World's best investment bank in the emerging markets 2019: BTG Pactual

When BTG Pactual announced a $2.5 billion follow-on transaction earlier this year the share price rose 15%. When the deal closed in early June the shares were up at R$47 ($12.28), from R$18 a year earlier.

In the first quarter of 2019, the bank reported strong investment banking revenues – reflecting the recovery in activity in the bank’s core Brazilian market, as well as growth in the Chilean, Colombian and Peruvian operations. 

Notably, financial advisory had strong performance – with revenue mix well distributed across Latin America. Equity capital markets had improved results, despite muted market activity, and the bank claimed first and third place in the Latin American and Brazilian league tables, in terms of deals. 

The bank also came third in the region’s M&A league table and enjoyed recent strong performance in local markets DCM, especially in Brazil – which differentiates BTG from the foreign-based competition that struggles to justify the use of international capital in local Brazilian debt deals. 

Annualized return on equity was 15.1%, but excluding its stake in EFG (which has been largely removed from the bank’s core results as a result of the follow-on transaction) and Banco Pan, the annualized ROE was 18.7%.

And it is not just this level of profitability in today’s competitive investment banking world that makes BTG Pactual unusual. The bank’s senior management attributes the bank’s success – its survival in a liquidity crisis that would have been fatal for many financial institutions, as well as its subsequent growth – to its preferred investment banking benchmark: the Wall Street of the past.

“Our preferred benchmark is the old partnerships that were privately owned – so Goldman Sachs before it became a public corporation,” says BTG Pactual’s chief executive Roberto Sallouti. “When the partners owned the stock and the partners are committed to the day to day – that’s still our benchmark.”

Sallouti’s predecessor, the former wunderkind of Brazilian banking André Esteves, is very clear on the damage that he believes the IPOs did to the traditional Wall Street banks. 

In BTG Pactual’s 2012 IPO, the shares of the bank’s partners were not placed directly into the listed vehicle but rather into a holding company that was 100% owned by the partners. If partners want to leave the bank – or cash out a little – they cannot sell their shares on the open market. Instead they must sell their shares back to the partnership’s holding company at book value, with those shares reassigned to the remaining partners (also at book value). 

When BTG’s big test came with Esteves’ arrest in 2015, the centralization of power into Esteves’ hands was a weakness – it magnified ‘key man’ risk. But, conversely it also proved a strength. There was no exodus of key talent.

Often in similar situations, a bank’s competitors circle and tempt away the people required to pull the bank through the crisis.

Sallouti also believes that short-run commercial pressures can weaken banks’ operational strategy in emerging markets like Latin America. 

“In one model, you are working to construct a long-term company and the other you’re really worried about the equity price,” he says.

Sallouti believes this conflict has led many of the international banks in Latin America (and emerging markets elsewhere) to adopt a policy of juniorizaçao – firing expensive bankers and bringing in cheaper ones.

“We have never juniorized [the Anglicization of juniorizaçao] our research team, our sales team or our investment banking team,” says Sallouti. “But with the global banks it is second nature now to adapt to the cycles of the regions: What’s hot? Let’s grow. What’s cold? Let’s shrink. But we have no option but to keep the senior people, and that makes the difference because it is always very hard to anticipate the timing of the market turnaround and so you always have bankers switching platforms. 

“Meanwhile our clients have been talking to the same people at BTG for 25 years.”

Once the crisis was over, the bank’s growth DNA reasserted itself. It has developed online financial platforms that offer high net-worth Brazilians access to the bank’s private banking products – at private banking fees. The build-up in assets has been swift and the bank is expanding again, by announcing it will offer full-service digital banking to Brazilians. 

It’s not just a diversification and growth story, Sallouti says that regional distribution is going to be increasingly important to keep the investment banking franchise relevant.

“Distribution to individuals is the only way that you can have a complete platform,” and he points to other global investment banks that are moving in the similar way. “It’s Goldman, it’s Morgan Stanley, it’s Macquarie. And if you look at all these different regions in the world, the leading investment banks are doing the same thing and they are all outperforming their peers, right? So it does call my attention.”

It seems pretty certain that BTG Pactual is catching their attention too.