As André Esteves approached the microphone overlooking the floor of the BMF&Bovespa, the electronic ticker board above his head flashed up the news update: "Credit Suisse lowers Itaú Unibanco to underperform".
All eyes were on BTG Pactual chief executive Esteves, though, and it’s doubtful whether many of the men (and the few women) who were looking up at their leader, and who were all wearing matching commemorative blue ties and smiles, registered this slice of cosmic irony.
Irony because as Itaú Unibanco – a division of which, Itaú BBA, is BTG’s closest investment banking rival – has hit consumer credit headwinds in Brazil, the newly listed BTG stock was about to hit the ground running.
There are two features of the BTG Pactual IPO that should give investors in this remarkable story confidence that, despite its high launch valuation, its stock shouldn’t underperform the market. One is a short-term feature, the other is long term. But the bank’s management should be applauded for both.
The first is the launch price. Despite strong demand the bank resisted the temptation to price at the top of its range. It had closed its book 24 hours ahead of schedule – signalling strong demand and pricing flexibility – and investors mulled over a possible top-of-the range price of R$33.75, or even higher. But the bank came at the mid-point.
By doing so BTG Pactual ensures a strong after-deal performance (the stock jumped up by more than 3.5% in its first day of trading before closing up by 0.64%). This will facilitate secondary offerings. It also demonstrates – in the clearest possible way – that the bank understands the vital importance of post-deal performance. Brazilian IPOs have been dogged for a while with the suspicion that issuers think any post-deal increase in the share price equates to leaving money on the table – that the bookrunners have undervalued the company at point of sale.
This single deal won’t fix the market – April’s deals for Locamerica and Unicasa show that the problem of mismatched perceptions of value between investors and issuers persists – but it did present BTG with the opportunity to demonstrate deal discipline. It took it, and now the bank that will bring a good many of Brazil’s upcoming IPOs to market will have the moral authority to talk to issuers seriously about the IPO pricing/post deal performance trade-off. "Do as we did," they can say. Not just "do as we say". And if this message resonates, the market could begin to build much-needed momentum.
The second important feature was for the longer term, and concerns the shareholdings of the partnership. Essentially, the partners’ shares are not directly part of the listed vehicle but have been placed into a holding company that is owned 100% by the partners. If partners wish to leave the bank they cannot simply sell their shares on the open market. Partners have to sell their shares back to the partnership at book value, which will then reassign those shares to existing partners at book value.
Partners can’t sell for the sale price of 2.5 times book (which probably helped the pricing discipline discussed above). Instead, the partners’ equity increases in value only by increasing the book value of the firm. Wealth creation for the partners and the shareholders is therefore directly aligned. That’s the carrot.
The stick, according to bankers who talked to Euromoney, is that Esteves has got almost total discretion to dismiss a partner he believes isn’t performing. In essence, Esteves has a call at book value on each partner’s shares at any moment, a powerful incentive to partners to maintain performance.
The structure is an implicit criticism of the path taken by Goldman Sachs and Morgan Stanley. Partners in those firms could – and many did – sell their shares over time and become incredibly wealthy. Presumably Esteves thinks that as they became rich they became, at the very least, potentially demotivated.
During the roadshows, BTG marketed this share-scheme structure as a clear differentiator to previous IPOs of partnership banks. And it is: it’s bold, imaginative and investor-friendly.
Above all, these two features of BTG Pactual’s IPO – among others – tell investors one important thing: this IPO has more than one eye to the future. Both in the short term and the long term this deal has been structured and executed to build a publicly listed bank that outperforms.
