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Will Brazil Emerge From Dry IPO Season?
After a dry spell, the pipeline of Brazilian IPO candidates is showing signs of filling up again.
BY ABRAHAM PAUL
We expect Brazilian public markets to take center stage in 2024, as hopes remain that this will be the year that South America’s largest economy breaks its IPO drought.
There have been no IPOs in Brazil since 2021, when fertilizer manufacturer Vittia Fertilizantes e Biologícos made its public market debut in Brazil and Brazilian fintech company Nubank successfully listed on the New York Stock Exchange.
The year leading up to those listings had been one of the best ever for Brazilian IPO activity, with IPO proceeds in 2021 totaling $14.73 billion, a five-year high and almost double the $8.47 billion raised in 2020.
However, since then, Brazil’s IPO market has been closed. The Brazilian Central Bank—Banco Central do Brasil—moved aggressively in 2021 to tackle rising inflation, pushing interest rates higher and faster than its counterparts in Western markets. In turn, higher interest rates raised capital costs, deterring IPO candidates from proceeding with listings.
In addition to interest rate headwinds, a close and unpredictable presidential election in late 2022 also put investors and issuers on the back foot as the market awaited the outcome.
With IPO activity failing to revive in 2023, the dearth of IPOs in Brazil since 2021 represents the longest dry spell in two decades, according to Bloomberg.
READY FOR A REVIVAL
Moving into 2024, bankers, issuers and investors are hopeful that Brazil’s IPO hiatus will end.
Brazil’s proactive approach to hiking interest rates as soon as inflationary pressures started building allowed the Brazilian Central Bank to begin reducing rates as early as August 2023, a move that may lure IPO issuers back to the market if the pace of reducing interest rates continues as hoped. A 25 percent rise in the Bovespa—the country’s main stock market index—during the past 12 months (until the end of Q1 2024) has provided additional tailwinds for potential IPOs.
Investment bankers and advisers are optimistic that the improving underlying fundamentals may lead to IPOs in Brazil, particularly once the interest rates in Brazil fall below 10 percent. In turn, investors may begin to seek higher returns in the equity capital markets and reduce their fixed-income exposure. According to the B3 stock exchange, more than 100 Brazilian companies are preparing for IPOs, while bankers at Itaú BBA, a leading Brazilian investment bank, are forecasting that proceeds from IPOs and other share issues in Brazil could reach between 50 billion reais and 70 billion reais (US$10 billion to US$14 billion), according to the Financial Times.
Companies from a variety of sectors, ranging from infrastructure to retail and technology, could launch IPOs in 2024, according to Bloomberg. And while the momentum behind IPOs grows, investors remain pragmatic and sensitive to risk. A recovery in Brazilian listings will be contingent on interest rates in the US stabilizing and coming down, and steady global growth. Investors are also likely to be more selective this time around, preferring both larger offerings that provide greater liquidity and companies that have established track records of positive results. Thus, it may take until Q3 2024 or later for anticipated IPOs to proceed.
However, the opportunity to support Brazilian IPOs does present investors with attractive upside potential. Brazilian equities were among the strongest performing emerging market stocks in 2023 and still present an attractive buying opportunity for investors. According to BTG Pactual, a leading Brazilian investment bank, Brazilian stocks have traded below historic 12-month forward price-to-earnings multiples (as of January 2024).
Many emerging markets funds have already taken overweight positions on Brazil, and as more domestic investors pivot back to equities as interest rates come down, more capital will flow into the markets and be available for new listings.
Abraham Paul is a São Paulo-based partner with White & Case. His practice focuses on capital markets transactions, representing issuers and underwriters in connection with a variety of cross-border offerings of securities, primarily Rule 144A and Regulation S equity offerings and private placements.
