Brazilian billionaire banker tests investor mettle

April 16, 2012

By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Andre Esteves is testing just how badly investors want a piece of his hot, Brazilian investment bank. The billionaire boss of BTG Pactual showed no signs of retreating from an initial public offering in the coming weeks despite a 350,000-euro fine against him by Italy’s financial watchdog for insider trading. The risks are looking big for this high-flyer.

Pactual’s allure owes much to Esteves’ dealmaking reputation. He sold his boutique to UBS at the top of the market and then bought it back a couple of years later in 2009 for a knockdown price when the Swiss bank ran into trouble. Since then, Esteves has attracted funds from a who’s who of global investors, including the Rothschild and Agnelli families, while retaining almost a quarter of the bank for himself. In the past three years Pactual’s value has increased six-fold to some $15 billion.

But that sparkling reputation just took a serious hit. Italian watchdog Consob accused Esteves of using privileged information when he bought shares of a local company in November 2007. The regulator has barred Esteves from holding senior corporate and board positions in Italy for six months and ordered some of his assets seized.

Pactual shrugged off the case and said Esteves was determined to appeal. Even so, a similar situation in Britain is quite revealing about the attitudes in Brazil. Ian Hannam, one of London’s most prominent bankers, resigned his role as chairman of capital markets at JPMorgan to fight a UK Financial Services Authority fine for alleged market abuse.

Esteves’ lieutenants come with their own reputational baggage, too. Huw Jenkins was in charge of the investment bank at UBS when it blew up in 2007. Roger Jenkins, another member of Pactual’s management team, spent years arranging aggressive tax structures for clients of Barclays, a business facing scrutiny in court in a case brought by the U.S. Internal Revenue Service.

But Pactual’s growth is tantalizing. In the five years to the end of 2011, its return on equity has averaged an eye-watering 41.5 percent, according to the IPO prospectus. That puts would-be investors in the position of deciding whether greed is enough to overwhelm any fears about putting their fortunes in the hands of a controlling shareholder embroiled in a trading scandal. Pactual may prove too hard to resist.

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