GIC and CIC show thirst for Latin America with Pactual stake

Asiamoney.com, December 8 2010

The news that the Government of Singapore Investment Corporation (GIC) and China Investment Corporation (CIC) will invest in Brazil’s BTG Pactual bank underlines a theme we are going to hear more and more about in years to come: intercontinental emerging market trade.

While GIC and CIC are the names that have struck the deal as part of a consortium putting in $1.8 billion, it’s another sovereign fund, Temasek, that has given the clearest signal that Asia-Latin America interest is going to grow and grow.

About two years ago Temasek shifted its target geographical allocation from one that had previously put a lot of money into developed markets, to a new 40:30:20:10 model, for Asia, Singapore, OECD countries and other markets respectively. At the time, comment focused on the relative increase of importance for Asia at the expense of developed markets, but another story was largely missed: the ‘other’ bit, which accounted for just 2% of the portfolio in March 2010 but will rise to 10 in this new model. Temasek’s portfolio, when last disclosed, was worth S$186 billion (US$141.29 billion), suggesting that $14.13 billion will go into other markets like Latin America and Africa, and that more than $11 billion of it will be new investment.

Temasek has been building a presence in Latin America for some time. In May 2008 it hired a new managing director for investment in Mexico, Barclays Capital’s Mexico president Lorenzo Gonzalez Bosco, and sent its MD for Latin America, Alan Thompson, to Sao Paolo. By then it had already bought 15.4% of the Brazilian oilfield services group San Antonio International, and this year followed it up with a JV with Mexico’s IMDI to pursue land banking opportunities there, seeding it with US$200 million. Greg Curl, the former Bank of America chief risk officer who became Temasek’s president in September, has responsibility for developing Temasek in the Americas; it’s already clear he’s likely to spend more of his time in the southern continent than the northern.

Set alongside this has been the headlong pursuit of African assets by Chinese companies, most obviously through resources companies like CNOOC and Petrochina, but also banks such as ICBC, which has bought into South Africa’s Standard Bank. China has a stomach for markets that make others queasy: Petrochina is big in Sudan (far too big for many advocates’ liking), while CNOOC has struck deals in Somalia. CIC’s purchase in BTG Pactual shows the sovereign wealth fund, which has been steadily getting into more frontier parts of the world like Mongolia and Kazakhstan for two years, following that lead into other, non-Asian emerging markets.

It’s natural that sovereign funds like GIC, Temasek and CIC should look to other emerging market blocs outside Asia. The financial crisis saw all three of them badly burned by investments into western financial institutions: Barclays and Merrill for Temasek, UBS for GIC, and Morgan Stanley and Blackstone for CIC (although several of those investments eventually turned positive after considerable pain in the meantime). And viewed from Asia, Brazil in particular has a lot to recommend it: scale and pace of growth reminiscent of BRIC counterparts China and India; and clear emerging champions like Petrobras – recent victors in the world’s biggest ever rights issue – and BTG Pactual itself.

Pactual is emblematic of what Asian sovereign wealth funds want from these markets, because it is the perfect emerging market story. A homegrown investment bank, in 2006 it did what most homegrown investment banks do and sold to a foreign global heavyweight, in this case UBS. It got $3.1 billion for it, much of that going to the bank’s partners. But, better still, when UBS ran into trouble in the financial crisis, it sold it back again, to BTG, which was the investment fund that former Pactual executive Andre Esteves had founded after his UBS windfall in the first place. UBS got $2.5 billion, an almost 20% erosion of value in three years if reported numbers are correct, and BTG Pactual is once again owned by its partners. Somewhat like CICC, it is a local powerhouse, often leading the market in capital raising and trading on both the debt and equity side, and increasingly in M&A too. And so it has that sense of the dawning power of emerging economies that Temasek, in particular, so frequently elucidates: growing from its own emerging market roots, taking on the biggest competitors in the world and, in this case, coming out the stronger for it.

BTG Pactuals don’t come along every day, but there’s enough strong companies in Latin America and Africa, and enough sovereign wealth in Asia, to ensure that these tentative engagements are just the start.