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André Esteves: multiplied the equity value of BTG Pactual by more than five times in only a few years
In most other circumstances, it would have been an initial public offering doomed to fail.
The day after BTG Pactual published the prospectus for its IPO, its billionaire chief executive – who has been responsible for the bank’s meteoric rise from a small brokerage in Rio de Janeiro to Latin America’s biggest standalone investment bank – was fined for insider trading in Italy.
The revelations not only called into question the reputation of 43-year-old André Esteves, the banking prodigy upon which BTG Pactual had been built, but deepened concerns over the already onerous terms of the flotation, which would give Mr Esteves over 80 per cent control of the bank’s voting rights.
However, as BTG Pactual’s joint bookrunners prepare to take their final orders on Monday ahead of Thursday’s flotation of the bank’s shares in São Paulo, the IPO is shaping up to be one of the country’s most successful.
By the end of last week, the offering was already twice subscribed with the shares expected to price closer to the upper end of the R$28.75-R$33.75 range, people familiar with the deal said.
If the Brazilian bank exercises an additional “greenshoe” option, selling around 14 per cent of itself instead of just the planned 10 per cent, it isexpected to raise up to $2bn, making it Brazil’s biggest IPO since 2009 and the seventh-largest on record, according to Dealogic.
“There has been every reason for it not to be a success,” says Ricardo Almeida, a professor of finance at Insper, a Brazilian education institution.
“It has a very complicated ownership structure and [Mr] Esteves will also hold a golden share, giving him the chance to block anything he doesn’t like. The risks are enormous,” he says. “However, because of the fact it is BTG Pactual and because they themselves have a long history of hosting successful IPOs, I think it will go well.”
With an enviable return on equity last year of 24 per cent and a higher tier one capital ratio than most US or European banks, BTG Pactual has been easy to sell in an industry still reeling from the effects of the financial crisis. That growth story has largely been put down to Mr Esteves himself, who joined the now-defunct Banco Pactual as a 21-year-old computer technician and rapidly worked his way up.
Through an aggressive acquisition strategy spanning sectors from real estate to oil services, Mr Esteves has since increased the bank’s value fivefold to an estimated $15bn – over a quarter of the size of Goldman Sachs.
However, this week’s IPO, the culmination of half his life’s work that is set to value Mr Esteves’s stake at up to $5bn, has also threatened to be his downfall as it has forced him to disclose an insider investigation he had managed to keep out of public view for the past four years.
In an interview with the Financial Times, Giovanni Portioli, who led theinvestigation at Italy’s Consob market regulator, said circumstantial evidence shows Mr Esteves made a large profit when he bought shares in Cremonini in 2007, using inside information about an upcoming joint venture between the Italian food company and Brazilian beef processor JBS.
Consob finally declared Mr Esteves guilty on April 4, fining him €350,000. In February, the regulator also ordered the confiscation of €4.2m of his assets – the total value of his position in Cremonini at the time of investigation – but Mr Portioli said these would be very difficult to retrieve from Brazil. Mr Esteves has vowed to appeal the civil ruling, which he says is completely without merit. Investors have largely taken the case in their stride.
BTG Pactual’s rapid growth has also persuaded investors to overlook the ownership structure of the flotation, which will not only give Mr Esteves 84.4 per cent voting control for his 22.4 per cent stake but also grant him and BTG Pactual’s seven senior partners golden shares.
“You are destroying accountability and it leaves you with a potential conflict of interest between smaller shareholders and the controlling investor,” says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “Potential investors should be very concerned about buying into such a structure.”
However, Ann Yerger, executive director of the Council of Institutional Investors, a US association of pension funds and endowments, says that when it comes to large fast-growing companies such as BTG Pactual, such structures seldom put the market off. “If owners think they can get away with it then they will try.”
Additional reporting by Daniel Schäfer in London
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