private placement of shares in December to raise capital for investment opportunities. Through the placement it also added a new tier of strategic partners to the bank.

Andre Esteves, chief executive and partner of BTG Pactual, tells Euromoney that for the first time in more than 20 years of working in Brazil and the emerging markets he was faced with more opportunities for investment than he had capital to deploy. Esteves says the cost of raising capital through an IPO and the private placement was broadly comparable. However, he adds: "We decided to go down the private placement route because it gives us the opportunity to establish a strategic relationship with some of the biggest and most respected investors in the world – including three large sovereign wealth funds."

The sale of $1.8 billion of 18.65% of equity to nine investors, including sovereign wealth funds Government of Singapore Investment Corp (GIC), China Investment Corp (CIC), and Abu Dhabi Investment Council (Adic) is, for Esteves, a sign of a "new financial world order – a very dramatic deal, a landmark".

$9.7bln  value of of BTG Pactual based on sale

value of BTG Pactual based on sale 

The deal values BTG Pactual at $9.7 billion, four times the pre-investment book value. However, as much as the deal is about providing a source of capital for new investment opportunities, it is designed to develop strategic and competitive advantage. As well as offering investors a good rate of return, an important element is to provide access to the Brazilian market for the investors, and investment for projects managed by Pactual. "All of these investors are extremely constructive about Brazil and Latin America and they like the idea of having a strategic partner on the ground," says Esteves. "Of course they expect profit from Pactual but they do also expect we could help them navigate this region and aid them in their investment pipeline over the next few years."

The bank has $4.3 billion in capital, which is sufficient for now, according to Esteves, although he says an IPO is likely to be "a natural development for institutions like ours." As well as the wealth funds, the investors comprised Ontario Teachers’ Pension Plan Board, JC Flowers, RIT Capital Partners (Lord Rothschild’s fund), Grupo Santo Domingo, Exor (Italy’s Agnelli family), and Inversiones Bahia (Panama’s Motta family).

"This is the largest private placement ever in Brazil. Before that it was OGX’s $1.5 billion, so it was significant for the country and especially for the statement made by the sovereign wealth funds regarding the future of Brazil," he says.

The sale was extremely targeted; just 10 investors were approached. It took up to eight months to conclude, with a complex execution following a "relatively easy sales process" with the convergence of Pactual’s recent growth in revenues, market share and reputation in a market such as Brazil proving a compelling sales proposition.

Alexandre Alburquerqe, analyst at Moody’s Investors Service in Brazil, views the deal as credit positive. "Moreover, with an enhanced capital base and international base, the bank will have an advantage against its competitors, particularly the local operations of global investment banks that have so far maintained timid capital positions in Brazil," he says.

Esteves says that although he believes the deal to be a landmark it is unlikely to replicated. "Theoretically it would be possible for others to do something similar but when you look at the emerging markets – they don’t have the same scale of capital markets. Brazil is unique in having the combination of democracy, capitalism and an open economy and in general terms has stability and a scale of growth that is a very, very good combination."

Pactual has been growing rapidly in Brazil, in asset management (R$90 billion – $53 billion – under management and/ or administration), wealth management (R$30 billion under management) and investment banking services, in part because it has been successful in trading on its independent status to clients and prospects. Does Esteves worry that through having nine investors so established within the company – they will have three seats on the board (believed to representatives from GIC, CIC and JC Flowers) – there could be perceived conflicts of interests? "We have high standards of compliance and we have long-term commitment to the clients, so any concerns will be very easy to deal with," he says.

Esteves says the high level of alignment between the remuneration of the bank and its bankers and the clients’ returns means there can be no performance conflict. "If you are a private equity or hedge fund it is extremely meaningful to know that our senior partners are invested in the same products as you and with the same conditions as you," he says. "We have full alignment – not the bullshit announcements about alignment of remuneration we are used to hearing from the big banks – it is reality at Pactual."

Esteves says his top 25 bankers’ rewards are weighted to shares more than cash and reward long-term "value-added, rather than short-term performance. The whole issue of alignment is very strategic for Pactual. To be honest, it is one of the sources of our edge – being aligned inside the franchise and with our clients is extremely important. All our partners are invested in our own funds, with the same price and conditions as our clients."

Such demonstrable alignment helps Pactual compete with the more established and international competition.

Pactual’s new investors are understood to be keen to explore opportunities in retail, finance, and agriculture. Another of the key areas of interest for the new investors is infrastructure projects in Brazil.