The crop of boutiques that sprang up from the bulge bracket wreckage faces fresh competition. They will need relationships, international connections and a proper structure to survive.

Boutique banks popped up in post-crisis Brazil like mushrooms after the rain. G5 Advisors, BR Partners and Orienta Partners have joined the ranks of an older generation that include Rothschild, Vergent Partners, Singular Partners, and Estáter Gestão e Finanças.

The brains behind the new pretenders are generally veteran investment bankers with large client lists, says Jorge Maluf, partner at recruiter Korn Ferry in São Paulo. "International banks put the brakes on too hard during the recession and senior executives became frustrated by the conservative attitudes and lack of attention from headquarters," he notes, pointing out this is similar to what drove the previous wave of openings, many following the 2002 Brazil market crisis.

Newcomers are already carving a niche out in Brazil’s explosive M&A scene. They generally seek to focus on the middle market, which they say larger investment banks either disdain or serve poorly and where fees remain generous.

The largest blue chips were able to reduce commissions for advisory work paid to global investment banks significantly during crisis, says a boutique investment banker. That has seen fees fall to 0.5%-0.7% from 1.0% on deals of 1.0 billion reais or more, he says. Meanwhile, fees on mid-sized deals of between 400-600 million reais have not proved so elastic, with charges of 2%-3% still typical, the banker says.

Mid-Market Opportunity
Companies in the mid-market sector felt they were not well served by the large investment banks in previous booms, notes Maluf. Often, large banks appoint a director rather than a partner to oversee mid-market clients and that can grate on the sensibilities of company management, he notes.
Celso de Barros, partner at boutique Vergent Partners in São Paulo, sees firms such as his filling an exposed niche in the mid-market corporate universe that New York-centric investment banks tend to ignore. In its 10 years of business, Vergent’s business has grown every year, including during the crisis, thanks to this focus, he says.

How long that remains the case is in doubt. The mid-market fees are likely to attract greater attention from investment banks, who are seeing compression as large-cap M&A gets more competitive. Maluf thinks it unlikely that the large, international banks such as Credit Suisse, Goldman and JPMorgan will pursue small deals.
However, new entrants and Brazilian banks will probably focus on such deals either as a differentiated strategy, leveraging the private bank or commercial bank relationships, or as an opportunistic way to generate revenues to maintain the team.

"My concern is whether the growth in boutiques is really sustainable," says Maluf. "The market will stabilize at some point and at the same time large banks are aiming to compete on smaller deals as they push more deeply into Brazil. This process will take one or two years, but it will show up a small number of winners and lots of losers in the boutiques," he adds. Losers are likely to be those lacking strong relationships with a key account, international connections and a proper structure, he predicts.
For boutiques to get a running start, client relationships are essential. Some bankers have been successful in bringing over very large clients from previous employers, which has catapulted them up the league tables. Maluf points to a close relationship between Estáter’s Pércio de Souza and Abílio Diniz, chairman of the board at Grupo Pão de Açucar. That has enabled the new firm to support the expansive supermarket in its acquisitions, most notably the take over of electronics firm Casas Bahia through a deal worth over 4.0 billion reais.

Meanwhile, BR Partners’ approach cements relationships even more tightly by inviting heavyweight Brazilian companies to become shareholders. "It’s more like a corporate, shareholder structure than a partnership," notes Maluf. Owners of firms like Hypermarcas, Suzano, BMC, Rodobens and Ripasa are all shareholders in the would-be bank.

Lumpy Streams

The newcomers are pursuing different models with varying levels of specialization. Some are looking for synergies and cross-selling opportunities between advisory and wealth businesses while BR Partners is seeking a full investment banking franchise. André Esteves’ BTG Pactual, the Brazil-based boutique that is swiftly morphing into a global player, has already blazed the trail.

Corrado Varoli, partner at G5 in São Paulo, explains why the firm is built on the pillars of advisory and wealth management. "M&A is attractive but it yields a very lumpy revenue stream. You can work on 10 deals at the same time and can then close a bunch or none at all. That fits in well at very large banks where it represents a small portion of revenues or at very lean boutiques, such as Estáter," he says.
For larger shops like G5, it is an advantage to have private wealth management, which is predictable in revenues and not capital intensive, making it an ideal partner for M&A. Putting M&A and private wealth together is uncommon in Brazil, but established in the US, Varoli says. "Our M&A and wealth managers communicate daily and are based in the same offices. Large investment banks claim that they can translate M&A business into private wealth management and vice versa but my experience suggests it does not work," he says.

Unbiased selection of asset managers is key and G5 is set up to avoid conflicts of interest, he adds. G5 has close to $1 billion in high net worth assets and some 50 professionals in São Paulo and Rio. The private wealth business could grow 3-4 times by assets in the next five years, predicts partner Marcelo Lajchter.
Conflicts of Interest
G5 is also developing a nascent asset management group, which has garnered 100 million reais to date, according to Lajchter. Assets are up from 30 million reais one year ago and he predicts they will hit 300-400 million reais in a year and could grow 8-9 times over five years, if performance is maintained.
Some warn that bringing asset managers inside the firm risks repeating the conflicts of interest seen at bigger firms. De Barros is establishing an outsourced private wealth management firm as he too believes that there are significant synergies between that business and advisory work. But he notes that an internal asset management team that is trading stocks could become privy to privileged information from the M&A side. The same criticism is often leveled at BTG Pactual.
At BR Partners, chief operating officer Andrea Pinheiro does not view the firm as a boutique but a fledgling full-service investment bank. It has applied for a banking license which it hopes to get as early as the end of next year, she notes. A comparison with BTG may be premature, but is not denied. "We are in the same market and are competing with them. But we are at a very different stage," she says.
A central advantage for BR Partners is the number of senior relationship bankers, she believes, which has translated into immediate mandates. M&A has only been up and running for six months but already clients include Carlyle Group, which the firm advised in its acquisition of Scalina. In addition, it worked on Grupo Localfrio’s purchase of assets of Complexo Industrial de Saupe, and São Luiz in its takeover of a controlling stake in Rede D’Or.
BR Partners is firing on all cylinders. It is also soliciting Brazilian high net worth clients for a proposed 200 million reais private equity fund that will seek to take stakes in companies looking to consolidate their sector. The fund is slated to start operations early next year, says Pinheiro. The company is also structuring an investment management business that may use purely independent outside managers or some internal oversight, she adds.
Global Reach
The business plan is not the only major difference between these firms. Boutiques also have varying degrees of international reach.
G5 is convinced a global presence is necessary, says Varoli. Brazilian managers are ever more keyed into international trends. Even though M&A has been mostly domestic in the last two years, this is not indicative of future trends.

"Cross-border flows represented 50% of all business historically, but have dropped to 10% because of the crisis. But in the next five years, you will see many more companies carrying out international transactions especially with Japan and China," says Varoli.
Putting its money where its mouth is, G5 sold a 50% participation to its US partner, investment bank Evercore, in September. G5 has also signed agreements with Japan’s Mizuho, Mexico’s Protego, Citic Securities of China, and Quantum Finanzas of Argentina. The Japanese connection has already yielded four advisory mandates, Varoli notes.
One boutique global advisor, which already has a successful franchise in Brazil, is equally convinced of the merits of global presence. "You can see trends in industries in other countries and provide industry intelligence to local clients. We have relationships with global industry players and can give information on their competitors in Europe and the US," says the partner.

Meanwhile, Vergent Partners is a member of the Global M&A network that gathers 40 boutiques and investment banks across the world, says de Barros. There is typically one firm per country although in Brazil Vergent and Porto Alegre-based Amati Negócios Internacionais are both members.
BR Partners, however, does not see the need for such cross-border partnerships, at least at this stage. Nonetheless, it has still lured foreign business, notes Renato Naigeborin, CFO, investment products. "We want to cater to Brazilians or clients investing in Brazil through M&A, private equity and direct investment and don’t see the need for a global tie-up," he says.
The business models may be different but the marketing pitch is often similar. The core selling points are typically the lack of conflicts of interest at a boutique level and the long-term views that come from a partnership.

Boutique managers claim conflicts are rife within large investment banks. "Do investment banks do a good job at separating out business lines?" asks one established boutique manager in São Paulo with an M&A focus. "Do they have conflicts of interest between clients? Just look at the number of mid-sized bank IPOs coming to market in 2007," he says.

Longer-term client commitments bolstered by a partnership structure that provides equity rather than annual bonuses is the other selling point. It should lock in talent and allow companies to plan for the long-term, believes Pinheiro.

The new boutiques are confident that they will be able to compete with investment banks even when the client’s financing needs include borrowing, traditionally an Achilles’ heel for small operations.

BR Partners has 120 million reais in equity and cannot compete for credit mandates, notes Pinheiro. However, she believes this poses less of a problem than the past because domestic banks are more willing to lend and international and domestic capital markets are opening. It can even be an advantage to be a boutique today and to be able to shop around the offers between different banks, says Pinheiro.

Building the Bank

Boutiques generally claim to give juniors a piece of the pie and offer more transparency. Yet the start-up phase is trying as revenues are low and spending needs high.

BR Partners pays most of its professional staff, excluding areas such as risk management and compliance, just 5,000 reais per month. Despite this, when the market was tight for new staff, BR Partners hired more than 20 people for the investment bank and 10 for the investment team, says Pinheiro.
Senior staff is content to wait for rewards down the line as the business is built, Pinheiro adds. At G5, 80% of employees have shares, although these can be as little as 0.01% and up to 5%-6%, says Lajchter.

The question remains whether boutiques can compete in a limited talent pool with thrusting new and well-established full service investment banks looking to add in Brazil. This year, a full seven investment banks have been looking for a new head either as a replacement or to start a new business, says Maluf. Many are also looking for more junior bankers.

In his recruitment work, Maluf has spoken to senior staff at the boutiques and generally finds they are happy. Moreover, boutiques are generating comfortable deal flow today, and most of the senior bankers like not having a boss along with all the politics and bureaucracy that entails, he says.
However, leading institutions pay more than a boutique in a start-up phase of 2-3 years, and for junior staff the immediate attractions are less obvious. If investment banks start to eat away at boutiques’ mid-market business or the M&A gravy train slows, the boutiques may prove as short-lived as a fungus.

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