Uncertainty stops wave of IPOs until 2022 elections

The years 2020 and 2021 registered robust growth in initial public offerings (IPOs) on the Brazilian Stock Exchange, which emerged as earning opportunities for entrepreneurs and investors in a context of low interest rates and optimism about a future resumption of economic growth in the post- pandemic.

In recent weeks, however, business expectations have been dismantled with fiscal uncertainty and inflation putting the country back in a scenario of interest rates high enough to practically make bolder investments in the stock market unfeasible.

IPOs awaited by the market, such as those of Kalunga, Havan, Bluefit, Eztec, Housi, You Inc, AgriBrasil and Comerc Energia, were recently suspended or canceled, according to a survey by iHUB Investimentos.

Between January and September of this year, there were 45 IPOs, 66.6% more than in the entire year of 2020. The values ​​of operations in the comparison between the periods increased by 40%, from R$ 45.3 billion to R$ 63.4 billion.

The sum of operations (72) and values ​​(R$ 108.7 billion) in the 2020-2021 biennium represent increases of 1,520% and 1,380%, respectively, in relation to the annual average of offers (4.4) and financial volume (R$7.3 billion) recorded between 2011 and 2019, according to data from Anbima (Brazilian Association of Financial and Capital Market Entities).

Now, analysts see the resumption of the wave of initial offers in a horizon beyond the 2022 elections or later, in 2023, when the cooling of political pressures for an increase in public spending tends to collaborate with inflation control and, consequently, with the drop in interest rates.

The environment for companies to open up to the market has been deteriorating since September, when the acceleration of global inflation was combined with the domestic institutional crisis whose worsening was evidenced by the coup-based protests stimulated by President Jair Bolsonaro (no party).

The scenario worsened in October, when the government made public its intention to breach the spending ceiling to increase spending in the 2022 election year, further expanding the market’s perception of the country’s fiscal risk. In October alone, the stock market fell 6.7%. This year, losses are almost 12%.

The annual interest rate on DI (Interbank Deposits) contracts for January 2023 went from 8.5%, on September 1st, to 12.1% last Friday (5).

“With a rate of 1% per month becoming the lowest interest rate in the country, IPOs become very unlikely”, says the CEO of iHUB, Paulo Cunha.

Even if the stock market recovers before the 2022 elections, Cunha assesses that the instability of the pre-election period will keep most operations suspended until October next year.

“It got worse. Getting confidence back with the elections approaching must be quite difficult,” says Cunha. “An IPO is a process that requires more market stability.”

The rise in interest rates makes investors demand ever-increasing risk premiums, bringing down the market value of companies, says Rodrigo Lima, an analyst at the investment platform Stake.

The analyst at Stake, who specializes in connecting investors to the US stock market, believes that even initial issues by Brazilian companies in the United States should only be carried out by fast-growing companies with a great capacity to make the market believe that they they may offer remuneration higher than the already high risk-free rate.

The weakening of the wave of IPOs will not mean, however, the complete absence of share issues over the next year, according to Denis Morante, managing partner of Fortezza Partners.

For Morante, some offers should take place later this year and early next year, but a new wave “with euphoria and optimism” will take time to happen, according to the specialist. “It may be necessary to wait for the 2022 elections.”

With investors averse to betting on start-up companies on the Stock Exchange, offers over the next few months should focus on issues from companies that are already publicly traded and that will return to the market to offer more shares, which in the market jargon is called follow on.

“The process will become more selective and only large and very solid emissions will end up happening, there will probably be more follow on than IPO”, says Morante.

Another move expected by the analyst is that companies previously willing to open public offerings decide to take a step back and resort to private investments through institutions in the private equity market (private equity). “Entrepreneurs can and should access this market, which is heated and optimistic about the possibility of taking the place of share issues,” he says.

Investor attention will be needed to assess companies that decide to launch themselves on the market even during the turmoil of the coming months, according to iHUB expert Guilherme Ammirabile.

The main point is about the company’s value (valuation), which is presented in the issue’s prospectus. This analysis requires expert assistance.

Another way to mitigate the risk of paying too much is to assess whether the sector is considered promising and whether the company has competitive advantages over the competition.

Ammirabile warns that, although the IPO theoretically has the lowest market value that a company will have, the relationship between demand and supply could distort this rule. “It is very common for us to observe great volatility at this time,” he says.