In October, a special task force comprised of VCs, CEOs, investors and investment bankers issued a report citing a crisis in the US IPO market, particularly for new listings under $50m. I heard Kate Mitchell of Scale Ventures talk about the report at a meeting in Israel, and it got me thinking about the IPO market in Latin America.
According to the task force, “over the last 15 years the number of emerging growth companies entering the capital markets through IPOs has plummeted relative to historical norms.” The report cites high frequency trading of large cap stocks as one factor making it more difficult for smaller, high growth companies to list.
Large high frequency traders have also been active on the Bovespa, and Brazilian PE firms looking to list portfolio companies have had a tough time navigating volatility in the last couple of years. There are about 500 stocks traded on the Bovespa, but 12 large cap stocks represent more than 80% of the float. This has a clear impact for small caps since the trade is concentrated in a small number of shares, and the investors buying stocks in Brazil tend to be large offshore funds that take sizable positions.
The concentration of large parts of the float in few hands also creates anomalies in the price of the share, since a decision to sell can create dramatic movements in price. Piero Minardi of Gavea Investimentos described the scenario to me in the context of the firm’s float in April 2011 of Time for Fun (T4F), a live entertainment company with operations in Brazil, Argentina and Chile.
“The offering priced in the middle of the range at R$16/share and was 3X oversubscribed, but in mid-September the stock took a steep dive coinciding with the deepening of the crisis and with the need of one investor to sell 100% of his position (about 10% of the float) to cover losses elsewhere. Since its bottom after the sell off two weeks ago the shares are up 25%. An example – there are many others in the same situation – of how much small caps may suffer from illiquidity.”
In Chile, the country’s pension funds and insurance companies provide liquidity to the Santiago exchange, making it one of Latin America’s deepest equity markets and an attractive exit option for local PE firms. In June, Linzor Capital raised $234m for the IPO of healthcare company Cruz Blanca Salud, with 84% of the float going to local investors.
Tim Purcell of Linzor told me “Cruz Blanca’s IPO was six times oversubscribed, reflecting how deep that market is and the attractiveness of the equity story. Recent volatility makes an IPO on the Chilean stock exchange more challenging but once markets stabilize I’m sure the market will open up again.”
LatAm PE firms are also targeting local retail investors for IPOs in markets like Colombia and Mexico. Patricio D’Apice of Access SEAF in Colombia reminded me that the firm plans to list Body Tech, a chain of sports clubs with locations in Colombia and Peru, on the Colombian exchange sometime in 2012. The strategy is to leverage the brand equity the firm has built up among its thousands of customers to raise capital from retail investors in the Andean region.
Nexxus Capital listed its Mexican sports club chain, Sports World, on the Mexican exchange in 2010. In 2009 Nexxus held an IPO of Genomma Labs, which manufacturers over-the-counter pharmaceuticals and personal care products for Mexico’s expanding middle class.
Latin American companies backed by PE firms are also targeting global investors by listing on international exchanges, and as the number of IPOs of US companies continues to wane, the NASDAQ and NYSE are marketing actively in emerging economies. The blockbuster Latin American IPO story of 2011 was the $1.25bn raised for Arcos Dorados, the regional McDonald’s franchise, on the NYSE in April. Arcos was backed by Victoria Capital Partners, Capital International and Gavea.
Larry Leibowitz, COO of the NYSE was also at the meeting in Israel and was on his way to Brazil the following week. He told me that the time zone synchronization makes a dual Bovespa-NYSE listing a great fit.
But in the heated Latin America of 2011, when international businesses are all seeking a toe hold in the region, the real issue may be, why IPO at all? Several managers I spoke with told me that they had foregone the IPO route this year to sell to strategic buyers because the multiples have been so attractive. Sidney Chameh of DGF Investimentos originally considered listing software solutions company Mastersaf on the Bovespa Mais, the mid-market segment of the Brazilian exchange. But in April he sold Mastersaf to Thomson Reuters.