After a challenging year for new deals, the Brazilian IPO market is picking up sharply—and driving a variety of changes in dealmaking. To take a closer look at these trends, Datasite, in partnership with Mergermarket, recently hosted an informative webinar. “The Age of the IPO: M&A Momentum in Brazil”, where an expert panel examined current M&A activity in Brazil and evaluated the future outlook for IPOs.
Moderator Thiago Barrozo, Latin America Editor at Mergermarket, opened up the discussion with a short recap of last year’s IPO market activity. According to data from Dialog, Brazil’s transaction volume was $30.6 billion last year— the highest volume in the last decade and a total of 28 IPOs. So far this year, the pace has accelerated with approximately 20 IPOs completed to date.
Luiz Ribeiro, Principal at General Atlantic, pointed out that the capital market for IPOs is perhaps the strongest in the past 20 years. He cited numerous relevant offers in the market encouraged by an environment with very low interest. Luiz believes that this strong market will carry on and that companies will continue to access the capital market to bring in new resources, to continue the expansion process, or to give liquidity to investors.
Diogo Bassi, CFO and IRO at Petz, agreed, and said the pandemic has accelerated several trends and habits that were already happening. He noted we could not have imagined that the pandemic, the stock market, and their associated concerns would set the stage for a robust IPO environment after just six months.
Despite the positive outlook, some challenges still remain. A real-time poll asked webinar participants what they considered the biggest challenges to companies in the IPO process in Brazil. A strong 51% of respondents agreed that the public lacked economic and exchange rate stability.
Luiz observed that recent increases in interest rates indicate some volatility issues—but he added that these challenges also create many opportunities. He pointed out that seasoned investors in Brazil and Latin America are used to a certain level of volatility, and work to take advantage of it. Jean Marcel Arakawa, Partner at Mattos Filho, noted that factors such as basic economic prices, structural factors, and market circumstances are subject to a lot of variation and fluctuation, especially in a Brazilian environment that is even more marked by uncertainties.
Sahid Xerfan, Sales Director at Datasite, underscored the point by observing that in 2007, 70% of IPOs were taken by foreign capital, compared to only 25% over the past year.
The conversation pivoted to discussion of fundraising. Thiago observed that IPOs still mostly attract between 500 million reals and 1.5 billion reals. He asked if we should expect to see a greater number of companies accessing the market in transactions that are below the volume of 500 million reals.
Luiz and Diogo agreed that what is most relevant is not simply the IPO offer, but the type of investor base companies bring and the risk inherent to the transaction. Luiz observed that, in general, companies that make larger offers often have a greater flow and carry a lower type of risk. He noted that SPACs are increasingly utilized in the United States, with more than 360 SPACs seeking to purchase companies—and more than $120 billion searching for potential acquisitions.
Jean pointed out that Brazilian depositary receipts (BDRs) could help make these types of transactions possible in Brazil. They could create a possible path forward for SPACs formed abroad, then eventually seek to raise local resources.
Sahid observed that SPAC valuations often tend to be slightly higher than the input valuation of a private equity organization. The panel, as well as live webinar poll participants, also noted that timing is sometimes more important than valuation in an offer.
The conversation turned to a look at M&A. Luiz observed that we have seen relevant M&A capitalization activity in the private market itself and that his organization often seeks to encourage their companies to do M&A, to strengthen their position in the market.
At the conclusion of the webinar, Sahid noted that he found the digitalization discussion especially interesting, in light of the pandemic’s acceleration of technology trends. The program concluded on a positive note. Diogo summed it up by reiterating that the Brazilian environment is not the easiest, but there is a capital market environment that has been strengthened like never before, which has also been helpful to the general economy. He concluded that difficult moments also bring opportunities for deeper reflection, enabling dealmakers to bring new solutions they might not have thought of under more normal conditions.
If you’d like to take a closer look at some of the perspectives shared at the webinar, a complete replay of the event is available for viewing (Note: the webinar presentation is in Portuguese).
Find out what else our experts had to say about the IPO market and M&A activity in Brazil, including the impact of increased regulatory requirements, market volatility, and the rise of retail investors. Note: this presentation was recorded in Portuguese.