Will Brazil’s ECM bankers get in their own way?


Rob Dwyer
Published on:

Buyers and sellers need to show some discipline.


Brazilian initial public offerings have long been dogged by lack of underwriter discipline. The poor performance of many of IPOs in 2007 may have been the fault of both buyers’ and sellers’ exuberance, but in the years since it has often felt like only investors have learned any lessons. Time and again IPOs have failed to take off when underwriters have promised companies ambitious valuations that investors baulked at.

Many deals have closed since then, of course, but, whenever momentum has been building, if domestic politics or international risk aversion didn’t kill it off, then lack of underwriter discipline conspired to sour otherwise favourable investor sentiment.

Now Brazil stands on the brink of an unprecedented bull run for equity issuance. If – and yes, it is a big if – the new government can fulfill its great desire and pass pensions reform, then the biggest macroeconomic concern that prevents international investors from allocating to Brazil will be removed.

In its place will be a growing economy. There will be an important structural shift in the domestic market into equities that will have an impact on valuations. And there will be a long line of companies that have emerged from a deep recession as lean, deleveraged and ready to execute investment plans that should deliver strong margin growth.

In November, bankers told Euromoney that 100 companies could come to the IPO market in Brazil in the next few years. Follow-ons could be strong too. That’s a lot of deals. And a lot of fees.

By and large, bankers are saying the right things as they gear up for what could well be their best year in a decade. They say that investors will be selective; that companies will need to match investors’ valuations; and that secondary market performance will be key for building momentum. They say they need to be cognisant of other deals coming – especially the large deals to which virtually all investors will be allocating.

But these bankers have always said this.


More interesting is the frank admission from one senior equities banker that he has been discussing the possibility of investors turning irrational: should the country’s fundamentals improve sharply next year and the first few deals perform well then investors may start to buy indiscriminately.

It’s human nature, he says. Many of the individuals who learned the 2007 lessons have moved on – the successful ones have retired or moved elsewhere and the unsuccessful have left. Institutional memory is weak.

Instead, many of portfolio managers may find the promise of Brazilian growth and equities performance to be an enticing opportunity.

We are telling companies that IPO mandates are not the way to repay lending relationships. We hope that will lead to fewer banks per deal 
 - Leading bank

Even if greed doesn’t lead to blind demand, investors could be overwhelmed. One banker says up to 40 companies could be readying to tap the markets in the first half of next year – keen to get ahead of large deals such as Caixa Seguridade and possibly even privatizations that would drain liquidity.

Completing comprehensive research on all 40 would be a logistical obstacle for investors, while the fear of missing out would be strong.

Poor discipline can most obviously be seen in low valuations, but it also comes out in the bookrunner inflation the market has seen in recent years, for which companies should take some of the blame. Having eight banks on the same deal doesn’t help the consistency of message delivery, nor does it help coordinate or optimise management’s time if there is atomisation of team meetings.

The leading banks hope that this cycle will see some deflation.


Says one: “We think that the balance sheet relationship will become less of an issue in mandating banks for IPOs because there will be more sources of financing for Brazilian companies. We are telling companies that IPO mandates are not the way to repay lending relationships. We hope that will lead to fewer banks per deal.”

‘Hope’ is the operative word in that quote. There has been no sign that locals are being excluded from mandates. On the contrary, of the nine mandates from the two IPOs now in the market, six of those roles are with local banks, including XP Investimentos and Brasil Plural – highlighting the importance of local demand.

Of course, one way to weaken local banks’ ability to win mandates is to take companies to international listings.

International banks recently took Stone and Arco to New York, following the trail blazed by PagSeguro. But while international banks will probably be able to continue this trend with tech stocks, it is highly unlikely that other sectors will follow.

The struggle of Netshoes highlights the difficulties for stocks that aren’t pure tech companies and that list outside Brazil. It has become of an orphan stock – without peers in New York and split from retail and other peers listed on the B3.

The vast majority of the coming wave should wash up on B3’s beach and pitch the local and international banks against each other.

Next year could be a good one for Brazilian equity issuance, especially if ECM bankers finally learn to walk their talk of greater underwriting discipline.