What is the background of BTG Pactual in general and specifically in Asia?
In 2005 UBS was given an IPO mandate by Banco Pactual, but upon closer inspection, UBS decided to acquire the bank rather than take it public. At the time Banco Pactual was Brazil’s leading domestic independent investment bank, but had only modest interaction with the rest of the world. This changed after the UBS transaction, which gave Pactual a far more convincing story with which to attract investment banking business in Brazil: international distribution through a truly global bank, and the business — now called UBS Pactual — boomed in 2006 and 2007 before the global financial crisis hit.
In 2008, the Brazilian partners of Pactual, who had now been promoted to senior positions in UBS investment bank, felt UBS was distracted from executing the original 2005 plan, and as the five-year profit target promised to UBS in 2006 was achieved in only 18 months, they suggested to UBS that they and a small number of UBS MDs set up an investment firm as a client of UBS. This was an amicable discussion as the loss of focus by UBS on the expansion plans of Pactual were dictated by global conditions, and UBS agreed to the proposal. This was the formation of the BTG partnership, and the Hong Kong office officially started in November 2008 as essentially a family wealth office licensed as an asset manager. Offices were simultaneously set up in New York and London, also largely staffed by ex-UBS traders, while the Brazilian core group — who were the largest shareholders — operated out of Sao Paolo.
In relatively short order, however, BTG was called by UBS, which was by then ever deeper in the morass of asset mark-downs and had to raise capital from the Swiss central bank, which put pressure on UBS to divest non-core assets, and while UBS Pactual was still a very profitable business line, it was sitting heavily on UBS’s equity since it had not been consolidated into its balance sheet and therefore attracted 100% risk weight. In short, UBS was by then just not the right owner and they reluctantly offered the bank to its old management, now called BTG. The transaction was concluded over the summer of 2009.
How did the separation affect the Hong Kong office?
The Hong Kong office changed its name to BTG Pactual Asia but, more importantly, the nature of the firm’s business had to change; we were only four traders plus support staff at the time, trading mainly Asia credit and fixed income. In order to keep Banco Pactual’s momentum in Brazil, we needed to make sure we could replace the distribution capability developed under UBS’s stewardship. We decided the most efficient way of achieving this was through working in close partnership with well-placed firms in the respective markets rather than trying to rebuild the UBS network in our own name, and we have been very well received in that respect. It helps that our profile is so easy to define — experts in all things Brazil — and that as such there is no overlap with such a partner and therefore no potential for conflict of interests. In order to coordinate this we have built a three-man M&A team: an MD with many years of Asia experience, a Brazilian M&A specialist and an analyst, while we continue to operate the trading desk for the Asian leg of our international hedge fund business, which now has $2.4 billion under management.
Which Asian countries have the strongest financial links with Brazil?
Asian investments into Brazil are not surprisingly dominated by China and Japan. Japan’s toshins routinely invest several billion dollars in Brazil’s public markets every month as the older generation looks for high yields to provide monthly retirement income, while China so far has been more focused on securing resource supplies.
BTG Pactual recently sold equity to investors including Singapore’s GIC and China’s CIC. What was the thinking?
As an extension of our strategy to work with well-placed partners internationally, we sold just under 20% of new stock to a consortium of investors in late 2010 and, for the most part, the investors made this commitment with a view to aligning their interests with a firm who can help them navigate Brazil’s business world; furthermore, we are always willing to co-invest our own funds to underline our commitment. This provides a comfort that cannot be exaggerated when you make cross-border transactions. The usual pattern is that most targets will happily accept your investment, but their enthusiasm is somewhat less pronounced when it comes to repatriating funds, whether the investment has been successful or not. Aligning your investment with a local partner who has been active in Brazil for 25 years and is expected to remain an important player in decades to come make local targets more likely to play by the rules.
While I can’t speak for the Agnellis, the Rothschild or even the Abu Dhabi Investment Council [the other investors], I can certainly attest that the Asia-based investors, GIC and in particular CIC, understand this, and view us as a partner with whom they can discuss specific transactions as well as brainstorm about their general Brazil strategy. Brazil is of course viewed by most as a source of commodities, but opportunities abound if investors can approach Brazil as a financial investment opportunity and not just an opportunity to secure long-term off-take agreements of oil, sugar, soy and iron ore.
As an example, civil servant payroll loans, a very popular and low-risk structure in which the government pays the monthly loan charge before paying salary into the staff’s account, will cost a minimum of 28% annual interest, in spite of competitive pressure among banks for this lucrative product. Is that priced on the basis of the risk profile? Hardly. It illustrates the scarcity of capital that has always haunted Brazil. Capital creation is hard enough in any economy, but with a history of high inflation and lack of a middle class that conspire to keep the savings rate low, combined with infrastructure bottlenecks everywhere, there is very little capital available for medium- and long-term investments, best illustrated in the very short maturity profile of the private sector banks’ balance sheets. Mortgage penetration is as low as 3% of GDP — although this is set to grow as inflation has stabilised after the adoption of the plan real. The enormous O&G reserves discovered off the Rio de Janeiro coast doesn’t help this dynamic, since capital requirements for development of these fields attracts what capital is available in the system. The Brazilian development bank, BNDES, is only one institution and can’t practically finance all worthwhile projects, and this illustrates how China, which is the world’s prime creator of capital, can gain by investing in a capital-scarce but opportunity-abundant country such as Brazil without solely focusing on resources. This is classic Ricardian economic theory, and is well understood by Asia-based investors.
Recently BTG was a sell-side adviser on Kirin’s $2.6 billion investment in Brazil. What is the background of the deal? What role did you play?
Schincariol was the last large independent beer player in Latin America, so represented a unique and non-replicable opportunity for entry into the attractive Brazilian market. The deal represented the highest multiple ever paid for a beer company globally, and was the largest acquisition ever by a Japanese company into the Brazilian market. We were retained by the controlling shareholders of Schincariol, which owned 50.45% of its total capital, and whose interests were not necessarily aligned with the remaining shareholders. Therefore, being able to capture such a premium on their shares, despite not being able to guarantee a sale of 100% of the shares, was a major win for us. The deal is proof of BTG Pactual’s capability of building a direct bridge with Asian companies interested in Brazilian assets.