Neglected Comrades: China's Links To Brazil's Scandal-Hit Bank

How does Brazil’s banking scandal bear on China? In ways that are not widely understood.

According to a former senior executive at investment bank BTG Pactual, China’s sovereign wealth fund played a key role in the run-up to the bank’s public listing in 2012 that led to such rich rewards for its partners. BTG today is at the center of a sweeping probe roiling elite Brazilian circles.

Despite a moribund IPO market at the time, BTG’s billionaire founder Andre Esteves managed to engineer a fivefold jump in the bank’s value to $14.5 billion in a mere three years. It came to be a symbol of Brazil’s growing economic might, ready to compete with global giants like Goldman Sachs.

At least that was the perception of outsiders, which is why Esteves’ arrest for obstruction of justice in late November was such a shock for so many–but certainly not for everyone.

“The hubris was of a type I had never seen in my life before, which fed egos and tested everyone. This is ultimately what got them [BTG] into trouble,” says Zeljko Ivic.

From Hong Kong Ivic worked for BTG as its managing director for Asia from 2010 to 2013. Recruited with visions of linking China’s appetite for commodities to Brazil’s seemingly boundless resources, he was a key player in securing BTG’s investments from China Investment Corp. (CIC), one of the world’s largest sovereign funds, and flagship brokerage Citic Securities .

Fast-forward to now, however, and at age 48 he counts himself among BTG’s casualties. He has Hong Kong lawsuits, one dating to 2013, pending against his former employer, alleging he wasn’t properly dismissed or paid. The Brazilian entity was thunderstruck by the criminal bribery/corruption probe that has implicated Esteves along with several public officials–its market capitalization dropped 50%. As his own case winds its way through the legal system, Ivic provided insights to FORBES ASIA into BTG’s ties to China.

Esteves and partners in 2010 were trying to sell a 19% stake of BTG through a private placement to some of the biggest and most respected investors in the world–a group of sovereign wealth funds, pension funds and private investors. Two were to be from Asia, CIC and Singapore’s GIC.

“You know how China works. You don’t walk through the front door with a spiral-bound presentation, with your credentials, saying, ‘Look at us!’ You’ll get nowhere,” says Ivic.

As a 20-year veteran of banking in Asia, Ivic was recruited by John Huw Gwili Jenkins, BTG’s current vice chairman, to join what was being described as the “Goldman of the tropics.”

Originally from Croatia, Ivic grew up in Germany before studying in the U.S. and landing a job on Wall Street. He relocated to Asia while working for Lehman Bros. in 1996. Through later stints with Jardine Fleming, ABN AMRO and BNP Paribas he built an extensive network of contacts in the region that enabled him to get to the decision makers, including those at CIC.

Headed by Lou Jiwei, now China’s finance minister, CIC committed to invest $300 million for a 3.1% stake in BTG. The much-touted private placement, announced in December 2010, would also include not only the Singapore fund but investment firm J.C. Flowers; the Ontario Teachers’ Pension Plan; Lord Rothschild’s family interests; EXOR, the investment company controlled by Italy’s Agnelli family, and Inversiones Bahia, the holding company of Panama’s Motta family.

BTG’s private placement was the groundwork for its IPO. Following CIC’s investment, Citic Securities signed on to the listing with a stake worth $150 million. The brokerage, controlled by state conglomerate Citic Group, wanted a partnership with the tropical Goldman to further a desired expansion outside of its Chinese market.

Although Esteves, Jenkins and other BTG executives were still talking about their global ambitions after the IPO, there’s little to show for it.

Ivic says he saw BTG having a duty to build on its relationship with CIC, having leveraged the sovereign fund’s name in Brazil. But mutual activity mostly came to naught. The Chinese sovereign fund is still invested but doesn’t want to talk about it.

BTG claimed in its IPO prospectus that it was working with Citic “to jointly develop a number of business initiatives, including by co-advising clients seeking to execute transactions involving Chinese and Latin American companies.” But the reality is underwhelming.

In the four years since BTG’s IPO the bank has acted as an advisor in only two M&A deals for just one Chinese company, according to Dealogic. The data firm said China Three Gorges Corp. was advised by BTG when it acquired assets of Energias de Portugal SA in 2014 and Triunfo Participac√≥es e Investimentos SA in 2015.

For its part, Citic was the joint book runner with Standard Chartered for BTG’s so-called dim sum bonds in 2013, when it raised 1 billion yuan ($160 million).

Was this all a disappointment? Citic doesn’t respond.

“Since my departure, BTG’s original promises to engineer landmark, transformational deals between China and Brazil in the resources field, to quench China’s thirst for everything from ores to grains, have fallen well short of such expectations,” Ivic says. And he says those prospects soured long before the commodity market tanked

BTG’s latest annual report doesn’t break out revenue from Asia or China, but it does indicate strategic priorities by staffing levels. The bank said it employs 1,737 people in Brazil, 297 in the U.S., 268 in the U.K., but only 32 in China and 13 in Hong Kong. Its Shanghai business is focused on commodities.

If BTG’s distancing from its Chinese investors was unsatisfying, they ought to have been wary of the firm’s parentage. Today’s BTG sprang from the ashes of UBS Pactual, the Latin American arm of Swiss megabank UBS, as the financial crisis began to unfold. UBS had bought Pactual in 2006, putting one of the acquired’s top shareholders, Esteves, in charge. He and other partners would leave in July 2008 to form BTG, which within a year acquired UBS Pactual.

Ivic’s boss, Jenkins, had joined BTG after an interval, or “gardening leave,” following his brief tenure as chief executive of the Investment Bank at UBS. The Swiss bank was Europe’s worst-hit bank in the crisis, with writedowns of nearly $50 billion by 2009. The unit Jenkins had overseen made the disastrous decision to build up holdings of collateralized debt obligations by 2007 that would be blamed for the majority of UBS’ subprime losses in a report prepared by the bank afterward. As the scale of UBS losses became apparent, Jenkins was among the first out the door. But new opportunities awaited with his ex-colleague Esteves. After working for BTG as a consultant for a year, Jenkins became a partner in March 2010. Soon he was recruiting Ivic for BTG.

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