Tivit Tests Hot Small Cap Market

Brazilian IT outsourcer Tivit is set to test appetite for illiquid LatAm small caps with an IPO expected to raise $200m-$300m equivalent in the coming months. Equity investors have for many months insisted on quality and scale, but Tivit, which should price in September or October, comes at a particularly opportune moment for small caps. The MSCI LatAm small cap index has rallied 96% YTD, after falling 62% in 2008. That compares to a 61% rise for the MSCI LatAm, which fell 51% last year. “In general, small caps are very sensitive to economic growth,” says Guilherme Reboucas, a portfolio manager at Itau Unibanco Asset Management, whose equity holdings are worth BRL20bn. “In Brazil, many of the small caps are consumer and homebuilding companies, both sectors that have rallied tremendously this year,” he adds, pointing to names like Herring, Guararapes, Hypermarcas and Marisa, which have leapt between 117% and 145% in 2009. Low income homebuilders like Tenda and MRV have also soared, thanks to a new program by the government to foster construction of affordable housing. While many of these companies have yet to deliver results, the outlook for GDP growth is strong and domestic consumption in Brazil is expected to keep expanding, says Reboucas. Itau sees Brazil GDP expanding 5% next year. Liquidity, however, remains an issue for smaller issuers, and investors have so far this year expressed very clear preferences for large liquid names, say bankers. This will be among the challenges for Tivit as it roadshows its offering via Credit Suisse, Morgan Stanley and Bradesco BBI. The IPO will be Tivit’s second attempt, following an aborted mission scheduled for Q4 2007. At around the time of the first attempt, investors had begun to shun small caps, owing to lack of liquidity and in many cases the fact they were trading below issue price.