André Esteves begins his working week on Sunday evening. The youthful chief executive officer of BTG Pactual, Brazil’s largest independent investment bank, invites half a dozen or so of the bank’s senior partners to his apartment in the upscale Jardins neighborhood of São Paulo. Over water and coffee they discuss strategy, plan activities for the coming week and occasionally make decisions on major deals. At a Sunday night meeting in May, for instance, the partners agreed to acquire Rede D’Or, a leading network of private hospitals in Rio de Janeiro. The firm didn’t disclose the amount, but it was a typical BTG Pactual deal, using both the partners’ own money and capital from third-party investors.
“We have a hard-working culture at Pactual,” the banker says in English with a strong Brazilian accent. “The harder you work, the more luck you have.”
Esteves, 41, has worked harder — and enjoyed more luck — than most. In 1989 the Rio native joined the Pactual banking boutique as an intern fresh out of university, and he quickly proved himself a talented debt trader and corporate financier. Within a decade he led a cadre of young bankers in taking control of Pactual from its founder, then in 2006 he sold the bank to UBS in a deal that made him one of Brazil’s wealthiest men. When massive subprime losses pushed the Swiss bank deep into the red, he bought back Pactual and merged it with his start-up asset management firm, BTG Investments.
Over the past year, Esteves has pushed the new BTG Pactual into the front ranks of investment banking in Brazil, building a major equities and M&A franchise and a growing fixed-income business. The ambitious banker is only getting started. Esteves aims to turn BTG Pactual into the preeminent investment bank of Latin America and one of the most important asset managers in the emerging markets.
“I think we can build a fantastic institution, the largest emerging-markets investment bank and investment firm,” says Esteves, who punctuates his comments with a broad, boyish smile. “Our ambition is big, but it is long term. I think we will have achieved something fantastic within ten years.”
Roberto Sallouti, BTG Pactual’s chief operating officer, who has worked with Esteves for 16 years, echoes his boss’s aspiration. “Why can’t Brazil have a global investment bank?” he asks. “The U.S. and Switzerland have them.”
Esteves’ vision is bold but not foolhardy. His astonishing track record combined with Brazil’s newfound dynamism give him and his team a solid chance of success.
The financial crisis has shifted the tectonic plates of the global economy. While the U.S. and Europe struggle with a huge debt overhang and sputtering economies, Brazil and other emerging-markets countries are resurgent. Brazil’s economy is expected to grow by just over 7 percent this year, according to the International Monetary Fund, one of the fastest rates in the EM world after China and India. Brazil faces a presidential election this month, an event that in years past has often sparked financial turmoil, but both the leading candidates — Dilma Rousseff of President Luiz Inácio Lula da Silva’s Workers’ Party and her center-right rival, José Serra of the opposition Brazilian Social Democracy Party — are committed to maintaining the liberal economic policies that have seen the country prosper over the past decade. Brazilian outfits like mining company Vale, aircraft maker Empresa Brasileira de Aeronáutica and Itaú Unibanco Holding have become major players beyond Brazil. The country boasts the most-vibrant capital markets in Latin America; a fourfold surge in equity prices over the past decade and a rash of major IPOs have created an abundance of wealth. Esteves is determined to take advantage of those trends and make BTG Pactual a regional, and global, player.
As the biggest country in Latin America and the Caribbean, and a magnet that attracts the largest share of the region’s foreign direct investment, Brazil provides an ideal springboard for Esteves’ ambition. The firm is off to a hot start. Since obtaining its banking license in September 2009, BTG Pactual has participated in 11 initial public offerings that raised a combined $24.5 billion. The deals included last October’s $8 billion offering of Banco Santander’s Brazilian subsidiary, the world’s largest IPO in 2009. In the same period the bank has advised on 13 mergers and acquisitions, valued at a total of $12.5 billion. BTG Pactual advised Cosan, a Brazilian sugar and ethanol producer, on a $4.9 billion ethanol joint venture with Royal Dutch Shell in February.
As of late August the bank ranked third this year in equity capital markets in Brazil, with a 14.9 percent market share, trailing only Itaú Unibanco and Bank of America Merrill Lynch, according to data provider Dealogic. It also ranked third in M&A, behind Credit Suisse and Morgan Stanley, advising on 21 deals worth $20.9 billion, in total. In August the bank advised Tam Linhas Aéreas, a Brazilian airline, on its $2.7 billion merger with Chilean carrier Lan Airlines, a deal that will create Latin America’s biggest airline.
In his expansion effort, Esteves’ first priority is to build out BTG Pactual’s investment banking platform across Latin America. The region “is in very good shape,” he says. “Mexico, Colombia, Peru, Chile — they all have very good markets, very good macro numbers. They have independent central banks and floating exchange-rate regimes. Their economies have not suffered any economic disasters recently, and they have become much more stable.”
The bank is extending its research and equity coverage and aims to cover all of Latin America within two years. BTG Pactual has roughly 50 analysts and ranks second in research in Brazil, behind Itaú Securities, according to Institutional Investor’s 2010 All-Brazil Research Team. It also ranks sixth in Latin American research. The bank has also been reaching out to other local investment banks in the region for possible deals. In August, for example, Esteves was the keynote speaker at a seminar on Brazil in Santiago, Chile, organized by LarrainVial, a leading independent investment bank in Chile, with $12 billion in assets under management. “We may make some niche acquisitions of some investment banking boutiques in other countries in the region, or we may make strategic partnerships with other groups if we find the right people,” says Esteves.
BTG Pactual also aims to capitalize on the current trend in favor of emerging markets to transform itself into an international player in money management. The bank’s asset management subsidiary already manages 53.7 billion reais ($31.1 billion), the bulk of it for Brazilian institutional investors. The bank also has a wealth management arm that manages R26.3 billion for private clients. Although it has scale, the bank’s money management business is a very local operation: Roughly 90 percent of assets are from Brazilian clients. Esteves sees no reason why BTG Pactual, with its deep experience in Brazil, can’t compete for international mandates with global players like London-based Ashmore Investment Management, a leading EM investor, with some $35 billion under management. The firm has raised $1 billion this year for a global emerging-markets fund run by a team of five senior portfolio managers and 40 investment professionals from offices in São Paulo, London and New York.
“I think we can equal Ashmore Investment within two years, probably sooner,” says Esteves. “Its key holding is in Brazil. The country is strongly weighted in many global emerging-markets funds. We already have a large sum of assets under management, but that is mostly Brazilian money. I think we can raise the same amount again, if not more, internationally.”
One of the biggest challenges Esteves faces in trying to grow his empire is the burgeoning competition. Buoyant economies and capital markets in other key emerging markets are fueling the rise of other local champions with big ambitions, but Esteves believes his firm has several important advantages over potential rivals. China’s Citic Securities Co., for example, enjoys a leading position in equity underwriting in China, the world’s biggest source of IPOs, but that bank is a state-controlled institution whose managers lack the entrepreneurial freedom of BTG Pactual’s executives, he says. Russia’s Troika Dialog and Renaissance Capital are based in a country where the economy is heavily dependent on energy.
“In many ways, Brazil is more developed than the other BRICs,” says Esteves. “It has greater liquidity, and market institutions are more advanced. The country’s political institutions are more solid, and there is more transparency. Its rule of law has a stronger basis than in the other BRICs. This is an advantage for Brazil — and for BTG Pactual.”
Esteves has more than the BRICs to contend with, meanwhile. The Brazilian market, like emerging markets generally, are attracting plenty of attention from global bulge-bracket firms, which are looking for new growth areas to offset sluggishness in the U.S. and European markets. Bank of America Merrill Lynch, Credit Suisse, HSBC Holdings, JPMorgan Chase & Co., Morgan Stanley and Santander are among the international banks looking to build on their already-strong presence in Brazil, while the country’s two leading retail and commercial banks, Itaú Unibanco and Banco do Brasil, are expanding their investment banking arms. Esteves isn’t daunted by the competition. “BTG Pactual’s big advantage over the big international banks is the fact that we are from the emerging markets,” says Esteves. “It is part of our DNA. You must understand the culture of emerging markets. It is easier to understand what is happening in Kazakhstan being based in Brazil than in New York. We lived through all the periods of economic volatility in Brazil, and we appreciate that that can happen in other emerging markets. We know how to navigate it.”
BTG Pactual’s other big challenge is scale. The bank expects to have net income of about $750 million this year, on revenue of $1.4 billion. It has a lofty tier-1 capital ratio of 18 percent. The bank has net equity of just $3.9 billion, though. Its small capital base threatens to hold back growth, especially in fixed-income markets. The bank ranked a modest tenth in Brazil’s debt capital markets this year, as of late August, having participated in five deals, valued at a combined $1.1 billion, according to Dealogic. Santander, HSBC and Banco do Brasil held the top three places.
Already there are strong market rumors that Esteves is looking for international investors. Sources close to the bank say BTG Pactual is in talks with a group of investors including Government of Singapore Investment Corp., the $185 billion sovereign wealth fund, about the possible sale of a stake. Brazilian media have suggested that the bank could sell a 16 percent holding for some $2.4 billion. Such an alliance would make sense. GIC has been shifting the financial services portion of its portfolio from Western banks to emerging-markets institutions, while BTG Pactual is eager to grow its limited presence in Asia. Neither GIC nor BTG Pactual would comment on the reports, but Esteves makes it clear that he would welcome deep-pocketed shareholders.
“We may realize an IPO within five years,” he says. “What is more likely is that within one or two years we undertake a high-quality private placement and raise around $1.5 billion.” However the bank goes about raising capital, Esteves insists that he intends to remain in control this time. “One thing I can rule out is sale to an international house, not after Pactual’s previous experience.”
As he looks to grow, Esteves can build on a strong management team. The bank boasts a cadre of accomplished and well-connected bankers, beginning with Esteves himself. In addition to climbing to the top of the ladder at the old Pactual, the CEO served as global head of fixed income at UBS between August 2007 and June 2008, when he left to create BTG. Persio Arida, the bank’s global chairman of asset management, is a former president of the Brazilian central bank and served as a board member of Itaú, the country’s dominant retail bank, between 2001 and 2008. Sallouti and such other key Brazilian partners as Guilherme Paes, who is head of investment banking, and James Oliveira, who is head of asset management in Brazil, are among the most-dynamic bankers in Brazil. Many of them have worked with Esteves from Pactual’s early days and are personal friends. Huw Jenkins, the managing partner in charge of BTG Pactual’s London office, is a former chief executive officer of UBS Investment Bank.
“BTG Pactual is a fantastic shop,” says the CEO of a leading investment banking boutique in Latin America, who asked not to be named. “It has a global reach with very strong local knowledge. It has top people.”
The rise of André Esteves and BTG Pactual reflects Brazil’s ascent in the world. Esteves, an only child, was brought up in Tijuca, a middle-class neighborhood of Rio de Janeiro. He studied computer science at Rio’s Federal University.
Upon leaving university in 1989, he joined Pactual, an investment banking boutique founded by banker Luiz Cezar Fernandes six years earlier. Although hired as a mere intern to fix back-office computers, Esteves’ drive was evident from the start: He used to sleep in Pactual’s office in the modest Lapa neighborhood of Rio de Janeiro so that he could get more work done.
Within a year he was a member of the bank’s foreign debt trading team, and within two he was managing IPOs and M&A deals. In 1992 his trading skills helped the bank to post a 59 percent return on capital. In recognition he was made a partner the following year. In 1999, Esteves and four other junior partners effectively took control of Pactual from Fernandes by demanding his final 14 percent stake in the bank in exchange for loans to prop up his other failing businesses.
It was a crucial period for the bank. At the time the bank’s old guard, led by Fernandes, wanted to take the firm into retail banking and compete with the likes of Itaú and Banco Bradesco. But Esteves and his partners prevailed with a different strategy. “What happened was that the younger generation of partners at the bank believed that it should follow the fully fledged investment banking model, and that ended up being the winning strategic proposal,” he says.
Winning, indeed. Pactual profited enormously from Brazil’s economic takeoff this decade, and in 2006 it became a highly prized target of UBS, the Swiss bank then jockeying for global investment banking leadership. That December, UBS bought Pactual for $2.6 billion plus a $500 million retention package for some 80 employees, including Pactual’s 33 partners. The deal made Esteves, who owned a 30 percent stake in Pactual, a very wealthy man.
The Swiss bank promptly made Esteves chairman and CEO of its overall Latin American business. The ink had barely dried on the sale agreement, however, when UBS began running into serious difficulties. Losses were piling up at Dillon Read Capital Management, a hedge fund arm run by former investment banking chief John Costas that invested heavily in subprime mortgage securities. In May 2007, UBS said it would wind down Dillon Read. Two months later the bank abruptly announced the departure of then-CEO Peter Wuffli because of the mounting losses. Esteves saw opportunity in the crisis. He lobbied investment banking boss Jenkins to appoint him as UBS’s global head of fixed income, citing his understanding of how flawed risk-assessment models had led the bank to underestimate its subprime valuations. In August 2007 the bank’s board followed Jenkins’s recommendation and appointed Esteves to the role, and he moved to London. Two months later the bank put him in charge of UBS’s currency and proprietary trading units, as well.
What Esteves inherited wasn’t pretty. By year-end the bank was reeling. UBS took the first of what would total some $50 billion in write-downs on mortgage-backed securities; it posted a loss of Sf4.4 billion (then worth $3.9 billion) for 2007 and would go on to lose Sf23.6 billion more over the following two years. The bank would ultimately need a big capital injection from the Swiss government to survive. “I was there at the peak of the stress,” he says. “Personally, it was a very constructive experience — but not something I would want to repeat.”
In June 2008, Esteves left the bank. With 30 former UBS employees, including 25 traders and portfolio managers, he set up BTG in September of that year under a strict “no compete” legal arrangement. The terms meant that BTG could focus only on asset management and private equity, a frustration to Esteves and the other partners, who wanted to engage in a full range of investment banking activities.
In April 2009, with UBS looking to retrench and raise capital, Esteves and his partners agreed to buy Pactual back from UBS for $2.5 billion and embarked on their campaign to restore the firm to prominence as a full-fledged investment bank. Some 15 of the original directors at UBS Pactual are now partners at BTG Pactual. Many, such as COO Sallouti, have been with Esteves since the early days at Pactual. Others have been recruited from UBS. In April, Jenkins lured Roberto Isolani, a former co-head of global capital markets at UBS, to join him in BTG Pactual’s London office as the managing partner responsible for client business across asset management and investment banking. The bank also recently hired Igor Hordiyevych, UBS’s former head of debt capital markets for Central and Eastern Europe, the Middle East and Africa, to develop its business in Central and Eastern Europe. Currently, BTG Pactual has about 1,000 employees, with 53 partners and 48 associates. It expects to double its head count within three years.
Other key partners include CFO Marcelo Kalim, who joined Pactual 14 years ago and served as chief investment officer at UBS Pactual with Esteves, and Simeon Schwartz, who heads the bank’s New York office. He spent 11 years at UBS, most recently as global head of derivatives, government securities and commodities, before leaving in 2008 to help Esteves set up BTG. Renato Cohn and Rogério Pessoa are co-heads of wealth management and have worked with Esteves for more than a decade. Cohn signed on with Pactual in 1999 and joined UBS Pactual as head of products and services in wealth management. Pessoa joined Pactual in 1998 and was the partner responsible for private banking.
BTG Pactual prides itself on its entrepreneurial, meritocratic culture. The bank’s headquarters occupies three floors in a modern building in the São Paulo neighborhood of Faria Lima, an unassuming district of broad thoroughfares and gray tower blocks that is emerging as the city’s new financial district. The office is open plan, which fosters interaction and allows even junior staff members to talk directly with partners. Esteves has his desk in the middle of the trading floor, which accommodates 150 people. Arida, who in many ways is his right-hand man, sits beside him, and Sallouti is in the row behind them.
“Culture is one of the big differences between BTG Pactual and the old UBS Pactual,” says Paes, the investment banking chief, who has worked at Pactual for 16 years. “We have the capability to take very fast decisions. If a client wants us to grant them a $400 million loan, we can make a decision within two days. At UBS the decision makers were very far removed from you. You had to explain to them how things worked on the ground. That did not help to run the business.”
Esteves compares BTG Pactual with Goldman Sachs Group when it was a partnership. He says the flat, lean structure creates efficiency, and he believes the bank can continue to operate in its current fashion with as many as 5,000 employees. “Think big but keep the structure flat,” he says.
The meritocratic model is central. Half-jokingly, Esteves says the partners are divided into two groups: the rich and the poor. The rich ones provide the capital for the bank and help to incentivize the poor ones. Esteves’ own rise inspires many partners and junior staff. “I love him,” says Paes. “He is so dynamic and knows so much about everything, whether it is the trading side, potential M&A deals or potential IPOs, macroeconomics. He is a very complete guy.”
The rags-to-riches ethos runs throughout the firm. “Many partners at BTG Pactual, including myself, represent the Brazilian dream,” says Sallouti. “We started from humble positions. Lots of people want to be entrepreneurs and to be rich. You have to come work for us. We have no problem recruiting. People know that we are entrepreneurial.” Esteves boasts that he likes to hire people with doctoral degrees. “Ph.D.s are poor, hungry and desperate to get rich,” he says. “I am no longer as poor as I used to be, but I am still hungry and desperate to get richer.”
Esteves doesn’t sleep at the office these days, but he does log long hours. He usually arrives as early as 6:30 a.m. and does not leave before 8:00 p.m. He often calls partners together for meetings as late as 10:00 p.m.
Esteves travels frequently, visiting the London and New York offices once a month and Hong Kong occasionally. When he is in São Paulo, he usually takes one risk call a day and has a meeting with an institutional client.
The bank has three divisions: investment banking, asset management and wealth management. The investment bank employs about 100 bankers, mostly in Brazil, but it is expanding overseas and has eight bankers in London and New York. Notable recent hires include Alexander (Sandy) Severino, a former head of fixed income for Brazilian companies at Citigroup, who came on board in New York in July to head the bank’s international fixed-income business.
BTG Pactual is expanding its capital markets operation at a time when the Brazilian market is showing some signs of softness. The IPO market has slowed during the past two years, although secondary offerings are still significant. In February, Multiplus of São Paulo, the frequent-flier unit of Brazil’s biggest airline, raised R724 million when it went public, one third less than it had wanted; and in March real estate developer BR Properties had to scale back its IPO to R1.1 billion, also about one third less than it had intended.
One of the biggest problems in the IPO market has been the number of underwriters. At the height of the financial crisis, Brazilian commercial banks extended important credit lines to companies on the condition that if they went public or made secondary stock offerings the banks would be included as book runners. “A company must get the underwriting right,” says Paes. “No proper book building has taken place, because some of the underwriters do not really know the deal. That has led to unrealistic valuations.”
BTG Pactual’s equity business has benefited from a surge in trading volume, though. The Bovespa, or Bolsa de Valores de São Paulo, is the world’s seventh-largest stock market, with a total capitalization of some $1.2 trillion. Trading volume has exploded by roughly 20-fold over the past decade, to an average of about R6 billion a day currently. In May the Bovespa ranked BTG Pactual No. 1 by trading volume, with a total of R20 billion for the month. Roughly 45 percent of that trading is done with Brazilian clients; the U.S. generates a similar amount, and Europe chips in 10 to 15 percent, says José Miguel Vilela, the bank’s head of equity sales and trading. “Brazilian investors are becoming more important, especially following the international financial crisis,” he says. The bank has senior sales teams and trading desks in São Paulo, New York and London. The latter office covers Asia for now, but the bank plans to establish an Asian sales and trading team in Hong Kong.
BTG Pactual’s asset management division has grown strongly during the past year. The bank moved up one place, to seventh, on the Brazil 20, II’s ranking of the country’s top money managers. The business is split into three parts: a long-only business, which manages R48.4 billion in Brazilian equities and fixed income; global-macro hedge funds, which manage R2.8 billion; and merchant banking or private equity, which manages R2.5 billion.
The long-only business is a purely domestic affair at the moment, investing exclusively in Brazilian stocks and bonds and marketed only to Brazilian institutional and retail investors. At the core of the business are two fund families: Pactual High Yield, a fixed-income portfolio that has produced a cumulative return of 110 percent since July 1996; and Pactual Hedge, a fixed-income and equities portfolio that has produced a cumulative return of 127.5 percent since October 1995. The two funds have a total of R14.2 billion in assets. The bank does have international ambitions in this area: It plans to launch a mutual fund for European retail and institutional investors based on its long-only equities fund.
The hedge fund business, which has R2.9 billion in assets, has grown steadily since the bank launched its flagship Global Emerging Market and Macro Fund in February 2009, mostly with the partners’ own money. The dollar-denominated fund, which currently has $940 million in assets, posted a 16 percent return from January to the end of August this year, making it one of best-performing funds in the global emerging-markets category. The bank has been actively marketing GEMM to foreign institutions this year, and Esteves believes it could attract as much as $5 billion within two years.
“This is a fantastic alternative investment for global investors,” says Esteves. “There is so much interest in the emerging markets now. I think we will attract many international investors.”
The bank has also launched a fund investing in distressed U.S. mortgage securities. It has raised $150 million of a goal of $200 million, with BTG Pactual’s partners committing $90 million. “The fact that partners have invested so much in this fund gives clients a lot of confidence,” says Sallouti.
In September 2009 the firm launched its merchant banking business, a private equity–style operation that uses the bank’s own capital and money from outsiders to make long-term investments. The business has three main focuses: special-situations funds, infrastructure and real estate. In addition to the Rede D’Or hospital group, the division’s portfolio includes a 51 percent stake in Derivados do Brasil, a gas-and-service stations operator, which was acquired in December 2008; a 50 percent stake in car-parks operator Estapar, bought in May 2009; and minority stakes in Suzuki Motors do Brasil and Mitsubishi Motors Corp. do Brasil, purchased in March of this year. The bank doesn’t disclose the amount of those investments.
BTG Pactual plans to start marketing soon for a private equity fund investing in Brazil, and an infrastructure fund is likely to follow.
Arida says Brazilian investors are still heavily tilted toward fixed-income products and short-term instruments, mainly because of the country’s comparatively high interest rates. On July 21 the central bank raised the benchmark Selic rate by 50 basis points, to 10.75 percent, in a bid to contain inflation, which stood at 4.49 percent in August. The central bank has been pushing the Selic rate up from its record low of 8.75 percent since April; the rate is well above the Federal Reserve Board’s policy rate of 0.25 percent and the European Central Bank’s 1 percent rate.
“Brazil is a paradox in one sense,” says Arida. “Investors are very sophisticated, but the lending and trading horizons are very short term. People want very liquid instruments.”
BTG Pactual is also emerging as one of the most important wealth managers in Brazil. Big retail banks such as Itaú Unibanco, Bradesco and Banco do Brasil have been expanding successfully at the lower end of this market, thanks to their massive branch networks and huge pools of existing customers they can mine for potential private clients. BTG Pactual is focusing on ultra-high-net-worth individuals, or clients with at least R10 million to invest, putting it in competition with the likes of Goldman Sachs.
In common with most top wealth managers in Brazil, BTG Pactual usually offers its biggest clients exclusive funds, akin to separately managed accounts, that can invest in other funds or individual assets. Some 60 percent of private clients have this type of fund.
“Pactual has a very long track record, with very consistent performance and high levels of capital preservation,” says Cohn. “That helps us attract clients.”
Cohn says that the wealth management team learned a lot from working at UBS. For example, they have emulated UBS’s idea of having a dedicated M&A team within the wealth management division to assist high-end clients that want to make acquisitions.
Esteves and his team have plenty to do to fulfill their goals, but the CEO points to Brazil’s emergence as an economic powerhouse that he and his partners can imitate at BTG Pactual.
“It’s not about the money, although results are important,” he says. “I want to build something special, something to be proud of. It’s a long-term ambition.”
