The Brazilian capital market is feeling relief. After a long period, variable income fund raising for Brazilian companies rose significantly. According to data from the Brazilian Financial and Capital Markets Association (Anbima), the total YTD volume of variable income issuance in September reached BRL 26.8 billion, the highest volume since 2010, when it was inflated by the capitalization of Petrobras. This figure is divided into BRL 14.1 billion in IPOs and BRL 12.7 billion in follow-on offerings. Taking pipeline operations into account, forecasts are for volumes to reach BRL 50 billion in 2017. For context, until September 2016, the raised volume was BRL 7.9 billion from follow-on offerings only.
Recent offering have had mixed performance. Some have priced based on a range fixed at the beginning of the book-building process, others have priced below this range, while there have also been cancelled offerings.
There are several explanations for the difficulty in achieving prices expected by sellers. One may be that the proposed range is based on an overly aggressive assessment by seller’s advisors to boost their commission. In addition, the Brazilian capital market is still very concentrated, enabling a small group of professional investors to dominate the pricing process.
However, we believe these dynamics do not adequately explain such mixed performance, considering more positive pricing outcomes in markets with similar structure and depth. For example, the recent IPO of Despegar.com, an Argentinean company that listed on NYSE in September 2017, priced at the top of its established range.
The Despegar.com case illustrates crucial aspects that enabled this pricing:
- Despegar.com was established 18 years ago, and received its first private equity investment after 8 years of operation. Therefore, the company has executed a series of actions over the long term that supported and more easily facilitated a successful IPO transaction.
- The IPO was just one step in Despegar.com’s ongoing growth. The company’s listing preparation required long-term relationship building with investors, and extensive support from a highly experienced IR team.
- In addition to working with investment banks, Despegar.com used consultants for tasks such as preparing its investment thesis. Working with third parties ensured a greater diversification of views, so the company was able to more robustly challenge and address potentially sensitive issues before formally beginning the process.
- Despegar.com relied on support from the senior team at InspIR Group, a spin-off of MBS Value Partners. New York and Latin American teams were involved in all aspects: the IR website, cover art of the F1, roadshow video scripts, media coverage in United States and Latin America on IPO day, and other celebrations. Notably, the roadshow documentary-style video and the F1 cover are common in IPOs for Silicon Valley’s tech companies, but an innovation for Latin American companies and enabled Despergar.com to showcase the unique aspects of its business model more creatively.
- The Company’s management participated in training and workshops with a focus on publicly-held companies. This included activities such as education on operating matters to a dry-run of Q&A for the roadshow. This detailed and thorough preparation was ultimately recognized by the market.
- The Company continued to work with expert consultants after their IPO to maintain the input of independent advisors who could help maximise the value of Despegar in the eyes of investors on an ongoing basis.
In summary, Despegar.com illustrates the way forward for Latin American companies that wish to professionalize their IPO process, and stand out in global capital markets.
- Thinking beyond the IPO: becoming a public company is just the start rather than the finish line.
- Planning the process: attention to detail and excellence in execution.
- Being innovative with all communication strategies and materials.
- Seeking discordant views and opinions: do not underestimate the value of the time invested in training and preparation.