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