In Brazil, one andorinha doesn’t make a summer. Equally, the performance of the first IPO of the year isn’t everything. After all, on January 31, 2011, Arezzo priced at the top of its range and went on to perform well, but it was to be the exception. (for further reading see Brazil's equities market suffers an identity crisis)
Subsequent deals last year struggled to make the bottom of the range and some dipped under. Post-pricing performance was, in the main, poor, although some did end the year ahead of the index – helped by its slump of 18% in 2011.
This year, the Bovespa is already up 9%, lifting optimism. Two deals had filings in place and both judged that the market was in a buying mood and proceeded with IPOs for early February. Brasil Travel had its head in front of Seabras, hoping to capitalise on a generally positive market sentiment and fresh investor liquidity.
Unfortunately, for those hoping to see some momentum being injected into the Brazilian ECM market, Brasil Travel quickly found the going tough. Questions have been raised about the complex structure of 35 companies, and the accounting and financial statements supplied to prospective investors.
There are reports that audited numbers are being added to rough numbers, and so the utility of the totals is being questioned. Investors also tell Euromoney there is no clear incentive plan about how to align the various companies’ performance and maximise corporate earnings.
The deal has, according to some, the feel of rushed opportunism. Trying investors’ patience further, Flow Corretora is both the financial sponsor and managing the transaction. At the very least, the perception of conflict of interest was predictable and should have been avoided. Those behind the deal counter this by basically saying: "Don’t worry – it’s cheap." Although many add that the multiples are high in any case.
Anyway, who wants rushed, faulty and cheap? Those selling suits to the investment bankers behind these deals would never dream of such a pitch – it’s care, expertise and value that matters. This is sales psychology for beginners.
Time and again bankers say that managing IPOs isn’t rocket science – it’s common sense. They say that bankers need to be firm with clients and tell them the harsh reality about their company, whether it’s valued too highly or it’s giving off fumes of an opportunistic cash-out. Who wants to invest in a company’s future when it feels like a hopeful exit rather than the beginning of a corporate-growth story?
Even the fee structure is raising eyebrows. Credit Suisse is believed to be getting the lion’s share (circa 75%) of a fee which has been rumoured to be between 5% and 7% – the market norm is between 3% and 4%. So at least it is getting paid for the risk to its reputation.
For its part, Barclays is trying to enter the market but what’s the point of a first mandate if you’re not proud of the deal? When one rival banker was asked why they thought the last of the four banks to be mandated – Santander – had joined for an estimated 10% of the fee, he couldn’t think of a reason: "I don’t think they know what they’re doing," he said. "It could end up burning them badly."
The fee structure, if true, doesn’t inspire confidence in the management team that negotiated it. And why the premium and the high proportion to one bank?
Brazil’s equities markets have a bright future. However, banks need to stop just talking about being disciplined with clients, rigorous on fundamentals, and thorough in their prospectus and marketing efforts. Investors haven’t been willing to invest on the Brazil play since 2007. It didn’t pan out then and it won’t wash now.
And it’s not just the banks working on the deals that face reputational damage. Brazil as a market for IPOs has been tarnished by too many poorly priced, badly managed transactions. If the first one of 2012 is another example, it will harm the jurisdiction in the eyes of international investors.
Managing IPOs might not be rocket science, but it does need to be done with care and with respect for the investor.
