Political uncertainty creates challenges for Brazil’s booming IPO industry

RIO DE JANEIRO, BRAZIL – The Brazilian capital market is going through the hottest IPO phase in its history. This year alone, there have been more than 40 initial public offerings (IPOs) through August, with deal volume reaching a new record of more than R$60 (US11.6) billion. Considering the follow-ups, stock offerings have already exceeded R$100 billion this year.

It is an unprecedented moment with an impact on the market. With the reduced participation of foreign investors in initial offerings, domestic investment funds have taken the lead in the IPO window on the demand side. Foreign participation in IPOs has been declining since 2019, according to B3 stock exchange data.

In 2018, the average foreign participation per IPO was 58.7% of traded volume. The following year, this percentage fell to 35%, in 2020 to 29%, and by May this year, it was 26%. In contrast, during this period, the average participation of domestic funds in offerings increased from 31% to 59.7%.

“The local market has grown and become more important. But there has also been a lack of interest from foreign investors, who began to opt for other emerging markets such as India and China,” says Francisco Kops, equity manager at Asset 1. Fiscal uncertainty and political instability are among the main factors driving foreign investors out of the country.

However, the growing reliance on local management companies for IPOs may be taking its toll for an indirect reason. In an environment of increasing attractiveness of fixed income due to the high Selic rate and weaker equity market performance in recent months, net inflows into the equity fund industry have lost steam.

According to the Brazilian Association of Financial and Capital Market Companies (Anbima), net fundraising in the 12 months ended in July totaled R$15.2 billion. This volume is 86.4% lower than the same period in 2020 when the total was R$111.8 billion. This year, the net inflow (fundraising minus redemptions) for equity funds is positive, with only R$794 million.

Multimarket funds, which eventually participate in IPOs, also reduced their fundraising volume. Year-over-year for the cumulative 12 months in July, the decline was 18.6% to R$82.7 billion.

“This wave of IPOs may not occur as predicted,” said Cláudia Yoshinaga, coordinator of the Center for Studies in Finance at FGV-EAESP. At the CVM (Securities and Exchange Commission), IPO applications from at least 20 companies are under review, including restaurant chain Madero and low-cost gym chain Bluefit.

“We already see the first signs of saturation of offerings,” says Matheus Spiess, an analyst at analytics firm Empiricus. Of the last five IPOs, four went at the floor or below the indicative price range, and one company abandoned the operation. “In the context of lower funding, there is a lack of resources to participate in everything.”

Given the lower participation from foreigners, Kops of asset management firm Asset 1 says he believes lower funding from local funds could be a “big problem” for companies planning to list.

“There’s not a lot of new money coming in, and institutional investors have a lot of new companies in their portfolios, many of which haven’t matured their theses yet,” he said. The question is how to find room in the portfolio.”

With the volume of initial offerings outpacing fundraising, funds looking to participate in future IPOs may be “forced” to sell assets in their portfolios. “We’ve had a pretty active offering window, which has impacted the stock price quite a bit,” Kops says.

Although he sees room for good news from startups, the manager believes the trend is that the bar for market demand is rising. “The competition for capital is going to get bigger and bigger because there’s almost no money coming into the industry.”

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