Brazil, Fortune and Fate Turn on Billionaire

Brazil’s economy, driven by a worldwide commodity boom, grew a blistering 7.5 percent that year. And Mr. Batista’s prodigious holdings — spanning oil, mining, shipping and real estate — were soaring in value. In the interview, Mr. Batista was asked how rich he would become over the next decade.

“A hundred billion dollars,” he said, an amount that would most likely have made him the wealthiest person in the world.

Today, with the Brazilian stock market and the value of its currency falling as mass demonstrations hobble the country, Mr. Batista’s billions are evaporating. From a peak of $34.5 billion in March 2012, his wealth has dropped to an estimated $4.8 billion, according to the Bloomberg Billionaires Index. His lenders are growing anxious, and there are concerns that he might have to reorganize — and possibly lose control of — his dwindling empire.

The rise and fall of the charismatic industrialist mirrors Brazil’s sudden reversal of fortune. After years of economic expansion, the South American nation has begun to sputter. Inflation has become a major concern. Brazil’s stock market index has declined about 23 percent this year, the most of any large country. This month, Standard & Poor’s cut its outlook on Brazil’s credit rating to negative, citing slowing growth and weakening finances.

And then there are the street protests spreading across Brazil, stunning the country’s political and business establishment. With outbursts of violence, the protests, initially caused by an increase in bus fares, have grown into a broad questioning of the government’s priorities. The protests shook an array of cities over the weekend, with somewhat less intensity than in previous days, and organizers promised a new round of demonstrations in the days ahead.

Mr. Batista’s conglomerate, as an emblem of the nation’s industrial mettle, ranked among the government priorities now being questioned, receiving more than $4 billion in loans and investments from the national development bank. While protesters have not focused much ire on Brazil’s economic elite, there has been a building resentment toward the fact that governing structures subject to corruption in Brazil remained largely the same throughout the long economic boom, as authorities channeled huge resources of the state to projects controlled by tycoons.

The protesters have directed much of their anger toward political leaders, some of whom are close to Mr. Batista, like the governor of Rio de Janeiro, Sérgio Cabral, to whom Mr. Batista occasionally lent his private jet and who found demonstrators camped in front his home.

“Eike Batista assembled an empire thanks to colossal financing from the Brazilian government,” said Carlos Lessa, an economist and former president of Brazil’s national development bank. “But his explosion of wealth and prominence on the global stage came with risks, as the government itself and investors are discovering now.”

Mr. Batista built his fortune by selling investors on the potential of Brazil, forming companies that would benefit from the country’s rich oil fields, vast mining resources and fast-growing middle class.

But over the last year, investors in Mr. Batista’s six publicly traded businesses — none of which are profitable — have unloaded their shares amid disappointing projections, missed deadlines and a heavy debt load.

“He bundled wind and sold it,” said Miriam Leitão, an economic historian and columnist for O Globo, a leading Brazilian newspaper. “The euphoria fooled a lot of people.”

Now Mr. Batista is shedding assets and raising cash. In April, he dumped a large stake in his electric power company. He has put a private jet, a $26 million Embraer Legacy 600, up for sale. He is seeking a partner for Rio de Janeiro’s landmark Hotel Glória that he bought in 2008, a project that was supposed to be ready for the 2014 soccer World Cup but is mired in delays.

DealBook: Despite Risks, Brazil Courts the Millisecond Investor

Yasuyoshi Chiba/Agence France-Presse — Getty ImagesThe stock exchange in São Paulo, Brazil, is the largest in South America.

SÃO PAULO, Brazil — At a time when the mere phrase “high-frequency trading” makes some investors queasy, Brazil’s stock exchange is putting out the digital welcome mat.

In recent years, the BM&F Bovespa stock exchange in São Paulo has taken steps to make its market more friendly to high-speed traders, even as many regulators around the world are casting an increasingly skeptical eye on the sector after a series of well-publicized market malfunctions in the United States.

Lawmakers in Canada, Australia and the European Union have been looking at imposing limits on such traders, whose investment time horizons are measured in milliseconds rather than months.

“Given the attention and the political discourse on the perceived dangers of H.F.T., exchanges are very reticent to be aggressive in promoting and attracting high-frequency trading,” said Andy Nybo, an analyst at the Tabb Group.

But in Brazil — as well as in other developing economies like Chile and Mexico — exchanges are actively courting high-speed traders without much resistance from their regulators. The appeal is that the traders can execute thousands of trades a second, resulting in big fees for the exchanges.

The BM&F Bovespa, which closed its open trading pits in 2009 in favor of electronic trading networks, is ramping up efforts to support computerized trading. Last month, the Brazil stock exchange introduced a new lightning-fast computer system, known as Puma, that allows high-speed traders to get in and out of trades more quickly. The exchange has offered these traders discounts since October 2010.

The BM&F Bovespa is “very open about what they are looking to do. They really have been aggressive in welcoming all types of strategies,” Mr. Nybo said.

The stocks on the Brazilian exchange are cumulatively worth $1.2 trillion, but the average daily trading volume on the exchange is only about $3.7 billion. In the United States, a single major stock like Apple can trade more than that each day.

The comparatively low volumes are in part a reflection of the relatively limited involvement of high-speed traders, who still only account for about 10.6 percent of all stock trades in Brazil. Although that is up from 8.5 percent in 2012, it is still a fraction of trading in other large global markets. In the United States, such firms dominate a majority of the trading, and in Europe, they are responsible for about 45 percent of the trading, according to Celent, a research and consulting firm.

The Brazilian exchange’s push seems like a risky gambit to many critics of the acceleration of American markets over the last decade. High-frequency traders have been accused of using technology to move share prices for their own advantage and to trick traditional investors. They have also taken some of the blame for market mishaps like the “flash crash” in May 2010, when stock indexes dropped nearly 10 percent in less than half an hour.

Wallace C. Turbeville, a senior fellow at Demos, a research group in New York, said most offers made by high-frequency trading firms were “illusory”: they exist not to be executed, but to measure, distort and exploit market sentiment, increasing volatility and costs for other investors.

Brazilian executives say they believe they have been able to avoid problems through strict regulation. They are also trying to keep at bay many of the other technological developments that have complicated American and European markets. Brazil has, for instance, banned dark pools, private venues where trades can be executed out of the public eye.

And unlike in the United States, which has 13 public stock exchanges, the BM&F Bovespa remains the only place to trade stocks in Brazil.

Cicero Vieira, the BM&F Bovespa’s chief operating officer, said a single trading environment meant computerized trading firms had fewer opportunities for arbitrage — simultaneously selling high in one place and buying low in another — which should keep high-frequency trading from growing past 20 percent or so of total volume.

“When it comes to H.F.T.’s, there is no such thing as zero risk,” Mr. Vieira said. “Our philosophy is to contain the impact of errors.”

Danielle Tierney, an analyst with the Aite Group, a financial advisory firm in Boston, said that Brazil’s tough regulations, including a prohibition on anonymous trading, and its less complicated market structure had helped prevent the problems that have drawn scrutiny in America.

“Risk controls can always fail, but compared to where we were in the U.S. in 2010, Brazil is much better prepared,” she said. She added that having a single stock exchange with low trading volume makes it easier to spot problems.

Brazil’s market regulator, the Comissão de Valores Mobiliários, has so far left regulations governing high-frequency trading to the exchange, but it says it is observing the segment closely.

For the BM&F Bovespa, the push to attract high-speed traders provides a way to keep out competitors. Direct Edge, a United States exchange with close ties to electronic trading desks, has applied to operate in Brazil, but approval is not expected before 2015. In the United States and Europe, upstart exchanges won market share by being more accommodating to speedy traders.

The BM&F Bovespa is also eager to get the benefits that electronic trading has brought to the United States. Several academic studies have suggested that the competition among the firms has led to smaller differences in the spread between the prices at which traders are willing to buy and sell stocks, making trading cheaper for slower investors.

“That will increase liquidity and reduce spreads and distortions,” Mr. Vieira said.

Brazil has been steadily making its systems more hospitable to high-frequency firms. In 2009, the exchange opened the door to more computerized traders by creating a data center that allowed firms to co-locate within a few feet of the exchange’s server, cutting down the delays associated with data traveling through fiber optic cables.

Chris Concannon, a partner at the New York-based electronic trading firm Virtu Financial, said that the exchange had worked “very hard at encouraging new participants into the market, both electronic and traditional.”

But the exchange ran into the limits of the speed of their own computer systems. The new Puma system cuts the time for order execution to around a single millisecond from 30 while increasing stability and capacity. The technology was developed together with America’s largest futures exchange, the Chicago Mercantile Exchange. The BM&F Bovespa and the CME own 5 percent stakes in each other. Ms. Tierney estimates that Puma cost at least $200 million and perhaps as much as $500 million.

The new technology has been available since 2011 to traders on Brazil’s derivatives markets, which BM&F Bovespa also operates, and is scheduled to include the bond market by early next year.

Mr. Concannon said that they had already noticed a “substantial improvement in the exchange performance with these upgrades.”

The eagerness of high-speed firms to enter Brazil points to their search for new markets as they experience difficulties in sustaining their profits in the highly competitive United States. Most of the high-speed trading activity has so far come from non-Brazilian firms like Virtu. Brazilian brokers have been winning some of this business and consequently welcoming the developments.

Yet, there are still those who sound caution on these initiatives. Felipe Santos, responsible for electronic trading at the São Paulo fund manager Equitas Investimentos, said that although high-frequency trading might make it easier for everyone to buy and sell stock in big companies, especially the largest ones, it had its limits.

“You cannot create volume out of thin air,” he said. “You need real investors, too.”

Dan Horch reported from São Paulo, Brazil, and Nathaniel Popper from New York.

DealBook: After I.P.O. Drought, Brazil Is More Hospitable to Investors

Ricardo Moraes/Associated PressA branch of Banco do Brasil in Rio de Janeiro.

SÃO PAULO, Brazil — The nation’s main stock exchange here forecast at the start of 2012 that 40 to 45 companies would hold initial public offerings to list their shares. Only three did.

“Very few transactions got done, and very few got done well,” said Fábio Nazari, head of equity capital markets at BTG Pactual. Many issuers encountered “very difficult conditions.”

Some of the lackluster performance can be chalked up to investors nervous about the global economy, but much also had to do with government policies in Brazil.

Last year, the country changed regulations and applied pressure to reduce consumer prices in several sectors, including retail banks and electricity utilities. Those measures may succeed in reducing consumer costs, but investors complained about lowered profit outlooks and accused the government of changing the rules in the middle of the game.

The government also used taxes and regulatory measures to weaken the currency in the first half of 2012. The value of the country’s currency, the real, fell more than 18 percent from March 1 to June 1, increasing uncertainty for foreign investors.

In Brazil, tough economic conditions also hung over the markets last year. In the first three quarters of 2012, the country’s gross domestic product rose only 0.7 percent. The Bovespa index was up 7.4 percent in 2012 — a healthy return but not the double-digit yearly gains it often had a few years ago.

Going into 2013, however, both government agencies and the private sector are taking steps to encourage start-ups and growth industries to raise financing through the public markets. In addition, analysts say, the most disruptive policy changes are already in place, so companies will find a more hospitable climate for stock offerings.

“We don’t foresee more big moves from the government,” Mr. Nazari said. “The past has been priced into valuations, and economic growth should pick up this year.”

Brazil has only 365 publicly traded companies, and they do not fully reflect the strength and diversity of the economy, the world’s seventh-largest. Commodities producers dominate the main stock index, even though industries that serve the country’s growing middle class are growing faster. But Mr. Nazari said at least 30 companies were ready to list in the next 12 to 18 months.

Two big stock offerings are already on tap to be listed on the BM&FBovespa, the main stock and futures exchange in Brazil.

Banco do Brasil, the state-controlled banking conglomerate, has announced that it intends to spin off its insurance operations into a new company, BB Seguridade, which would then hold an I.P.O. in the first half of 2013. The deal, if it goes through, could raise 5 billion reais.

And local investment banks say Votorantim Cimentos, Brazil’s largest cement producer, is preparing for an I.P.O. this year that would aim to raise 6 billion reais.

Investors may also turn to I.P.O.’s to seek better returns. After decades in which investors could buy short-term government bonds and earn double-digit returns, interest rates in Brazil have dropped. Most traditional fixed-income investments now hardly keep up with inflation.

Jean-Marc Etlin, chief executive of Itaú BBA Investment Bank, said that in an environment of relatively low interest rates, Brazilian investors had incentives to increase their stock market allocations, potentially creating demand for new companies.

Mr. Etlin also said there were thousands of Brazilian companies, mostly family owned, that could provide the basis for sustained activity.

“Brazil’s equity capital markets literally restarted just 10 years ago, with the first I.P.O. under new governance rules. We are still in the early stages,” he said.

Since Brazil’s first modern initial public offering in 2002, 70 percent of financing has come from foreign investors, so the market in the near term is dependent on global trends.

Brazil had a banner year in 2009, when companies raised nearly 46 billion reais on the public markets, according to the BM&FBovepsa (that figure includes I.P.O.’s and follow-on offerings, when companies issued additional shares). That year included I.P.O.’s of the bank Santander Brasil, which raised 13.2 billion reais, and the credit card operator Visanet, which raised 8.4 billion reais.

Renato Ejnisman, managing director of Bradesco BBI, Banco Bradesco’s investment banking division, said the market this year was not likely to return to 2009 levels, but “two or three times as many deals as in 2012 is pretty doable.”

Facundo Vazquez, head of Latin America equity capital markets at Bank of America Merrill Lynch, said foreign institutional investors preferred larger deals because they were more easily traded on the public markets, while risk-averse investors were more comfortable putting money into big companies that dominated their sectors.

Conglomerates looking to spin off units will be “the sweet spot,” he predicted, as such operations are big deals with plenty of liquidity from well-known companies.

Mr. Nazari of BTG Pactual also said that bigger offerings attracted more interest. “Right now, it is easier to do a $2 billion deal than a $200 million one,” he said. “A lot of investors are sitting on cash, waiting for the new year and for opportunities.”

The government itself is taking measures to facilitate listings, although more for smaller offerings. The Comissão de Valores Mobiliários, Brazil’s main securities regulator, announced in November that it would consider, on a case-by-case basis, easing requirements for smaller I.P.O.’s.

The equity arm of the state-owned development bank BNDES has 108 billion reais invested in nearly 400 companies, some of which are publicly traded giants like Petrobras, but most of which are privately held.

The BNDES, short for Banco Nacional do Desenvolvimento (or the National Development Bank in English), said in October that it intended to encourage or even oblige its start-ups and other companies to hold I.P.O.’s or at least join the exchange’s access tier, Bovespa Mais.

The Bovespa Mais requires companies to meet the same governance requirements as public companies and to go public, with at least 25 percent of their shares listed, within seven years.

Linx, a midsize software firm in which the BNDES holds a 21.7 percent stake, filed paperwork with regulators at the end of December to hold an I.P.O. this year. Linx is expected to try to raise 500 million reais.

Both government and private sector entities are also working together to present by March a package of regulatory and tax measures to pave the way for smaller I.P.O.’s, though the measures probably would not be in place until 2014.

In general, the change in regulations and investor demand could finally help end Brazil’s drought in I.P.O.’s, analysts said.

“In 10 years or less, we could easily see the number of listed companies in Brazil double,” said Mr. Nazari of BTG Pactual.

DealBook: Brazil Steps Up Investments in Overlooked Tech Start-Ups

André Vieira for The New York TimesMarcio Spata, left, head of the Criatec investment fund at BNDES, Brazil’s state controled development bank, and Eduardo Klingelhoefer de Sa, the bank’s director of investment funds.

RIO DE JANEIRO — For the last few years, Brazilian start-ups have begun to successfully draw blue-chip Silicon Valley venture firms. But in the process, promising technology segments have been ignored.

Although private firms are readily investing in e-commerce and other hot areas, fields like nanotechnology, robotics and information technology — considered critical to transforming Brazil’s commodity-export, consumption-dependent economy — are falling by the wayside.

Rather than leave innovation financing solely to private investment firms, Brazilian officials decided several years ago to step in and shepherd nascent companies. And in 2007, Brazil’s national development bank, BNDES, started Criatec I, a 10-year venture capital fund of 100 million reais, or about $48 million, aimed at start-ups. Foreign venture capital firms have been welcome to make follow-on investments. To date, not one has.

Instead, Brazil has doubled down on its goal of promoting technology growth. This week, the bank awarded a new fund of 186 million reais, or $89 million, to Icone Investments. BNDES is providing most of the capital, with contributions from regional public banks.

Though the government has been taking the lead, it has not been for a lack of interest from private venture capital. Over the last two years, Redpoint Ventures, Accel Partners and Sequoia have become active here, as have Peter Thiel, Dave McClure and European and Israeli investors. But BNDES believes a huge void remains in early-stage financing.

“They are voraciously investing in all the paste-and-copy stuff, the copycats. They are not really into technology innovation,” said Robert E. Binder, whose private firm, Antera Resource Management, comanages the initial Criatec fund with São Paulo-based Inseed Investments.

Innovation is an urgent matter in Brazil, economists say. According to the Research Institute for Industrial Development, this year through September, the country ran a $38.7 billion trade deficit in technology-intensive goods, an increase from last year. Brazil’s economy is highly vulnerable to global economic uncertainty, which is reflected in the country’s recent third-quarter growth figures.

A looming demographic shift is also a concern. In 2030, Brazil’s population is expected to decline and get increasingly older, potentially straining government resources.

Venture capital firms investing in Brazil’s start-up boom regard Criatec as well intentioned. Eric Acher, a founding partner at Monashees Capital, called it a “great learning experience to focus on innovation.”

Anderson Thees of Redpoint e.Ventures also praised the fund. “They are probably tapping into very good opportunities early,” he said.

Yet these and other venture funds have yet to team up with Criatec on investments.

For instance, Criatec looks for companies developing technology and with clear intellectual property that can be licensed or retained, Mr. Thees said. “Silicon Valley is less interested in this,” he said.

Mr. Acher agreed: “I don’t think at the moment Silicon Valley is looking for technology innovation in Brazil,” adding that the return did not yet justify the level of risk involved.

BNDES expected such risk aversion when it created Criatec.

“Not even Brazilian funds were showing interest in early-stage companies,” said Eduardo Rath Fingerl, one of the fund’s architects. “We knew it would have to be entirely a BNDES effort.”

BNDES, short for Banco Nacional do Desenvolvimento (the National Development Bank in English), has long played an important role in Brazil’s rise. Formed in 1952, the development bank initially financed major infrastructure. Its scope and size grew considerably under former President Luiz Inácio Lula da Silva, who thought Brazil needed brand-name multinationals to gain respect overseas.

In 2003, the bank disbursed $11.7 billion, but by 2010, that figure had skyrocketed to $96.3 billion. It has provided subsidized loans to most large Brazilian companies, including the oil giant Petrobras and the mining concern Vale. The bank has also supported foreign companies, including $3 billion to American Airlines to buy planes from Embraer, a Brazilian manufacturer.

Its dominance here has drawn criticism. Some contend the government bank has the wrong priorities, including financing mergers and acquisitions, which some contend should be left to the private sector.

“Long-term credit is still a problem in Brazil,” the Brazilian economist Mansueto Almeida said. However, “Brazil today is very different from what it was 20 years ago. It has very active capital markets.”

Criatec, however, is one of the bank’s smallest and least-controversial programs. Mr. Almeida said that with this initiative, “it is trying to do the right thing. That’s exactly what one expects from a development bank.”

Criatec I has had a slow track record of success. Usix Technologies, an insurance market exchange technology firm that received backing from Criatec, was acquired by the publicly traded Ebix in 2010. It has also backed companies with promise, like Amazon Dreams, which has developed patented techniques to produce açai and other berries with higher antioxidant content.

Some foreign investors are starting to look at the Criatec I portfolio. Intel Capital, the venture arm of the chip maker Intel, is evaluating the location intelligence software company Geofusion, according to a person briefed on the talks, who asked to be anonymous because the discussions were ongoing.

Kleiner Perkins Caufield & Byers showed interest this year in the agro-pesticide company Bug Agentes Biologicos but said the start-up first needed $10 million in revenue. Now that company is discussing a strategic partnership with Israel’s Bio-Bee Biological Systems. But such potential deals again indicate that foreign venture capital firms are still not courting the smaller start-ups.

“They all want to find these companies with $10 million to $15 million in revenue, but there just is not deal flow at that size,” said a person familiar with Kleiner Perkins’s outreach plans, who also asked to remain anonymous as the talks were private.

Based on 2012 estimates, only one Criatec I company of the 33 in business will cross $10 million in revenue.

Amazon Dreams’ revenue, for example, is still negligible despite the health craze in the United States for açai berries.

BNDES also established the fund to help out academics who have great ideas but don’t have the same success in obtaining the private sector financing that entrepreneurs do.

“Brazil has a lot of intelligence,” said Mr. Rath Fingerl, who retired from BNDES last year, but “the great difficulty is bridging the divide between the scientific and business communities.”

The fund also has limitations. For example, the bank holds veto power on most company decisions even though it is a minority shareholder. Yet, it appears quite flexible as it seeks co-investments.

BNDES’s political influence in Criatec companies “is totally negotiable,” said Marcio Spata, head of the Criatec fund at the development bank. “We are always open to changing our rights” for appropriate offers.

Eduardo Klingelhoefer de Sa, head of the department of funds at BNDES, said, “We would be very happy if private investors come so that our stakes are reduced.”