Brazils equity markets are booming, with many IPOs, but investor interest may have peaked and finding staff is a real headache. John Rumsey explains.
Recently, a senior analyst covering Latin America was lured by an investment bank from New York to Săo Paulo. The analyst may not have seemed an obvious choice for such a position, being neither Brazilian nor a Portuguese speaker. For the analyst, the salary was the driver; for the bank, it was his expertise. This reversal of the normal flow of talent is symptomatic of a market that is in runaway expansion. Local banks that are flush with cash from lending want in and, in some cases, are matching packages offered by the global banks. That is encouraging further salary inflation and a revolving door mentality.
Brazilian equity markets are running at full tilt: issuance is the third highest on the planet so far this year (after the US and UK). That is a spectacular ramp up. In 2005, just nine companies launched initial public offerings (IPO) on the Bovespa exchange, raising $2.1bn. Last year, 26 such deals raised $7.1bn and the Ibovespa, the most widely quoted benchmark, was up 33%. By mid-May this year, there had been 21 IPOs.
Better still for investment banks, transaction fees have remained enticingly high at about 3%-5%, partly because first-time issuers are more concerned about being heard in a deafening marketplace than squeezing out a low fee. That has resulted in issuers clustering round the execution banks with proven track records, particularly the two giants, Credit Suisse and UBS-Pactual.
The good news is that the equity capital markets boom looks healthier than previous such swells. For a start, economic stability is more deep-rooted with a balance of payments surplus, low inflation and an appreciating currency. Rating agencies Fitch and Standard & Poors both raised Brazil to one notch below investment grade in May. Confidence that corporate governance standards have improved has stimulated foreign interest. They are buying IPOs from a broader swathe of sectors than they did in the 1990s, when flotation was driven by privatisation and concentrated in energy, utilities and commodities.
The financial sector and credit institutions, real estate and biofuels will continue to be strong and popular, predicts Alexandre Bettamio, managing director and head of investment banking at UBS-Pactual in Brazil. Companies in healthcare, education, agriculture, meat processing, logistics and technology have all been able to sell equity of late, too.
This surplus of riches is not without its downsides. Banks are finding it tough to get enough personnel as hiring becomes the priority. Its particularly important to be seen to have lots of staff because the latest smear tactic by your competitor is to whisper in the ears of treasurers that you are under-resourced and will not be able to execute their deal well, says one investment banker.
Investors, too, are complaining of levels of service. Investment banks are completely understaffed, says Gilberto Nagai, equity fund manager at ABN AMRO in Săo Paulo.
José Olympio Pereira, managing director and head of Brazilian investment banking at well-established Credit Suisse, agrees. The biggest scarcity is experienced people. This is the biggest barrier to entry for newcomers, he says.
The challenge is not only to hire new staff but also to retain existing staff. As local banks and foreign newcomers try to carve out a niche, they are offering incredible packages with one-year or even two-year guarantees to lure names, according to headhunters. You have to offer a guaranteed bonus industry or you wont get the guy. Compensation has become de-linked from performance, says Demósthenes Madureira de Pinho Neto, head of the wholesale business at Unibanco.
Fight for space
Local banks are being forced to swallow hard to compete on an even footing. The culture at Banco Itaú, which has the most successful local franchise, accepts this, according to president and CEO Roberto Setúbal. The market is very competitive, with everyone fighting for space. Were doing well and recognise that this industry has very competitive remuneration. You have to be able to pay what the market pays.
Mr Madureira de Pinho Neto says: You need a track record and reputation and it helps if you have a nice franchise in the country. Unibanco has been building up its investment bank fast.
Bradesco has been slower off the mark, however. Márcio Cypriano, the banks president, says that recent deals show we can compete in this area. And he believes the bank will have a strong presence in two or three years time. Nevertheless, Bradescos focus on training staff internally, except in specialist areas, makes it difficult to see how it will become a player to reckon with in this boom.
Just how damaging that is depends on how long the wave will last. That is anyones guess. Markets and salaries have factored in good news at an astonishing speed. In the private equity markets, a raft of money has already driven prices of biofuel assets, such as land and mills, to giddy heights.
There are signs of stress in the public markets, too. IPOs have typically leapt in the after-market telecom company GVTs February IPO was up more than 27% immediately after pricing, and in March educational services company Anhanguera rose by 21% guaranteeing strong demand for future flotations. ABNs Mr Nagai believes that for fund managers there is a lot of pressure to buy in the primary market. It is very difficult to make significant amounts of money operating only in the secondary market, he says.
Until recently, that is. The dynamic seems to be changing, as turbo-charged IPO pricing meets resistance. Shares of meat packer Friboi, which came to market in March, slumped 12.5% the day after pricing, for example, and a couple of other deals have slid, if by a lesser 2%-4%, in after-markets. Investment banks are parsimonious with good deals but are dumping poorer ones in the market, says Mr Nagai. If the deal is very hot, the amount of shares we receive in the IPO is very small, meaningless. If it is not a very good deal, we receive a lot of shares but they dont perform well.
With the ability to flip IPO stocks no longer a sure-fire thing, investors are staying away from some deals. Ominously, industrial laundry company Atmosfera had its IPO pulled amid criticism that shareholders were holding out for unrealistic pricing and had an uninteresting story.
However, Mr Bettamio at UBS, which was the lead on Friboi and was designated for Atmosfera, points out that Fribois share price has largely recovered it was trading at 7.5 reais ($3.9) in mid-May against the launch price of 8 reais and controlling shareholders at Atmosfera decided not to accept a lower price because it had other options. The setbacks must be put in context, he says.
UBS had captured 13 of the 26 IPOs issued by mid-May. That makes it the leader in the equity market this year, dethroning perennial leader Credit Suisse.
In some cases, in some sectors, prices are a little above what might be considered a rational price for the asset, says Itaús Mr Setúbal. The market is adjusting and taking care of any price incongruities; and the high quality of companies that are coming to market, the performance of shares in the secondary market, growth in revenues and continued investor appetite suggest that we are still at an early stage in the cycle and we will see more such deals, he says.But he thinks that the pace of issuance is likely to slow somewhat in the short-term.
The big question is what is going to happen to the real estate market, which has been one of the biggest sources of new deals. Share prices have cooled somewhat after an effusive 2006. The pricing of real estate IPOs last year implied a rate of growth that will be a bit more gradual, says Mr Madureira de Pinho Neto.
IPOs are still going ahead at a torrid pace, with seven so far this year. There are too many issues in real estate, Mr Nagai complains. Investors need to be extra picky, he warns.
The market is the next big challenge and opportunity for Brazilian banks, according to Mr Setúbal. The banks are busy poring over a variety of business models to figure out how to expand lending in what is likely to represent the final lending wave in the country. Part of the excitement is related to lower rates and the possibility that the mortgage market is on the cusp of maturing.