A local affair
In 2020, Brazil dominated ECM in Latin America thanks to a rapidly growing domestic investor base. The focus on domestic listings at the expense of US exchanges suited Itau BBA, which was at the forefront of that shift and is IFR’s Latin America Equity House of the Year.
Itau BBA, one of the five incumbent banks in Brazil, had a banner year in equity capital markets, underwriting more deals than rivals and leading the shift in fundraising activity from international to local markets.
Brazilian companies dominated activity across Latin America, accounting for 69 of the 75 ECM trades in the year across the region and 95% of the US$32.3bn of proceeds raised. Itau was a bookrunner on 39 of those deals, earning league table credit of US$3.1bn, giving it a 10.7% share of overall issuance across the region just behind top ranked Morgan Stanley. Itau was top for the awards period, with 47 trades versus Morgan Stanley’s 24.
“Over the past 18 months, we have seen a strong migration of investor money out of other asset classes into equities,” said Itau head of ECM Renata Dominguez. “It has become more important than ever to have local expertise and on-the-ground knowledge to reach investors and issuers. It takes time to develop those relationships.”
In an incredibly volatile year, the benchmark Bovespa stock index cratered by nearly 50% in March only to stage a dramatic recovery and end the year up 2.9%.
The Brazilian central bank in June cut target lending rates to a record low 2%, from 4.25% entering the year and 14.25% back in 2016.
The Brazilian Real, in turn, depreciated 22.6% relative to the US dollar.
It was enough to trigger an exodus of international equity funds but an influx of domestic investors willing to accept greater risk for higher returns.
It led to feats such as Lojas Americanas’ shares trading up over 11% during marketing of a follow-on and the retailer then increasing the shares offered by 35% to raise R$7.9bn (US$1.5bn).
Over the course of 2020, Brazilian asset managers saw inflows into equities of R$69.4bn, extending on the record R$88.9bn the year before, and R$41.2bn of outflows from fixed income during the year, according to the Brazilian Financial and Capital Markets Association.
This rotation into equities was embodied by XP, the Brazilian online brokerage that bookends IFR’s consideration period with an IPO in December 2019 and follow-on in December 2020.
XP was one of just three LatAm companies that opted to list on an international exchange in the review period and its US$2.25bn IPO is IFR’s Latin America Equity Issue of the Year.
Itau Unibanco, the parent of Itau, crystalised a three-fold return on its 2017 investment in XP through a US$935m secondary sale of XP’s Nasdaq-listed shares in December 2020 which priced 44% higher than the IPO. Itau was a global coordinator on both trades.
Locaweb Servicos de Internet, a web hosting company that is deeply embedded in e-commerce through subscription-based software solutions, is the type of fast-growing company that would have elected to list on a US exchange in the past. Itau instead advised on a local B3 listing with other banks – Goldman Sachs, Morgan Stanley and XP – mandated as global coordinators months after the decision, said Pedro de Garcia Souza, Itau’s head of investment banking.
“The market tone was very positive at the beginning of the year,” said Garcia Souza, who oversees a team of 70 bankers covering LatAm, including about 50 focused on Brazil.
Locaweb’s global offering in February, led by selling from shareholders including US tech-focused private equity firm Silver Lake Partners, priced at a top of the range R$17.25 while partial exercise of the hot-shoe upsize option and full greenshoe raised R$1.325bn across primary and secondary.
The performance of the stock has been stellar, ending 2020 at R$80.48, 366.6% above offer, and leading to a 1:4 share split in February 2021.
Fast-growing pet goods retailer Pet Center Comercio e Participacoes’ R$2.7bn IPO in September again proved local investor appetite. The offering was scheduled to happen in March, following extensive pre-marketing, but Itau recommended to hold off until the impact of coronavirus on operations was understood.
“This is a segment in Brazil that is growing significantly, even in the context of Covid-19,” said Dominguez. “We had been working with the company on the IPO for more than a year.”
Over 90% of the offering in September was secondary shares, mainly from Warburg Pincus, and included full exercises of both the hot-shoe and greenshoe options, at R$13.25, the midpoint of the R$12.25–$15.25 range marketed. That valued the company at R$4.9bn or some 50-times forward revenue forecast, high in any jurisdiction.
Warburg, which saw its stake reduced to 5.5% from 51%, awarded Itau a greater share of the 1.25% incentive fee than other syndicate banks.
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