Investment bankers have never had it so good in Brazil, but electoral tensions may spoil the IPO party.
At first, Brazilian investment bankers called 3tentos the “hat trick project.” That made sense. A fever was building up about the company’s looming initial public offering (IPO), and the odd name was quickly translated to “three tries” in Portuguese, or in a footballing nation like Brazil to three goals and, hence, a hat trick if scored by the same player.
But the name refers to something far more apt for this fast-growing agribusiness: the lasso to tame wild animals.
That, in a way, is what the agribusiness set out to do this year from its Santa Bárbara do Sul headquarters in the southern farmlands of Brazil. 3tentos joined a bevy of companies taking advantage of strong investor demand for equities to go public, raising BRL1.35 billion ($257 million) in a primary and secondary IPO in July.
A success, certainly. But the road to the deal was bumpier than what 3tentos executives had expected, an experience not unlike what dozens of Brazilian companies have gone through this year.
3tentos has huge promise in an underrepresented sector on the B3 in São Paulo, the country’s biggest stock exchange, says Marcelo Millen, head of equity capital markets at Citibank in São Paulo.
The agribusiness arranges financing for farmers through barter agreements, supplies fertilizers and seeds, and produces biofuels, all in the world’s third-biggest agricultural producing nation after China and the United States.
Yet 3tentos’ first attempt to go public, in March this year, didn’t pan out as the company would have hoped.
“There was strong investor interest in agribusiness, but the market started to fall in March and April and there was a spike in risk aversion,” remembers Mauricio Hasson, 3tentos’ CFO who helped take the Brazilian dairy and food producer Vigor Alimentos public in 2012. “Some companies had to give great discounts to go public. We decided to respect the market.”
Image: Mauricio Hasson
3tentos waited until the conditions improved and finally went to the market with an offer restricted to institutional investors in July that raised it money to build a plant in Mato Grosso, a big farming and livestock state in west-central Brazil, and to open new branches.
3tentos is one of many companies to go public this year in Brazil. Roderick Greenlees, head of investment banking at Itaú BBA in São Paulo, says companies raised a record BRL131 billion in 49 IPOs and 19 follow-on offers through August, more than the previous high of BRL124 billion in all of 2020.
THE IPO REVIVAL
“The numbers speak for themselves,” he says. “There is more than a 50% increase in IPOs already and the year is not over yet. 2020 had already been the busiest year for Brazilian capital markets, so this is going to be another record year.”
The largest number of deals was registered in 2007, when a global commodities super cycle, or a prolonged rise in commodities prices, and a voracious appetite of foreign investors for Brazil spurred 59 IPOs. But this year, companies have already raised a record amount of money, says Greenlees.
One driver of this demand is investor’s thirst for companies in underrepresented sectors on the B3, such as real estate developers, shopping malls and commercial properties, says Millen.
But more than that, a loosening of the country’s monetary policy over the past few years has been driving demand for equities. Brazil’s central bank cut the benchmark Selic interest rate from a most recent high of 14.25% between July 2015 and October 2016 to a record low of 2% from August 2020 to March 2021, sparking demand for equities on the B3 at a time when global trading volume was surging for the same reasons of low interest rates and the search for higher returns.
“There was unprecedented liquidity outside and unprecedented liquidity inside Brazil as a result of the all-time low interest rates,” says Millen. This led to “a meaningful shift of investment from fixed income securities to equity, mutual funds and hedge funds,” he adds.
Even though base rates have been rising again this year around the world – the Selic reached 5.25% in August, real interest rates have remained low in line with inflation in Brazil, which has been rising this year as the economy recovers from a recession last year after the onset of the COVID-19 pandemic.
For companies in Brazil, the low rates have made it cheaper to raise money through equity than debt.
“When you have interest rates as high as 14.25%, you cannot deploy capital in order to finance growth,” says Millen. “But when you have cheap capital, as low as 2%, you have abundant capital to foster organic or inorganic growth.”
“A lot of companies decided to go public in order to get cheap financing in the form of equity to finance growth,” Millen says. “It was cheaper for some companies to raise equity rather than debt. So, a lot of companies went public to pay down debt or finance growth.”
The wave of IPOs has also triggered a wave of mergers and acquisitions, such as Hapvida’s BRL111 tie-up with Notre Dame Intermédica to create one of the largest health care companies in the world.
“As more companies go public in Brazil, more M&A will take place,” says Greenlees. “As a private company, the only way you can do M&A is using cash. It is leveraging up your company and buying another one for cash. But the minute you become a publicly traded company, you basically have another currency, which are your shares because they are liquid, they have a price on the screen, and so people are much more comfortable with a publicly traded company to receive shares than if you were not.”
Ricardo Lacerda, CEO of Brazilian investment bank BR Partners, said in a recent business conference that a lot of the capital raised in IPOS is going to M&A.
One of those is Grupo Soma, a retail group based in Rio de Janeiro. It raised BRL883 million in a follow-on offer in July to cover part of the acquisition of local rival Hering.
The stock market “is a big engine” for M&A, Lacerda said.
BR Partners itself went public in June, raising BRL400 million to help diversify the business, says Vinicius Carmona, director of investor relations at the São Paulo-based bank.
“We are doing a lot of real estate receivables certificates [CRIs],” he says. “Now that we raised additional capital, we want to take a more active part in agriculture receivables certificates [CRAs.] We structured our first CRA in June.”
BR Partners is also looking at the growth potential in infrastructure debentures.
“Everywhere you look, investment is needed,” Carmona says. “There is a very big infrastructure gap in our country.”
MORE LOCAL INVESTORS
As well as the surge in IPO volumes, there’s been a significant shift in the profile of IPO investors.
“When I started to do ECM [equity capital management] in Brazil 25 years ago, the local market depended a lot on international markets. At least 70% of the IPO money came from international accounts,” says Millen.
Now it’s almost the other way round.
“As a result of the meaningful, sizeable, unprecedented inflow of funds towards equity funds, local institutional buyers gained the kind of power they never had seen before,” he says. “We used to depend a lot on foreign investors to price transactions. Now we are experiencing the flip side of the coin. There is a huge abundance of capital in the local market.”
International investors still play a big role in IPOs that total more than BRL1.5 billion, Millen adds.
But on the whole, 60% of shares are routinely allocated to domestic investors, and 40% to foreign investors, says Itaú BBA’s Greenlees.
While more healthcare, energy and technology companies have been going public in Brazil this year, some are opting to be listed in the United States instead, such as was the case this year with VTEX, a digital commerce platform.
This route makes it possible so that companies can have “access to a large pool of tech investors rather than just emerging market investors,” says Todd Crider, head of the Latin American practice at Simpson Thacher, a New York-based law firm. “One of the drivers is wanting to present the company not as an emerging market opportunity exclusively but as a broader technology opportunity and tap into that investor base.”
It is also a way to escape Brazil’s chronic volatility. The Brazilian economy, which is expected to grow 5% or more this year, is facing multiple risks. By September, inflation was approaching the double digits, the highest since 2015-16, even after the central bank tightened its monetary. Energy shortages are another threat to the economic outlook, so too the fiscal accounts as the government seeks to increase public spending. A surge in the Delta variant of the coronavirus could also stall economic growth.
But the main problem is political. While the presidential elections are not until October next year, tensions are already running high.
“We did not expect the elections to impact market conditions before next year. [But] I think people are getting a bit more wary of the elections,” Greenlees said in reference to the polarization between the extreme right-wing president, Jair Bolsonaro, and his main challenger, the former leftist head of state Luiz Inácio Lula da Silva.
Could this spoil the IPO party?
Not all think so.
“Beyond the macroeconomy, there is a micro level that has been attracting investors to the stock exchange,” says Marcelo Giufrida, CEO of Garde, a São Paulo-based asset management company. “That is why we see more foreign investors. At the macro level, they acknowledge there is some market turmoil, but when you look at business in details, companies’ histories, it’s pretty good, so investors become more enthusiastic.”
Brazilian issuers like 3tentos have been grateful for this. LF