Submarino, a Brazilian online retailer, went public recently and raised $175 million from investors. Gol, Brazil’s aggressive low-cost airline, has just raised another $205 million in the equity markets following its successful 2004 IPO. Over the last year or so, well over half a dozen companies have come to market, raising in excess of $1 billion. A cosmetics company, a railroad operator, a utility, an apple grower have all issued shares and most of these new stocks have done well. This is even more impressive when you realize that risk-free government bonds pay at almost 20% a year.
Brazil’s equity boom looks like more than a one-night stand. Adherence to high standards of corporate governance, respect for minority shareholder rights, US GAAP accounting methods have all become commonplace at large Brazilian companies. True, Brazil’s stock market is still no Shangri-La and investors need eyes in the back of their heads, but neither is the market the shark-pool it once was.
What’s going on?
Companies realize that equity finance is cheaper than borrowing at high interest rates. They need to treat investors fairly. Corporate earnings look healthy, so investors want to buy more shares. The São Paulo stock market index is up 204% since 2003, although it is faltering now. Institutional investors, which have always bought shares, are doing so more aggressively. They want to diversify away from debt, especially government debt.
Brazil’s emerging equity culture is a great thing. It helps companies, investors and capital markets mature and develop. Latin America’s traditional addiction to debt too often kills companies. Brazil has a large domestic capital market, an entrepreneurial culture and an increasingly effective market regulator. Economic stability and relatively enlightened government policies also help. The only ingredient missing from the recipe for success are civilized interest rates. Keep your fingers crossed.