Brazil: What’s the Portuguese for backbone?

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Brazil might develop a more mutually beneficial equities market, but history suggests it won’t.

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Market participants think that the new Brazilian administration is a catalyst for economic take-off. Inflection points are being seen. Again.

While this time could be different, and the sighting of a recovery in the stricken Brazilian economy might not prove to be another case of mistaken identity, that won’t be enough to see a bounce in equity issuance, because if you talk to investors about IPOs they remember. They remember the throw-these-companies-at-the-market-and-see-what-sticks approach from 2007. They remember the squeeze on pricing-till-the-pips squeak approach of 2011-12. They remember, and they aren’t convinced that Brazilian bankers will be any different the next time around.

In-house teams at Brazilian companies thinking of launching IPOs don’t care about the market in general. They don’t care about fostering a positive investor sentiment, about pricing a deal to perform in the secondary market. It’s their one-time show and they want to maximise it.

Underwriters

Fair enough, in a one-off, narrow, self-interested kind of sense. But if things are going to change for the better, it’s the underwriters who are going to have to be different. It is they who will have to be strong on pricing and convince issuers that investors will be better disposed to any future follow-ons if they see some positive post-pricing momentum.

Will this happen? A glimmer of hope comes from the smaller number of ECM teams left standing on Faria Lima after the desert-like equities market in Brazil in the past couple of years. That could cut some of the competitive dynamic that led to valuation-based competition for mandates. But then again, there is still enough competition to leave that impulse as a distinct possibility.

Ultimately history suggests that Brazil isn’t likely to develop an equities market in which everyone works together and everyone wins. Not without bankers growing backbones sufficiently sturdy to stand-up to issuers on valuations and resist internal pressures to chase mandates at any cost.

It could happen. But international investors will be forgiven for remaining sceptical.