Investment in off-exchange companies resists low tide

With no initial public offerings (IPOs) in 2022, the Brazilian Stock Exchange is one of the thermometers of the difficulty that local companies face in gaining market value in this year in which global inflation has catapulted interest rates and, consequently, created a threat to the growth of the global economy.

But despite the blackout in IPOs in Brazil, the segment of investment in shares of companies traded outside the stock exchange shows resistance.

It is the market for participation in private capital, also known as private equity and venture capital, the first being focused on mature companies and the second focused on those with greater growth potential.

In the first five months of this year, the net worth of the FIPs industry (Funds for Investments in Participations) amounts to almost R$ 581 billion, a value 16% higher than the R$ 502 billion accumulated until the end of last year and ten times greater than the approximately R$ 55 billion recorded in 2011, according to a survey by Quantum Finance.

In this span of just over a decade, the number of FIPs rose from 139 to 1,220. The number of quota holders increased from 468 to 35,152.

Although it is not possible to point out the number of new companies that sought capitalization in this segment, nor to say which companies exchanged the stock market for private capital, the data on the evolution of private funds show a constancy that contrasts with the abrupt interruption of the wave of IPOs.

Before ceasing in 2022, initial offerings on the Exchange had reached a record 46 in 2021.

High interest rates are responsible for the disappearance of new companies on the stock market. High rates increase the return on fixed income, an option with greater liquidity and lower risk than investing in variable income, especially in the case of companies that are new to the market.

In other words, if interest rates go up, investors are unwilling to pay higher prices for stocks.

“The increase in interest rates squeezes the market value of companies, which cannot impose the price they would like on their shares and the deal does not happen”, explains João Daronco, an analyst at Suno Research.

The heated fixed income, however, also reduces the appetite of domestic investors for the private capital market, emphasizes Carlos Miranda, president of X8 Investimentos.

But the devaluation of the real against the dollar creates, according to him, favorable opportunities in this segment for foreigners.

The exchange rate advantage also applies to foreign investment in the Brazilian stock exchange. But in the case of private equity, investors are less exposed to fluctuations in the stock market, especially in periods of instability, such as a presidential election year.

“Direct investment is less susceptible to market volatility, often caused by a perception of risk that does not always exist”, he says.

Miranda and Daronco consider, however, that the growth of the private capital market is not directly related to the drop in IPOs, but rather to glimpses of opportunity on the part of investors.

For the Suno analyst, the growth would be the result of the popularization of this modality. The creation of funds accessible to individuals by brokerages would explain the phenomenon.

Danielle Lopes, partner and equity analyst at Nord Research, agrees that the still incipient democratization of the sector is an asset for expansion, despite the crisis.

She does not, however, rule out the relationship with the drop in IPOs and the possibility that companies are also seeking capitalization in the private market while waiting for the most favorable moment to enter the stock market.

“The company ends up forcing itself to be more professional in order to be accountable to shareholders and begins to understand the level of governance that it needs to achieve”, he comments.

From the investor’s point of view, Lopes points to private equity and venture capital funds as options for diversifying portfolios with a focus on the long term (more than five or ten years).

“Whoever invests in this type of business must develop a long-term mentality”, he says. “You invest in ten or fifteen companies and only one of them has a better chance of succeeding and paying for the investment in the others.”