IPOs and Follow-ons regain optimism in Brazil
During the peak of the crisis caused by the Covid-19 pandemic in March and April, pessimism prevailed in financial markets. Most estimates suggested a scenario full of uncertainties in a paralyzed economy. “I remember that scenarios suggested that IPOs would not be resumed in 2020,” says Mr. Daniel Utsch, equity manager at Fator Administração de Recursos (FAR).
Four months later, the recovery of the stock exchange and the flow of offers of new shares have been overcoming expectations. Even before controlling the pandemic in the country, we had 5 IPOs and 7 follow-on offerings in the first half, 53% higher than the same period last year. “At the beginning of the crisis, with a dramatic initial impact, few people believed in a V-shaped recovery. And now we are surprised with the recovery speed. The number of offers is one of the positive indicators of this new scenario,” FAR’s manager says.
Despite the deep crisis, many companies have been showing resilience. With the need for funding to resume growth, businesses are raising capital through IPOs or follow-ons. On the other side, investors’ appetite for riskier assets has been growing as a result of the lowest level for interest rates in the history of the Brazilian economy. “There is demand from both sides” Mr. Utsch says.
Mr. Alessandro Farkuh, Head of Bradesco BBI, remembers the tremendous optimism
about new IPOs in the end of 2019 and in January and February 2020. “Operations were dismantled due to the high level of uncertainties. All projects were put on hold in the short term”, he says.
For approximately 4 to 5 weeks, the perception was that the spread of the pandemic was uncontrolled. But in mid-April, such perception began to dissipate as Europe started to address main issues and the US market was reopened, he remembers. After the initial shock, the effects on the domestic capital market were not significant, assets were performing well, and institutional investors’ capital levels were not affected.
Resumption of Activities
In mid-May, Estapar conducted the first deal that reopened the IPO market. After that, Centauro and Via Varejo also went public. “Since then, the market has been speaking for itself, with a dozen of new share offers. In July, the movement continued very positive,” Mr. Farkuh highlights. Bradesco’s investment banking area participated in 8 issues of new shares in May, June, and July.
Despite the uncertainties regarding the economic recovery, prospects about the companies’ resilience are good. “The state of mind could not be better. There is plenty of capital to be invested and a huge demand. The economy continues to worry us, but we are optimistic about the capital market,” states Mr. Farkuh.
Companies with a good background and solid governance models are attracting investors to fund their IPOs and follow-on offers. Many foreign investors, despite doubtful about the Brazilian economy, have been participating in the IPOs. “The political and environmental crises may affect the market, but solid companies with a sound management and good prospects of growth in the short and medium terms have been attracting both domestic and foreign investors,” says BBI’s executive.
The ESG Case
The waste management company Ambipar is an example of a successful IPO conducted in the beginning of July. Through the offering, which was coordinated by Bradesco BBI, BTG Pactual, and Bank of America, the company raised R$1.08 billion Reais (US$ 200 millions). “Ambipar is an iconic case in which foreign investors had a strong participation,” Mr. Farkuh states.
According to him, it was the first IPO focused on ESG factors. The case shows that environmental strategies, together with good governance, can attract a good demand of investors.
Another model that is highly appreciated in the market is that of companies with robust digital transformation processes. “With the pandemic, e-commerce has seen a boom of years in only few months. These companies need cash and are an excellent investment opportunity,” says Mr. Daniel Utsch, from FAR. He states that even real estate developers are taking part in these new IPOs.
Accordingly, the focus is on the companies’ quality. “More than a specific industry, it is important to be a well-managed company,” Mr. Farkuh points out. He says that companies in the sanitation, technology, retail and financial industries, among others, have been going public. The executive reveals that Bradesco BBI’s current pipeline of new deals is at the same level as that in the beginning of the year, in the pre-pandemic period, without disclosing the exact number.
Record projection
Today, there are 20 IPOs under analysis in the Brazilian Securities and Exchange Commission (CVM). Analysts say that this number can be much higher, however. According to Mr. Álvaro Gonçalves, partner of the Stratus Group and president of B3’s Advisory Committee – Companies and Underwriting, IPOs are expected to beat records in the 3rd and 4th quarters of 2020. “A process to ‘recover lost territory’ is likely to take place. According to our prospects, some 100 IPOs and follow-on offerings will be conducted by the end of 2020,” he says.
Mr. Gonçalves analyzes that the cycle of lower interest rates started 4 years ago created the opportunity of longer investments. Although the pandemic led to uncertainties in the short term, the long-term perspective has returned. “Stock investors seek at least 1- to 2-year returns. The perception is that the pandemic will be controlled by then,” says Stratus’ partner.
He adds that the economy has been stumbling due several factors, among which the political crises in the past years. However, there was no change of direction, on the contrary, this direction was reinforced. An evidence of that is the listing of almost 2 million new CPFs (Taxpayer Identification Numbers) in the stock exchange in the past 3 years.
“The capital market and the stock exchange are getting into a virtuous cycle. The market is well capitalized, and investors are seeking higher returns, benefiting the funding of businesses and the economy”, he states. One of the difficulties is that the Brazilian stock exchange is one of the most concentrated in the world.
There are only 400 companies listed in B3 and there is a universe of dozens of thousands of companies that, in theory, can go public. Stratus’s manager estimates that the number of listed companies in the stock exchange will jump to 1,500.
The investors’ “engagement force”, as he calls it, in invested companies is one of the grounds for his optimism. This movement is supported by the work developed by organizations such as the Brazilian Institute of Corporate Governance (IBGC) and the Association of Capital Market Investors (Amec), Mr. Gonçalves says. The manager also mentions the robust regulatory framework developed by the Brazilian Securities and Exchange Commission (CVM) that impart a high degree of safety to the Brazilian capital market.
Mr. Farkuh, from Bradesco BBI, shares this same optimistic view. “We are working hard to make up for the lost time. We are very excited about being part of the rapidly evolving maturing of the capital market over the past months,” he says. He believes that, with the perspective of maintenance of low interest rates, investors will continue to seek higher returns for a long period.
