LatinFinance - January/February 2015 - 16

or private equity firm, BTG's bankers from director level up are
partners, with a large chunk of their personal wealth invested in the
firm. Pactual, which UBS bought in 2006 for $2.6 billion, had also
been run on a partnership model after its foundation as a brokerage
house in Rio de Janeiro, 30 years ago.
Today BTG's stock is split between the bank - Banco BTG Pactual
- and BTG Pactual Investments, a Cayman Islands vehicle for the
firm's proprietary trading, real estate, and private equity investment
(or merchant banking, as BTG terms it). BTG Pactual Investments
accounted for around a quarter of the group's equity at the end of
September 2014. It brought in around $250 million of revenues in
2013.
But principal investments dragged down BTG's group revenue by
around $140 million in the first nine months of 2014. Prop trading
losses in the credit market in the third quarter, private equity losses
in the second quarter, and real estate losses in the first quarter hit
the business.
Now, just as rivals are raising increasing doubts about BTG's
use of its own equity in investment banking deals, Esteves himself
admits companies held by the private equity arm will face a tough
time as the Brazilian economy stutters. Will this mean a retreat from
deploying equity, at least, in the merchant banking division?
A Moody's report in July flagged BTG's investments in nonfinancial companies as cause for concern. BTG had a choice
between slowing the growth of its balance sheet or focusing on
business demanding less of the bank's own capital, it said. Private
equity investments could bring opportunities for other business
units in the future, the agency said, but cautioned that these made
evaluating BTG's longer-term creditworthiness harder.
One banker in São Paulo characterizes the merchant banking
division as "the weakest part" of BTG, while another says these
private equity deals were part of a misguided "macro-economic bet"
on Brazil, particularly in 2011 and 2012.
Eduardo Ribas, who covers BTG at Fitch, notes that most of these
holdings are still in the investment phase, so contribute little to
profit. Some are listed, though, and must be marked to market. One
such is BR Properties, a real estate firm, whose share price lost 40%
of its stock market value in the year to November.
Another is BR Pharma, Brazil's biggest drugstore chain. BTG
controls the company, which is one of its oldest private equity
investments, dating back to 2009. Its stock has lost 75% of its value
over the past two years. It posted a $200 million loss in the first nine
months of 2014, breaching debt covenants as it struggled to integrate
acquisitions. BTG helped the firm raise $160 million in new equity
in April.
Esteves says the BR Pharma investment, at its November price,
had been "neutral" for BTG. Although some of the merchant bank's
investments have made money, including parking garage chain
Estapar and hospital operator Rede D'Or, he admits others have not.
But it is simply "the nature of this business" that some investments
bring strong gains, others remain flat, and others lose money, he
says.
The formula makes sense if the rewards are high enough among
the winners, he says. "If in the first third you multiply [capital] by 10,
the second third is flattish, and you lose everything in the last third,
it means you multiply by nine at the end of the day," he says.

Dividing risk and spoils
Insiders at BTG say a culture of sharing risks with clients like this,
in part, reflects the management structure. Similar to a hedge fund

New balance
Esteves does not deny that, as Moody's suggests, BTG has a choice
between slowing its growth and preserving its capital. Investing

gettyimages ®

on bookrunners subscribing to their own deals, says Christian
Flemming, an associate in BTG's investment banking unit.
Ultimately, demand for Biosev stock was strong enough that BTG
did not have to exercise its backstop, but it did buy just under $150
million in CPFL Renováveis' offering. And after MPX scrapped a
public deal, BTG agreed to buy shares not taken by minorities in a
$340 million private offering, of which German energy firm E.ON
was to take $150 million.
Bankers at other firms differ on whether BTG would have
performed so well in the Brazilian investment banking league tables
if it had not deployed equity in these deals. Some say the company
simply has better bankers, better research, and better distribution
than its competitors. "BTG has a platform that's strong enough to
win mandates on its own merits," says one banker.
Paes is careful to point out that the Oi relationship pre-dated its
merger with Portugal Telecom. The bank did not know it would
back the follow-on with its own capital before it started working
on the deal, he says. Similarly, the bank was already helping EBX
restructure its various businesses more than six months before the
MPX follow-on. "There's no link between how we use our equity and
how well we perform in investment banking," insists Paes.
But even Paes
seems keen to
highlight BTG's
ability to deploy
equity as a
distinguishing,
if by no means
decisive, feature
of what BTG
offers. None of
its competitors
deploy equity
in investment
banking deals
in this way, he
says, and clients
appreciate that
extra tool in its
arsenal.
"The way we
ARIDA: Risk deployment must
use our equity
be profitable in itself
together with
our clients is very
important to us," he says. "We are not afraid to commit capital for
the client when it is necessary."
Esteves adds that the Biosev IPO, for example, would not have
gone ahead without BTG's equity support. "The client became
extremely happy with that; it was the only way of doing the IPO," he
says. "It was a very creative deal, exactly the kind of thing we expect
to be doing - being innovative and extremely helpful to customers."
As such, Esteves says, BTG retains an appetite to deploy equity
in investment banking, despite Brazil's gloomy economic growth
outlook and the still volatile stock market. Competitors should not
rely on a change. "You could continue to expect this use of transitory
balance sheet for transactions like that," says Esteves.

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