Evercore Partners' deal to buy a 50% stake in the boutique bank G5 Advisors last week is just one example of how Wall Street dealmakers are scrambling to get a foothold in Brazil, whose rapidly growing economy promises to be an active source of mergers and acquisitions.
"There is a lack of knowledge about how to make investments in Brazil. Evercore and G5; we want to be in the middle of that," Corrado Varoli, a former Goldman Sachs dealmaker who started G5 three years earlier, said in a telephone interview from Sao Paulo.
Evercore, the firm founded by former Deputy Treasury Secretary Roger Altman in 1996, agreed to pay $20 million in cash and securities, and said there is the potential for earnout payments based on performance through 2013.
It also has the option to buy the rest of G5 in 2014. The deal is expected to close in October and be moderately accretive to Evercore's earnings. (In August, Evercore reported second-quarter net income of $2 million, or 5 cents a share, compared with $3.6 million, or 10 cents a share, a year ago.)
Varoli cited another aspect of this purchase: G5's asset management and private wealth management business units would dovetail with Evercore's asset and wealth management business units.
"We see a significant opportunity to market products through Evercore. Our clients want to diversify outside of Brazil," he said. "We see a lot of opportunity to cross-sell and cross-advise with Evercore."
G5's private wealth unit manages $2.5 billion for high-net-worth individuals, and its asset management business consists of two hedge funds with $60 million.
"We expect to build the hedge fund business," said Varoli. "Brazil has become an attractive place to invest."
He also said his firm wants to branch out into private equity (an industry that he calls relatively small in Brazil, considering the size of its economy) and real estate principal investments.
G5 currently operates only in Brazil — with offices in Sao Paulo and Rio de Janeiro — but may eventually move into other South America markets, Varoli said, though he would not be more specific.
"We've doubled [in staff] over the last two years," he said. "Right now, we have 45 people, and that could double by the end of next year."
Just over $53 billion of M&A deals were completed last year in Brazil, according to data compiled by Thomson Reuters. So far this year, $19 billion of deals have been completed.
"We believe the number of cross-border merger transactions will increase, and that Brazil and Latin America will be an increasingly important part of this trend," Ralph Schlosstein, Evercore's president and chief executive officer, said in a press release unveiling its deal.
Leading M&A advisers in Brazil include Santander, Banco BTG Pactual SA, Morgan Stanley, Banco Bradesco SA, Credit Suisse and Deutsche Bank.
So far this year, Brazilian companies have raised over $25 billion through the sale of debt, versus $6.5 billion for all of last year and $10.9 billion for all of 2008, according to Thomson Reuters.
Top firms in the debt underwriting business include HSBC, JPMorgan Chase, Santander, Citigroup, Goldman, Bank of America Merrill Lynch, Deutsche Bank and Itau Unibanco.
Just over $16 billion has been raised in the Brazilian equity markets this year, versus roughly $26 billion all of last year and $20 billion in 2008.
Varoli expects multinationals to make more acquisitions in Brazil, and he expects businesses based there to target more U.S. companies.
He cited the bid for the Burger King food chain by a Brazilian fund manager and the purchase of Pilgrim's Pride by Brazil's JBS as examples of such deals.
"Brazil has become very central to the global economy," said Varoli, who was a partner, a managing director and the head of the Latin America business at Goldman before founding G5.
"It is much more integrated than it has historically been."
The country's well-known natural resources - oil, gas, iron ore and forest products - likely will remain an active source of deals, he said, but market participants should not overlook its financial institutions, many of which have market caps of more than $100 billion.
"Why wouldn't these financial institutions expand outside of Brazil?" Varoli asked.
"There is a feeling among many Brazilian companies that when looked at in the global context, the U.S. may offer more long-term investment opportunities that may be undervalued and hence attractive, compared with other developed economies."
Separately, Evercore announced Sept. 13 that it and some of its shareholders started a public offering of an aggregate of 2.6 million shares of Evercore class A common stock.
The banking firm said it will use the proceeds from the sale to buy from certain holders, including members of its senior management, a number of outstanding Evercore LP partnership units equal to the number of newly issued class A common stock sold.
