Brazilian capital markets and equity public offerings: overview for 2022
Public offerings have been gaining momentum despite economic uncertainty and the Covid-19 pandemic
In 2021, public offerings continued to make up a significant portion of transactions in Brazilian capital markets. With the economic impact of the Covid-19 pandemic being felt both locally and globally for a second year, public offerings represented an important alternative for companies of various sizes and sectors to obtain funding.
Many companies are incorporated and structured strategically aiming to seek third-party capital to grow and expand. In this context, initial public offerings (IPOs) represent a way of raising funds that allows for both organic and inorganic growth. While the former involves expanding business activities, developing new solutions for clients or increasing product portfolios, the latter may take the form of M&A transactions targeting, for example, market consolidation or aggregating complementary businesses.
Despite ongoing political and economic uncertainty and market volatility, equity public offerings have been gaining momentum with Brazilian companies. Since the second half of 2019, the market has heated up to the extent that it has even surpassed the historic 2006-2007 window that saw approximately BRL 100 billion moved via stock offerings. Indeed, 2020-2021 saw approximately BRL 250 billion in IPOs and subsequent offerings (follow-ons).
The major difference between 2020 and 2021 was the initial impact of the Covid-19 pandemic in early 2020, which brought IPOs to a complete halt in Brazil for approximately three months. From mid-2020, this market began to move once more and IPO-related activity accelerated rapidly, despite changes (and perhaps even because of them) in the dynamics of these offerings due to social distancing measures. For example, roadshow meetings and other meetings came to be held online rather than in person.
What then, explains this rush by Brazilian companies to go public? In addition to historically low interest rates and the resulting shift from fixed-income investments toward variable-income investments, there was a great amount of liquidity among investors, while the Brazilian Real’s devaluation against the US Dollar also made investing in Brazil cheaper for foreigners. Moreover, with the pandemic creating volatility in global markets and thus stifling investors’ appetite for taking large risks, the stock market presented a more attractive alternative for investors looking to diversify their portfolios.
After the pandemic’s initial impact on equity public offerings in 2020, the Brazilian stock market was back in full swing at the beginning of 2021, stemming from favorable prospects for legislative and regulatory reforms combined with low interest rates, high liquidity and a shift in institutional and retail investors’ appetites toward variable-income investments. The main performance index for shares traded on B3’s stock exchange, Ibovespa, started the year with 119,000 points and surpassed the historic mark of 130,000 points in early June.
In general, retail investors’ involvement (mainly individual investors) has become increasingly significant in recent equity public offerings, particularly when compared to the 2006-2007 period. These investors play an important role in the dynamics of capital markets, as they provide increased liquidity and turnover to the shares, in particular as regards access to secondary markets.
The companies that sought to conduct equity public offerings to access Brazilian capital markets varied in size and sector, though companies in the health, telecommunications, education, retail, commodities and natural resource sectors particularly stood out. Some of these companies had already begun preparations to go public in previous years, while others started preparing in 2021 with a view to taking advantage of the market window. Indeed, there was a considerable number of companies at different stages of preparing for IPOs and listing on the B3. Many of the companies that have experienced accelerated growth in recent years and have commenced planning to conduct equity public offerings have some kind of technology component in their business.
When a market window opens up for public stock offerings, companies that have already begun preparations are usually ideally placed to seize the opportunity, while other companies inevitably find themselves running against the clock to take advantage of it. Going public represents an important moment in a company’s life cycle and involves a series of steps and work on numerous fronts. It needs to be supported by proper internal controls, a strong accounting team, and strict information control on the price per share.
In the first half of 2021, it was believed that the surge in equity public offerings activity would carry on until at least the first quarter of 2022, with the record for IPOs in a single year (2007) to be either matched or surpassed. However, from the second quarter of 2021 onwards, certain offerings were restructured and made more flexible in terms of pricing so they could be concluded, while others with greater flexibility in their timetable were postponed as companies waited for a more favorable moment.
A combination of growing inflation and unemployment, an expectation that Brazil’s Central Bank’s interest rate (Selic) would hit double digits in 2022, and a worsening economic, fiscal and electoral outlook led to a wave of withdrawn or interrupted public offerings. This shift was accentuated in the final quarter of 2021, resulting in a relatively calm ending to what was otherwise a frenetic year for the Brazilian stock market, which still saw a record-breaking BRL 130 billion moved via IPOs and follow-ons. In the end, 46 companies debuted on the B3 with IPOs totaling a value of approximately BRL 65 billion, the highest sum in a single year in Brazil to date.
Certain companies that completed IPOs during 2020 and 2021 currently have lower share prices than when these started trading. These results stem not only from changes in forecasts for the market, but also an increased perception from investors that these companies are operating differently from what was expected at the time of their respective IPOs, despite strong performances and results at that time.
Push for listing on US stock exchanges
In light of the challenges of the Brazilian stock market – especially in the current scenario – Brazilian companies have been increasingly moving to float on stock exchanges in the United States. This market is considered more mature than the Brazilian market and is highly attractive for Brazilian companies that earn revenue in US dollars, operate outside Brazil or have aspirations to expand their activities internationally. The increase in demand for listing in the United States has been especially prominent among Brazilian companies with a strong technological business focus – in particular software and digital service companies – as well as companies in the education and finance sectors (fintechs).
Compared with Brazilian markets, American stock exchanges generally offer higher multiples, greater liquidity, and access to strategic investors who may not invest in Latin America. Moreover, they have stricter governance standards and are less susceptible to shifts in Brazil’s political and economic landscape, which helps to boost investor confidence. Particularly in times of political and economic instability, the ease of raising funds in US dollars and the possibility of setting valuations also in US dollars means that companies listed there stand to benefit. On the other hand, listing in the United States presents other challenges, including:
Fiercer competition from other companies (whether in the same sector or otherwise):
Volatility arising from the ease with which investors can dispose of securities;
Higher costs compared to Brazilian stock exchanges;
Increased complexity of adapting company structures to the American market, including stricter internal control standards;
Increased accountability risk and more severe penalties within the United States’ criminal justice system.
Outlook for 2022
2021 was a strong year for Brazilian capital markets, surpassing the volume of share offerings carried out in 2020. However, a number of movements that had been expected to only occur this year (due to the presidential elections) were brought forward to 2021, significantly impacting the current scenario and outlook for 2022. The last quarter of 2021 also saw growing political tensions, changes to a cap on government spending, growing inflation and rising interest rates. Together with the Evergrande case in China and excess global liquidity resulting from measures to combat the pandemic’s economic consequences, these factors have combined to limit new transactions on Brazil’s stock markets.
In this context, investors have taken a more selective approach, carefully analyzing companies that are already listed with discounted share prices. These companies tend to be more attractive to investors in highly volatile scenarios, and as such, it can be difficult for a newcomer to attain a pricing it considers interesting or that comes close to what was expected before conditions changed at the end of 2021. Furthermore, companies operating in industries not traditionally linked to the stock market face additional challenges in familiarizing investors and analysts with these new businesses.
Expectations concerning changes in important issues in Brazil in 2022 – mostly when it comes to tax reform and the potential outcome of the elections – make companies and investors more cautious about new offerings in the stock market. When uncertainty about these issues decreases, a reduction in market volatility would be expected. However, this uncertainty is likely to last until Brazil’s presidential elections have been decided.
Therefore, due to the political and economic scenarios mentioned above, as well as the expected behavior of investors, the outlook for 2022 is one of reduced numbers of equity public offerings launched and priced. Although there is always an open market window for good assets, the pricing and structures for stock offerings would need to be adapted to the reality of the scenario at the time.
Furthermore, transactions in the local market with significant financial value and whose equity stories are attractive to the point of being less influenced by the wider macroeconomic scenario are expected to stand out – especially follow-ons. Meanwhile, Brazilian companies are expected to continue listing shares on American stock exchanges due to the advantages mentioned above. After Brazil’s presidential elections, local markets are expected to stabilize, and the volume of business should bounce back or even surpass what has been seen over the last two years, though this will depend on the election outcome and the scenario that develops afterward.
It is expected that companies that chose to postpone their IPOs or follow-ons in 2021 will resume plans for structuring offerings during the first half of 2022, with the first quarter of the year set to function as a thermometer for the rest of the year. This break period can be used by companies to improve preparation, revisit strategies and approaches for making presentations to investors, strategic positioning, shaping incentive plans for executives and possible corporate reorganizations, as well as to strengthen the organization of internal workflows to reflect the everyday reality of publicly traded companies. An interesting way to prepare for this may be to carry out debt public offerings by issuing debentures, which also require audited balance sheets to be kept and involve contact with investors through roadshow meetings.
In 2022, the Brazilian stock market is also likely to see equity offerings with restricted placement efforts. This type of offering is regulated by CVM Instruction No. 476 and does not require registration with the Brazilian Securities and Exchange Commission (CVM). Offerings with restricted placement efforts allow for easier access to capital markets, and can offer a more attractive way to raise funds within the uncertain context that characterizes the Brazilian economy at present. This is especially the case for companies that started their IPO in 2021, only to postpone the launch or pricing later.
Finally, regulation reform for public offerings and for the levels of outstanding shares of listed companies on the B3 should also be closely monitored. After years of debate and a series of public hearings held throughout 2021, the CVM and B3 are currently analyzing comments submitted by various market participants. When the results are announced, these reforms should introduce many important changes to the dynamics and structure of share offerings. It is expected that these changes will facilitate lasting access to Brazilian capital markets, with important impacts for the economy – either directly, via injection of more funds, or indirectly, by representing a means of reducing unemployment and increasing government tax collection.
For further information about this topic, please contact Mattos Filho’s Capital Markets practice area.
*The summary of this article is available in French, Japanese and Italian at this link.