Analysis: Demand for IPOs exposes need for “access market” in Brazil

RIO DE JANEIRO, BRAZIL – This year 30 IPOs (initial public offerings) have already taken place, more than the 25 held in 2020, according to the Brazilian Securities and Exchange Commission (CVM). This positive scenario could be improved if Brazil were to have an “access market”.

An access market is an environment for listing and trading the shares of companies which have grown large enough not to be considered startups, but which do not yet have the muscle to go public in traditional stock exchanges.

It is an organized (and regulated) market, in which a company is already considered public and needs to implement good governance and transparency practices, speaking the “market language,” but is not forced to meet the same requirements as large publicly traded companies.

There are significant initiatives in this segment worldwide, such as AIM in the UK’s London Stock Exchange, and TSX Ventures in Canada’s TSX Exchange.

A study conducted by Deloitte estimated that the average cost for a company to go public in Brazil between 2004 and 2020 reached 3.9% of the total raised in the operation; if it is a Novo Mercado listing, the cost reaches 5%.

These percentages seem low, but they are not, considering that there are minimal other costs and that these are billion-dollar operations, in which the whole investment in structuring and preparing the company to go public is ultimately diluted due to the size of the offerings. To illustrate this, R$66.2 (US$12.6) billion were raised in the 30 IPOs mentioned, with an average of R$2.2 billion per issue.

For emerging companies, which are looking for lower amounts, the costs and the level of organization required to start trading on the B3 exchange, fulfilling the requirements of the regulatory provision (CVM 480) and complying with all the criteria and practices demanded by the regulator, render the option of going public prohibitively expensive.

In Brazil, which in 2008 saw the launch of Bovespa Mais, a B3 initiative that failed to gain traction, the debate over developing the access market has reemerged. Back then the conjuncture was different. It was the year of the subprime crisis and investors in general were less prone to risk. Suffice it to say that there were fewer than 600,000 individual investors registered on the stock exchange.

Today the scenario has changed. The stock market has heated up, there are over 4 million individual investors registered at the B3; these investors are eager for new alternatives. In parallel, the CVM has been talking to the market agents and advancing with a regulatory reform agenda.

An example of this is the so-called “sandbox”, an experimental environment in which participants will receive temporary and conditional authorizations from the CVM to develop innovations in activities in capital markets. Of the 33 proposals registered for the first cycle,19 proposed projects involving the constitution and administration of organized markets.

Another factor contributing to the development of the access market is technological advances. Solutions using blockchain and the progress of financial services integration, for example, allow the cost of governance to become more competitive, simplifying procedures and obligations while protecting investors’ interests.

According to IBGE (Brazilian Institute of Geography and Statistics), there are over 22,000 scale-ups in Brazil, that is, companies that have grown over 20% per year over the past 3 years. How many of these companies could accelerate their growth even further if they were to go public? How many of these companies would be excellent investment opportunities?

The challenge to achieve this lies in structuring an organized market for trading shares of emerging companies, one that combines the simplification of the listing process with a minimally high standard of governance to provide security to stakeholders.

By allowing more businesses to finance themselves through its capital markets, Brazil may not only facilitate the emergence of new large companies but also create value for shareholders and employees, thereby contributing to the country’s economic growth.