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Santiago’s New School

Staid no more: Chile’s finance scene is changing fast as investment banks like Celfin embrace Wall Street tactics.

Investors in Chile can hardly deny it: The traditionally polite, slow-paced financial landscape of Santiago, the country’s capital, is these days displaying a rough-and-tumble competitive style reminiscent of Wall Street. Local observers point to an incident two years ago at the Bolsa de Comercio, the stock exchange in Santiago, as the harbinger of this change. That was when Anheuser-Busch Cos., the U.S. beer colossus, decided to sell its 20 percent stake in Chile’s largest brewer, Compañía de Cervecerías Unidas, or CCU, and agreed to have the shares auctioned off by global giant Deutsche Bank and Chile’s prestigious LarrainVial, a white-shoe investment bank with a seven-decade history.

But as it turned out, this wasn’t a done deal. A few days before the November 12, 2004, auction, in a startling break with Bolsa etiquette, a rival investment bank, Celfin Capital, secretly contacted Anheuser-Busch and offered to purchase the CCU shares for $300 million on behalf of a group of Chilean retail and institutional investors. According to an Anheuser-Busch spokesman and Celfin executives, the auction of the CCU shares went ahead as scheduled to maintain transparency and allow for a possible higher bid. The mandate for the auction was given to Celfin. When nobody matched the offer by the investment group it had put together, Celfin collected fees from both its clients and Anheuser-Busch.

Deutsche Bank and LarrainVial were paid their promised fee by the U.S. brewer, but they weren’t mollified. “You don’t steal away another firm’s mandate,” says Manuel Bulnes, CEO of LarrainVial’s brokerage division. And local market observers tended to side with his firm’s allegations that unwritten rules had been broken by Celfin. “Promises and tradition have been devalued in favor of quick profits and glory,” wrote César Barros in his widely read column in La Tercera, a leading newspaper, the day after the auction.

Hogwash, was Celfin’s gleeful response. “We were just looking out for our clients,” says Jorge Errázuriz, 53, a founding partner at Celfin and head of its corporate finance division. “Our view is that if it’s legal, we’ll do it.”

This sort of American-style aggressiveness isn’t the only sign of a coming of age for Chile’s financial markets. The country has long been the star economic performer in Latin America, with 6 percent average annual growth over the past two decades. But until recently, local capital markets were dominated by a well-behaved handful of big banks and by even larger private pension funds, the Administradoras de Fondos de Pensiones, or AFPs.

“The big story of the past three or four years is the emergence of other actors who have been in the vanguard of changes,” says Ben Laidler, head of research for UBS in Chile. Local independent investment banks, like Celfin, IM Trust and an increasingly harder-nosed LarrainVial, are elbowing their way to the forefronts in stock transactions, private equity deals and mergers and acquisitions. They are also demonstrating to local corporate clients that it is sometimes easier and cheaper to issue debt in Chile than abroad — and to find Chilean investors who are willing to pay more than foreigners for stakes in domestic companies.

“Celfin is the most aggressive of the local investment banks,” says Eduardo Santibáñez, head of research for Chilean financial institutions at rating agency Fitch Chile in Santiago. Joaquín Cortéz, chief investment officer at BBVA Provida, the largest AFP, with more than $23 billion in assets, concurs. “Celfin has definitely become the tough new kid on the block,” he says.

Although controversies like the Anheuser-CCU stock auction have forged Celfin’s reputation for feistiness, the firm has also drawn recognition for some of the most notable financial deals in Chile over the past couple of years. In 2004 it arranged a $332 million IPO for 20 percent of Cencosud, a supermarket and home improvement store chain at the time fully owned by Horst Paulmann, one of Chile’s wealthiest and most colorful entrepreneurs. A year later Celfin managed Cencosud’s purchase of a majority stake in Chile’s second-largest department store chain, Almacenes París — the first time a major local company was acquired in an all-share transaction. It was also one of the most bruising market deals in Chile, with Celfin and Cencosud outbidding the Luksic family, the wealthiest in the country. And Celfin was in the news again last year for successfully placing on the local market a 20-year, $200 million bullet bond — a bond that cannot be redeemed before maturity — with only 3.29 percent annual interest, for Codelco, Chile’s state-owned copper mining behemoth. “We showed it was possible for a Chilean company to issue bonds domestically on cheaper terms than abroad,” brags Errázuriz.

Eye-catching corporate finance deals are fine. But for steady, growing income, Celfin relies on fees from $2 billion in assets under management and commissions from stock trading; in 2005 it led all brokerages by handling 17.8 percent of transactions for third parties on the Bolsa. Headquartered on the 19th floor of a mirrored-glass high-rise in Las Condes, the new business district in eastern Santiago, Celfin has 275 employees. The firm only discloses net income from its brokerage activities: $4.5 million last year. But according to Celfin executives, total profits are roughly equally divided among asset management, trading and corporate finance — meaning that 2005 net income was probably about $13 million, slightly behind the $14 million reported by LarrainVial, the largest independent investment bank.

Because of their similar size and contrasting public images, Celfin and LarrainVial inevitably draw comparison. Both rank among the top three brokerages and are among the market leaders in mutual funds dedicated to Chilean equities. Whenever LarrainVial manages the IPO of a leading Chilean company, Celfin is sure to follow with an IPO for a rival firm. In asset management and private banking, LarrainVial emphasizes its longevity and the blue-blooded credentials of its founding owners, the Larrain and Vial families. Last year the firm softened its reputation for stodginess by managing the IPO of Colo-Colo, Chile’s most popular soccer team. Lately, LarrainVial executives favor sports images to describe their rivalry with Celfin. “We want to win every game, but if we lose fairly, we just move on to the next match,” says brokerage chief Bulnes. Celfin’s Errázuriz retorts: “Forget about fair play — this isn’t sports.”

For all the attention the Celfin-LarrainVial rivalry gets, their financial figures don’t impress the big commercial banks, which are increasingly engaged in investment banking of their own. “These smaller firms need alliances with some big guns from abroad if they are going to leap to the next level,” says Gonzalo Menéndez, a senior bank manager who sits on the board of Banco de Chile, the country’s second-biggest bank after Banco Santander Santiago.

Celfin executives couldn’t agree more. That’s why in May they signed an accord with Merrill Lynch & Co. under which the global heavyweight will give Celfin clients more exposure abroad while Celfin does the same in Chile for Merrill’s clients. “Merrill has no presence locally besides its small private banking operations,” says Juan Andres Camus, 53, Celfin’s chief executive officer and founding partner. “So we’re a good fit.” According to Andrew Gray, Merrill’s first vice president for corporate strategy, his firm was impressed by Celfin’s “research capability and the great relationships it has built up as an investment bank.” The initial focus, say both sides, will be on equities and fixed-income assets, with the intention of moving on to more-sophisticated private banking and corporate finance deals.

Celfin was founded 18 years ago, but Camus and Errázuriz, who each hold a 32 percent stake in the firm, had been discussing the idea of starting an investment bank since their college days in the 1970s. Both are descendants of Basques who emigrated to Chile in the mid-1700s, during the Spanish colonial era. Over the next two centuries, their families filled the ranks of the lawyers, doctors, landholders, clergy and politicians who dominated Chilean society. That social order was shattered first by the 1970 election of a Marxist president, Salvador Allende, who brought much of the economy under state control, and then by the brutal 17-year rule of a right-wing dictator, Augusto Pinochet, whose violent coup in 1973 overturned the Marxist government and led to Allende’s death during the upheaval. Pinochet then instituted radically conservative economic reforms.

Camus and Errázuriz met in the early ’70s at the Pontificia Universidad Católica de Chile, where they studied under the University of Chicago–trained professors who headed Pinochet’s economic team. After graduating in 1975 they ended up four years later at Banco Bice, a Chilean bank where Camus became a commercial banking executive while Errázuriz joined Bice Chileconsult, a joint venture with N.M. Rothschild & Sons of London that became Chile’s first investment bank.

The contacts made during those early years provided a useful client base for Celfin when it was launched in 1988 by Errázuriz, Camus and a third partner, Mario Lobo, who is no longer with the firm. Back then, the pool of domestic investors was still small, and the only way an investment bank could prosper was by selling Chilean companies or their shares to foreigners. “Celfin decided at that point to create a research department that spoke English and met the more sophisticated requirements of a Wall Street firm,” says Alejandro Montero, 39, head of capital markets and a senior partner.

This led to an alliance with Salomon Brothers in 1989 under which the U.S. firm agreed to split trading fees generated by Celfin’s research on Chilean companies. At that time, regulations aimed at preventing rapid outflows of capital from Chile required foreigners who invested in Chilean companies to keep their money in the country for at least a year. (Restrictions on capital flows were fully rescinded only in 2002.) But Celfin and Salomon successfully lobbied the government for approval of their Chile Fund, the first Latin American country fund traded on the New York Stock Exchange.

The alliance lasted until 1998, when Salomon Smith Barney was acquired by Citigroup, which had a full range of financial operations in Chile. The break from Salomon coincided with the Asian financial crisis of 1997–’98 that led to a lull in global investment in emerging markets, including Chile. Celfin and the handful of other independent Chilean investment banks had to refocus and look for capital closer to home. Fortunately for Celfin, the pool of domestic investors was widening. Chilean entrepreneurs were flush with cash from selling parts or all of their companies to foreigners during the 1990s. “People were calling us up and asking what to do with their new fortunes,” says Camus. “So we started to develop our private banking business.” In 1996, Celfin bought brokerage Gardeweg y García Corredores de Bolsa, which at the time handled about 6 percent of the Bolsa’s total trading volume. A decade later Celfin Gardeweg has tripled its share of Bolsa trading.

Ever since shifting its focus toward the domestic market, Celfin’s biggest customers have been the AFPs, six private pension funds that manage assets totaling $80 billion in a country with a 2005 GDP of $105 billion. (Retail clients account for less than half of Celfin’s income.) Because of their size and clout, the AFPs are both bane and balm for Chilean investment banks. The pension funds account for 20 percent of Celfin’s trading activities and pay less than half the commissions that retail clients get charged. “But because of the volume of their transactions, they provide much of the daily flow and liquidity for our business,” says Celfin senior partner Montero. “And if you look at all our businesses with the AFPs, they amount to a reasonable, steady, growing income.”

Among the more prominent examples of Celfin deals that drew heavy AFP investments were the IPO for Cencosud in 2004, followed by its 2005 acquisition of department store chain Almacenes París. Until then the AFPs had no interest in Cencosud because its owner, Paulmann, now 71, managed his supermarkets, home improvement outlets and shopping malls as tightly as if they were a mom-and-pop shop.

Paulmann, who was born in Germany and after World War II moved with his parents to Argentina and then Chile, “kept his very hands-on management style from early days,” says Errázuriz. He recounts a telling episode when he was courting the entrepreneur in 2004: Sitting at a café in a shopping mall he owned, Paulmann chided the waitress for not pressing them to have food or dessert along with their coffee. “Always try to get clients to spend more,” he told her.

Paulmann financed his business almost entirely from cash flow; with no Cencosud shares on the market, his real worth was anybody’s guess. But as he neared 70, Paulmann decided to transform his empire into a modern, publicly traded corporation with a constituency of shareholders who might invest with him in new projects. In 2004 he asked Celfin to arrange an IPO for 20 percent of Cencosud. “We held road shows in Chile, Europe and the U.S.,” recalls Errázuriz. “The real surprise was just how much capital was available in Chile.” Chilean investors — mostly AFPs and insurance companies, and the rest retail investors — took 70 percent of the $332 million IPO. They would have bought even more, but Paulmann had reserved 30 percent of the offering for foreign institutional investors.

Soon afterward, Paulmann again turned to Celfin, this time to arrange the $602 million purchase of 71 percent of the Almacenes París department store chain. Today Cencosud is one of the most traded shares on the Bolsa and a mainstay in AFP portfolios. Cencosud’s market cap, $1.66 billion at the time of the March 2004 IPO, stood at $5.08 billion in late September.

Although the Cencosud deals firmed up Celfin’s reputation as an equity firm, it is still considered weak in managing debt issues. “We are in the process of working closely with Celfin to grow our fixed-income presence in Chile,” says Merrill’s Gray. That is why, say Celfin executives, it was so important to land last year’s $200 million bond issue by Codelco, Chile’s largest company and the world’s biggest copper producer.

In many ways, Codelco is an anomaly. In a country where just about everything from manufacturing to banking to social security has been privatized, Codelco remains 100 percent state-owned. With $10.5 billion in revenues and net profits of $1.78 billion in 2005, it accounts for 70 percent of Chile’s copper industry. Codelco is likely to remain under government control for the foreseeable future because of the strong ties created by the Pinochet regime between the company and the armed forces. Under statutes from the Pinochet era, the military’s budget is financed by 10 percent of Codelco’s revenues — not profits. With copper prices more than doubling, from $1.70 a pound on August 1, 2005 to $3.50 a pound a year later, the armed forces are suffering an embarrassment of riches.

With so much financial and political clout, Codelco has preferred to float its bonds with global institutions. “In all my years in investment banking, I was never able to get a foot in Codelco’s door,” says Errázuriz. What finally got Celfin over the threshold were the kind words of a well-placed friend: Juan Eduardo Herrera, Codelco’s senior vice president for strategy and business development. Errázuriz and Camus had met Herrera in 1990 when he was a director of Chile’s central bank. At that time, Celfin and Salomon negotiated often with Herrera to get the central bank to allow the pathbreaking issue of American depositary receipts on the New York Stock Exchange for Compañia de Teléfonos de Chile. (The Chilean telecommunications company is now a subsidiary of Spanish telecom giant Telefónica and has been renamed Telefónica CTC Chile.) Thereafter, Herrera maintained a friendship with the Celfin executives. When a new financial team arrived at Codelco last year, Herrera felt it was an appropriate moment to give Celfin a hearing. “We asked them why Codelco should only think of raising debt abroad when there was a strong enough local pool of capital willing to accept cheaper interest rates,” says Errázuriz.

Celfin’s solution — 20-year bullet bonds — came with a 3.29 percent annual interest rate, which was barely 20 basis points above the terms for a comparable bond from the central bank. Working with Credit Suisse, Celfin arranged a cross-currency swap for the duration of the bond, meant to offer protection against currency fluctuation losses. Most of the Codelco bond issue was bought by the AFPs.

As Celfin’s profile and profitability swell, speculation is beginning to mount about whether it will remain an independent firm. After all, much larger Chilean financial companies — including most AFPs and big commercial banks — have foreign institutions as their controlling shareholders. Camus, Errázuriz and Montero own 80 percent of Celfin, with the remaining 20 percent split equally among four other executives. “We don’t want a family business, and there are no relatives working here,” says Camus, who nonetheless insists he hasn’t given a thought to selling the firm.

Errázuriz, on the other hand, has mulled over that possibility and suggests a strategy for Celfin similar to what the firm has offered to clients like Cencosud’s Paulmann. “In five or ten years, Celfin should become a publicly traded company,” he says. “Of course, if the price is right, something could happen sooner.”