RIO DE JANEIRO, BRAZIL – After a heated pre-Carnaval period, which moved more than R$32 (US$5.6) billion in stock offerings, this next window for initial stock offerings (IPOs) on the B3 stock exchange – with balance sheets for 2020 closed – started with a scare. There were some withdrawals, as was the case with LG Informática, and adjustments in price expectations. The main sign came with the reduction in the price range for Dasa’s IPO, which was one of the most awaited operations in the current waiting list.
In an interview, Fabio Nazari, lead partner of BTG Pactual (from the same group that controls EXAME) for equity capital markets, explains that this is a cyclical challenge and not a structural problem. In his evaluation, there will be no rupture or suspension of activity, as the pandemic caused in 2020, between the end of February and the month of May.
Smaller transactions – between R$ 500 million and R$ 1 billion – will be more difficult, but the structural environment remains positive. So much so that the movement for April promises to be intense. There were more than 20 offerings by Carnaval this year, and there are more than 15 planned for this month alone.
They come at a time when the flow into the stock market is less intense than it was last year, which makes the price debate more relevant. This is the main question.
The investor – international and national – is worried about the Brazilian political scenario and the risk of interference in the state-owned companies and the macroeconomic picture and the pandemic reflexes. Stock funds experienced redemptions at the beginning of the year.
The flow had a slight improvement, but the accumulated balance at the beginning of 2021 is still negative in R$ 9.5 billion for the portfolios dedicated to the stock market, according to data from Anbima.
Nazari estimates that between 70 and 75 new companies will have become listed on B3 by the end of this year. “I continue to see a record year.” In volume, he prefers not to make projections, but still expects many transactions to take place. The number may vary if there is a very significant change (more) in the flow of money, but he does not believe in an expressive worsening.
For him, who has also lived through the market boom from 2004 to 2008, the environment is completely different from that period. The success of the operations is and will be increasingly linked to the time that companies devote to investor education and preparation.
For this reason, he recommends that companies invest in this relationship in advance. “There’s no longer that thing of taking the operation off the shelf and putting it in the lap of the investor, even with all his will to diversify”.
EXAME IN has compiled a list of IPOs since the beginning of 2019. More than 50 companies have listed shares so far. Together, they are currently worth close to $370 billion, or almost 8% of the stock market’s entire capitalization today, which is around $5 trillion.
Below are the main points of the conversation with Nazari:
What happened with the offerings in this second window of 2021?
The chronology of events here is important. Just before Carnaval, the investor was already tired. There were many offers, in a very short time to digest, a record movement. Soon after the holiday, there was the change in the presidency of Petrobras, which brought a concern about political interference. Along with this was the increase in interest rates here in Brazil and the consolidation of the perspective of an increase in interest rates in the United States. The market is going through a certain fatigue.
What is this fatigue?
It is broad. In a more fragile market environment, like the one I described, when the market falls, new operations start to compete with the companies already listed even if not much. The known companies, which are easier to analyze, get cheaper. Along with this, there was redemption of stock funds at the beginning of the year. The manager looks inside his portfolio and tries to be more conservative. They prefer to leave resources in assets with more liquidity and, in some cases, even reserve cash.
But is there fatigue for new companies?
Not exactly. Investors always think it’s good and support having more companies. But there are moments when they need to prefer liquidity. So when we look at the traffic, there is a lack of arms to evaluate everything. A management company with R$1 billion may have ten employees. A company with R$30 billion will have 15 analysts. It won’t have that many more, as it has more money. And it is not humanly possible to look at everything. Buying into IPOs requires more work than buying what you already know.
And this market volatility gets in the way?
Of course, it does. When you look at the index, you are confused. Inside, things are bubbling. It is also necessary to consider that every new company, from an IPO, is a non-indexed asset. That is: it is not a Bovespa Index, it is not MSCI, it is not any indicator that the investor can be attached to in order to follow the market. It is a “non-core business” stock in this beginning. So, in these times, when the flowers are shaking in the wind, it is normal for investors to stick to what they know and avoid what is new. Like it or not, the IPO is always a foreign body in the portfolio.
Is this what happened to technology companies?
To some extent, yes. But not only that. Brazil followed the correction movement outside this segment, very affected by the perspective of an increase in the long-term American interest rate. This competes directly with the shares of technology companies, in which profits are in the future. There was what we call a “sell-off” of techs. And it wasn’t only the newcomers that suffered. Magazine Luiza went through this, Stone, Linx, Totvs. No one escaped. Along with this, there was a mood with the vaccine and with the known companies. Investors migrated to the “old economy”, everything that suffered from isolation: education, retail and everything related to economic activity, including ore, and banks, because of interest rate expectations.
So this start of the year has been a pull for the investment industry?
This mix of things has brought a lot of havoc to portfolios. Especially in the last few years, the locals are much more present in the offerings than the foreigners. And this was even stronger at the beginning of the year, with many tech offers from smaller companies, which the international houses don’t enter for liquidity reasons. I joke that money only enters through the door that that it can also exit. So, the domestic management companies were loaded with techs and IPOs at the beginning of the year, which fell. Added to the redemptions and the losses with the state-owned companies, it was a mess.
So, deep down, it is this sum of events that is harming the offerings at this moment?
Yes, it is cyclical, not structural. April started with several operations and this bruised investor picture. This sum of things made the appetite for new assets decrease a lot in these weeks.
And does the retail, the small investor, have a role in this?
Yes, to the extent that they invest in funds, which are the buyers and price setters in IPOs. And it also plays a role with the day after. At the beginning of the year, you can notice that there was a lot of action pulled on the wave of the “GameStop” event and the sardine revolution. Investments that were unfounded gave back all the gain later.
You lived through that market boom from 2004 to 2008. Everything is very different now.
Very much so. It is a different market. Before, the foreigner took on an average of 75% of the offers. Now, it is inverted. The Brazilian market gained a lot of depth and specialization. Nowadays, there is a demand for risk within Brazil and this didn’t exist before. There has been the democratization of access to investment funds with the platforms. Every day we see a new fund manager emerge. Today, the effort to present to investors, the road show, is much more concentrated in Brazil. It was the opposite before. Along with this, foreign investors are still interested in Brazil, but they are timider.
Is this depth also behind the increase in the number of companies interested in going public?
Yes. The current interest rate level not only brings investors to the stock exchange. It goes beyond this. The low interest rate allowed companies to deleverage and think about growth, access the market, and invest. Besides, this generation of new entrepreneurs, more used to private equity and venture capital funds, is already entering the stock market, and they face the possibility of a dilution [reduction of the participation in the business by issuing shares to raise new money] in a calmer way.
The value of the companies is more interesting as well.
Yes, there is the issue of multiples. The stock market gets expensive or cheap by these indicators, like 10 times the profit, 20 times the profit [the higher the multiple, the more expensive the stock, technically]. So, if the profit goes up because the company grows and also because it generates more cash by paying less debt, the multiple goes down. The stock becomes cheaper again, more interesting, and attracts more capital. This condition of multiple expansion did not exist in Brazil. With things returning to some normality, this situation will become clearer. That’s why, once again, the economic situation could be better, but the structural one is great.
That is why the market has been active for years, because of this improvement?
Let’s go back to 2016. We hadn’t stopped trading since then when the stock market index was at 37,000 points. From then to now, we only stopped during the truckers’ strike and now, in the pandemic, one for a period. Back then, the market served to help companies to deleverage. Last year, it should also be mentioned, there was a fear of the pandemic, and many companies were picking up cash to deal with the situation.
What else has changed?
What I have talked too much about is the preparation time and the bid traffic. I’ve been hitting that a lot in conversations with clients. Ideally, it would be best if you spent a lot more time building investor rapport. Even deeper and more specialized, the local market can still not absorb 40 companies in a 35 to 50-day window. It is a lot. There is no longer that thing of taking the operation off the shelf and putting it in the lap of the investor, even with all his will to diversify.
Has the businessman changed, or does he continue always to want to sell at high prices?
There will always be an arm-wrestling match between investors and entrepreneurs. But the entrepreneur is more aware that the investor needs to win as well. That he can make a smaller offer now and then make another. It doesn’t have to be just one. And, in all these years of work, I don’t know any entrepreneur who came to me and said: “I regretted going public”. I know the opposite, one who didn’t come for the price discussion and later regretted it because they lost competitiveness.
About the techs, is there (already) a sell-off with these companies? Have investors given up on them?
No. Not at all. Because technology is comprehensive, there is proptech, fintech, edutech, health tech. There is a lot of tech. The only sector that really went through sector fatigue was real estate. But even this has many sub-segments yet to come, with logistics and warehouses, which will come in the wake of the growth of e-commerce. For now, what we have is more difficulty for smaller offers, for all the reasons I mentioned.
Source: Exame
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