What was shaping up as Brazil’s best year for initial public offerings in more than a decade is now on the rocks, as many companies shelve their plans amid concerns on the country’s fiscal discipline and a surfeit of new equity supply.
Fueled by surging demand from domestic retail investors seeking alternatives to historically low interest rates, local companies were expected to raise roughly 100 billion reais (US$ 17.7 billion) by year-end in 2020 by selling their shares in IPOs and follow-on.
But several companies’ IPO hopes have been dashed in recent weeks. Even state-owned lender Caixa Economica Federal’s planned flotation of its Caixa Seguridade SA insurance unit, which had aimed to raise more than 10 billion reais, collapsed last week. Cosan SA’s gas unit Compass and investment bank BR Partners met the same fate.
Many additional companies are also mulling cancellations, bankers say, as investor sentiment is soured both by concern about government overspending and by the sheer size of the pipeline of companies seeking to go public.
Others, such as homebuilder Lavvi and drugstore chain Pague Menos, yielded to pressure from investors and cut their initial valuations.
This year, Brazilian IPOs have been mainly funded by local investors, fueled by record low benchmark interest rates at 2%. Foreign investors have accounted for 38% of the money in Brazilian IPOs this year, below the historic average level of 60% since 2007, giving domestic investors a lot of influence over pricings.
Cash equities have seen foreign investment outflows of some 90 billion reais so far this year, while local equity funds had inflows of over 60 billion reais, according to a recent Bank of America report.
“International investors’ sentiment toward Brazil this year is anemic, with most showing preference for Chinese companies among emerging markets, especially tech IPOs,” said Andre Rosenblit, head of at Banco Santander Brasil SA’ broker unit.
Uncertainties around U.S. presidential elections and a second wave of COVID-19 in Europe, and a related shift to a more “risk off” posture among global investors have also emerged as obstacles to new stock flotations.
Beyond that, Brazil’s short-lived IPO boom became a victim of its own success as companies’ rush to float shares ran afoul of an immutable fact: the country’s investor base - even given its recent growth - can only absorb so many IPOs.
The problem in many cases, is simple: there are simply not enough buyers at once for the massive bulge in supply, bankers, companies and asset managers say. Some asset managers even complain they lack enough analysts to scrutinize - for example - three drug retailers or a dozen construction companies simultaneously seeking a flotation.