Season of IPOs pauses to regain momentum

The cancellation or postponement of dozens of IPOs in the past weeks has raised questions in the market. Would the window of opportunities to go public in the Brazilian stock exchange be closing again? Managers and specialists consulted by Amec said it is not closing and that opportunities will continue in 2021 with a heated market driven by investors’ appetite for investing in companies with a solid background.

As a matter of fact, the current scenario results from a series of cyclical factors that led to a transitory growth in market’s volatility. With that, the valuation conditions for IPOs are affected, but this is a temporary situation. “Companies are waiting for better valuation conditions. The growing appetite of individual and institutional investors continues,” says Mr. Marcos de Callis, strategist at Hieron Patrimônio Familiar e Investimento.

“The medium- and long-term scenarios have not changed. The perspectives for Brazilian companies have not change. No cycle of rising interest rates is expected. Savers and investors will continue to seek opportunities to invest in shares,” states Mr. Álvaro Gonçalves, CEO of Stratus. According to him, the market continues heated because companies continue to need long-term capital, which matches with the liquidity of investors’ assets.
The manager said that in the past 40 days he has been invited to participate in dozens of meetings with companies that are considering going public. “There is a broad volume of money available due to the new scenario of low interest rates. The lower interest rates are a global reality and Brazil is following this trend. In this environment, the assets’ value increases,” Mr. Gonçalves states.
The momentary pause in IPOs in the Brazilian stock exchange results from the combination of several pressure factors in the domestic and foreign markets. The fiscal imbalance risk and the    public spending cap breach s are old issues in Brazil, but they have been worsening in recent months.
“Nobody has assertively explained how the country is going to adjust its fiscal imbalances. There are no perspectives of alignment of political leaderships in Brazil. This is not going to happen before the local elections. The issue is more likely to be addressed only in the beginning of 2021,” Stratus CEO says.
According to Mr. de Callis, there are concerns with the fiscal balance, but it will have a positive outcome. “I believe the government will ultimately do the right thing. The fiscal imbalance risk may remain elevated until after the local elections. Market volatility will remain high in the 4Q and, after that, we are likely to see a positive solution in 2021,” the strategist says. For him, the beginning of next year will be a “do or die” moment for the country. “In any case, we are optimistic, we believe the government will resume the fiscal anchor,” he states.

International volatility

According to Hieron’s manager, there is another factor that is currently affecting the market’s mood. He believes that the US elections can eventually have a complex outcome in judicial terms.
“We are experiencing a period of growing volatility in prices, also in the international markets because of the US elections. I believe there is high risk that US elections are eventually taken to court,” Mr. de Callis says. He thinks that if Mr. Donald Trump loses by very narrow margins, the elections can be taken to court, and that has been affecting the valuation of stock exchanges,” he states.
In addition to the risks and uncertainties related to the results of the presidential elections in the USA, another factor that continues to destabilize markets all over the world is the pandemic, with the second wave in Europe and several US states. “The pandemic continues to negatively affect the economy with the risk of new waves, and this also leads to growing volatility levels,” Mr. Gonçalves says.

Optimism

The prospects for IPOs are much more positive for the next year. If in 2020 there was resumption in the number of primary offerings, after the result of the elections in the USA and Brazil, the market will be less volatile. “Many companies are waiting to go public next year, when we expect new records in the number of new offers and in the economic growth,” states Mr. Gonçalves.

Mr. João Rafael Araújo, Head of Capital Markets at Grant Thornton Brasil, expects that the movement of IPOs will continue to grow for companies with robust background. “The preparation for new offers is underway. The pipeline of IPOs is strong because the structural scenario has not changed. Interest rates are low and will remain low and this is the main driver for the market,” he says.
According to him, the 2020 window is closing, but operations will be resumed soon, in March or April of next year. However, the specialist calls attention to the fact that the market will be more and more mature and selective. “It is very important to do an adequate preparation for the IPO, with the minimum references in reporting and governance terms,” the executive says.

Amec’s efforts

With respect to the preparation of companies, Amec has been conducting a work to follow up the governance of both new and old companies. “The relationship between companies and investors is a topic of utmost importance for Amec and its members. We still see attitudes that make the interaction between companies and the market difficult, attitudes of conservatism of IR areas that hampers a closer relationship,” says Mr. Fábio Coelho, Amec CEO.
As negative examples, Mr. Coelho mentions recent cases of mature companies in which the IR area “backed off” and that, when confronted by investors, did not take a firm stand on a timely basis. He also highlights that companies that intend to go public need to do an adequate preparation. “New companies should have a minimally structured governance bodies ready to interact and engage,” the CEO states.
Mr. de Callis also expresses concern with new companies that are debuting on the stock exchange. “We notice that some companies are not fully prepared for an IPO in governance terms. It is a risk not only for investors, but also for the entire fund management industry,” he states. He points out that it is also a problem for investors, mainly individuals that are not able to properly assess the risks and problems of new companies on the stock exchange.
In any case, he also expects a robust reopening of IPOs in 2021. It does not mean that everybody will  take advantage of the market liquidity opportunities. Investors are more selective and have been seeking more diversified and multi-sector portfolios. A large number of IPOs has already been undertaken in some industries, such as the home building segment. The market is likely to offer opportunities for more solid cases.
According to Mr. Gonçalves from Stratus, the number of IPOs is expected to increase in the next years. He says there is a large number of Brazilian companies prepared to go public. “There are hundreds of companies ready to undertake their IPO in Brazil in the next 3 to 5 years. No doubt that that the largest organizations will be the first ones to do that,” he states, optimistically.
With the growing number of IPOs, the role played by both investors and Amec in analyzing the governance conditions of new companies has been more and more relevant, according to Stratus’ manager. “All this will need to be reviewed in terms of governance,” Mr. Gonçalves says.