Brazilian firms are attracting foreign investors thanks to higher turnover
08/22/2023
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Daniel Bassan — Foto: Nilani Goettems/Valor
Many of the companies that have already taken advantage of the opening of the secondary offerings window are finding a valuable asset amidst the current market volatility: liquidity. Having a minimum daily trading is key to facilitate entry and exit for investors and draw new ones.
This year’s offerings that have benefited from increased liquidity include Oncoclínicas, Orizon, Direcional, Hidrovias do Brasil, Vamos, and Viveo. According to investment bankers, this theme remains a priority in the offerings that are still expected to be launched as the equity market gains traction.
In the case of the medical products manufacturing and distribution company Viveo, which major funds previously overlooked due to low trading volume on the stock exchange, liquidity increased by over 433% after the secondary offering, according to a study by UBS BB (an investment banking joint venture between UBS Group AG and state-controlled lender Banco do Brasil), commissioned by Valor. For Oncoclínicas, the increase was 91%. Hidrovias do Brasil’s liquidity also increased by 38%.
Companies are paying attention. In the market, the calculation is that a company needs its shares to have a minimum daily trading volume of R$50 million ($10 million) to attract foreign capital flow, which seeks companies where it can swiftly build or exit positions. In times of greater volatility, for instance, capital seeks more liquid assets for greater agility in transitioning portfolio positions. Conversely, less liquid stocks suffer more, as seen during the global surge in interest rates.
An examination of the stocks traded on the Brazilian stock exchange shows that the situation indeed needs to be addressed. Of the approximately 400 companies listed on the Brazilian stock exchange, B3, around two-thirds have low liquidity and are far from the reach of major investors, even local ones, trading below $5 million per day, according to a Trademap survey. Only 87 companies have a daily liquidity above $10 million, the minimum threshold indicated by foreigners, which also helps explain the concentration in the Brazilian market.
“For a foreign fund, liquidity is essential. Smaller companies with low liquidity have more difficulty attracting foreign capital, and their shareholder base is mostly local investors. Today, we already see more companies bothered by the lack of liquidity and the perception that the valuation recovery may be slower,” said Daniel Bassan, CEO of UBS BB.
In a recent interview with Valor, Fábio Nazari, BTG Pactual’s partner responsible for equity, noted that a minimum daily liquidity can help a company attract foreign fund attention, potentially shifting its position. “Companies can use an offering to strengthen their balance sheet, create value, and enter a virtuous cycle.”
According to Mr. Nazari, public offerings work both ways: they improve capital structure and liquidity. He also pointed out at the time that the company unlocks value on the stock exchange, a bonus to this equation.
Liquidity is currently valuable, as it is the first checkpoint for foreign investors to assess Brazil with a clear possibility of increasing exposure in their portfolios. Many companies that went public in recent years, especially during the pandemic when global liquidity was ample, conducted smaller offerings with demand predominantly from Brazilian investors. Now, amidst volatility, their stocks are overlooked by reputable market funds due to the liquidity issue.
Roderick Greenless, head of investment banking at Itaú BBA, states that during “non-deals roadshows” with clients, which are meetings between company management and local and foreign investors, many international investors point to low liquidity as an investment obstacle. “This is the feedback we receive. And the public offering provides this benefit,” commented Mr. Greenless.
According to him, the majority of companies that conducted stock offerings this year have positive performance on the stock market, which also helps adjust company values.
Mr. Greenless also emphasized that another crucial factor to consider is that gaining liquidity allows companies to be included in B3 indices – Ibovespa (Brazil’s benchmark stock index) being the most famous example. “The indices are followed by passive funds, creating demand for companies that did not exist before,” commented the BBA executive.
Felipe Thut, head of investment banking at Bradesco BBI, acknowledged that although liquidity is crucial for a publicly traded company, when considering a public offering, the company needs to rationalize the use of the raised capital. “Liquidity alone is not a reason for a public offering; the company must indeed have a rationale,” said Mr. Thut.
In the offering equation, achieving the best possible liquidity is a point of discussion during structuring. “Sometimes there is a secondary sale by shareholders solely to increase liquidity for the stock,” said Mr. Thut. For instance, this was the case with Oncoclínicas, where Goldman Sachs joined the offering to increase the volume sold and, in turn, enhance stock liquidity on the exchange.
*Por Fernanda Guimarães — São Paulo
Source: Valor International