By Sarah de Sainte Croix, Senior Contributing Reporter
RIO DE JANEIRO, BRAZIL – The Rio-based investment company, Rio Apartments Group, has announced the launch of the F-10 Public Offering (Form 10 Public Offering) concept as a solution for small to medium-sized businesses in Brazil seeking to raise working capital. The program will be provided via the U.S. investment management company Dutchess Capital.
Mike Bennett, CEO and partner in Rio Apartments Group, says, “[The F-10 Public Offering] has never been done in Brazil because most investment bankers were waiting to see if the economic growth was sustainable, and now that it is, there is interest from Wall Street institutional investors for these types of transactions.”
He continues, “Brazil’s current economic boom is presenting small to mid-sized companies with ample opportunities for growth. The challenge for these companies is raising the necessary capital to take advantage of these opportunities.”
The traditional options available to small to mid-cap companies for raising equity in Brazil include bank loans, private equity funds and going public on the Bovespa (the Brazilian Stock Exchange).
A significant downside to bank loans in Brazil are high interest rates. A recent article in Valor magazine indicated that banks are also tightening their guidelines and requiring more collateral for commercial loans to businesses for working capital, making this option challenging for smaller businesses.
According to a report produced by Trusted Sources, a UK based economic research group, mid-cap firms have found it increasingly difficult to raise capital on the Bovespa since the 2008 global crisis, something not likely to improve given the recent plunge.
The Bovespa Mais (a section of the stock market specifically designed for small to medium-sized firms), has only managed to attract one company out of an eligible 60,000 since it was created in 2005. The report speculates that limited interest from underwriters and book builders in smaller offerings could be the cause.
The F-10 Public Offering option allows a private Brazilian company to go public in the U.S. and raise funds on the U.S. stock market instead. The company first completes a share exchange (called a reverse merger) with a Form-10 blank shell company in the US (a newly formed public company registered with the Securities and Exchange Commission in the U.S., with no prior business activities).
The company immediately receives an initial equity investment, (known as PIPE financing), from Dutchess Capital of between US$3 and US$8 million. Following this, the company is then prepared for an Initial Public Offering (IPO) on a major U.S. stock exchange, which will generally raise an additional US$10 – US$40 million.
The whole process takes up to a year to complete, but one advantage of the F-10 Public Offering over private equity is that once the company is funded and trading shares in the U.S., it can go back to the market to raise additional capital in the future as it continues to grow. Owners also have flexibility over their ownership options.
The U.S. stock market has always been an obvious port of call for Brazilian business interests for reasons of time-zone, historic trading and financial relationships, and the tradition of Brazilian executives taking MBAs in the US, but for some the evolving crisis with the dollar might be a significant detractor.
Bennett argues, “The key is that there is a lot of money sitting on the sidelines looking for a home … particularly since everyone is pulling out of China now.”