Deal of the future

Last December, the prestigious and innovative Brazilian investment bank BTG Pactual opened up its equity structure to several outside investors, a deal which was especially interesting because it managed to involve several important trends in today’s private capital investment market.

The bank agreed to issue $1.8 billion in new shares to a consortium of heavyweight institutions, including private equity firm JC Flowers, the Government of Singapore Investment Corporation (GIC), the China Investment Corporation (CIC), Ontario Teachers’ Pension Plan Board, the Abu Dhabi Investment Council and number of undisclosed family offices.

David Snow

The deal is notable for several reasons: it involves significant direct investment on the parts of institutional investors who might otherwise have invested indirectly through limited partnerships; it is clearly a growth equity play with all the existing shareholders staying put; it is likewise located in a part of the world that is expected to deliver incredible growth over the next generation; it is a financial services play designed to put wind in the sails of a new type of investment bank as the traditional banking world continues to be bailed out.

Compared with the heady equity outlays of 2006 and 2007, this $1.8 billion transaction isn’t mind-blowing, but considering that it is in Brazil and it comes after a long deal drought, it is a real indicator of momentum. More interesting were the names of the investors. Although JC Flowers is a private equity fund manager, it is known for prodigiously syndicating other financial services companies into its deals and funds. In this case, the other deal participants are huge institutions investing for their own accounts but known also as significant limited partners in externally managed funds. However in this case, GIC, CIC, Ontario Teachers and Abu Dhabi Investment Council are going in direct. This is a good indication of the direct-investment sophistication that a growing number of institutions are acquiring, as well as a reminder that many LPs are increasingly looking for co-investment deals. Each time a deal the likes of BTG Pactual gets announced, the board members of LPs around the world send around a staff note saying, “Why can’t we do deals like this?”

The deal announcement notes that no BTG partners are selling shares in the offering. This conforms to the stated use of the funding for growth, and more broadly it conforms to emphasis on growth across private equity. Although this asset class has always preferred to highlight its role in helping companies transform and thrive (David Rubenstein has called for the industry moniker to be changed from “private equity” to “change equity”), the amount of leverage deployed during the erstwhile boom years, and the amount of “cashing out” that took place, has created the opposite impression.

As an interesting side note, this deal can officially be deemed a venture capital transaction as per the recently unveiled Securities and Exchange Commission definition of VC. In seeking to cause private equity, but not venture capital, firms to register as investment advisors, the SEC was compelled to define a VC firm as, among other things, a firm that invests for growth and in a fashion that does not buy out the shares of existing stakeholders.

BTG Pactual is itself among the hottest financial services names in among the most feverishly admired economies in the world. It is led by an IT-professional turned banking-titan, Andre Esteves, who is one of the few entrepreneurs to have (effectively) successfully shorted his own private company. UBS acquired BTG Pactual in 2006 for a whopping $2.6 billion and then amid the economic crisis sold it back to Esteves and team for a lower price.

The bank, using the term broadly, is a major wealth manager in Brazil, but has a very dynamic, early Goldman-esque partnership culture that has fostered the launch of a number of cutting edge investment and co-investment platforms. Look for a quiet wave of BTG-branded investment initiatives to be launched in the near future.

Then there is Brazil itself, a country to which it appears that about half of the global private equity industry has paid a first-time visit in the past 24 months. There is a growing understanding among investors with allocations to private equity unless they have some China, India and Brazil in their portfolios, the asset class won’t do what it needs to do to be worth the effort.