- The recovery of the economy and investment attractiveness will keep on growing in all industry sectors.
- Brazil is well-positioned to attract foreign investments.
- ESG is today mandatory in investments.
On December 9, during the M&A Community webinar ‘Capital Market in Brazil: Strategies and Challenges for Companies in 2021’, participants organized a debate about Brazil’s capital market in 2020 and expectations for the IPO and M&A scenarios in the country for 2021.
Participants included: Alexandre Pierantoni, Managing Director at Duff & Phelps’ mergers and acquisitions consultancy practice, Gabriella Maranesi Najjar, Partner at Vella Pugliese Buosi Guidoni Advogados in Corporate & Finance, Mauro Tukiyama, Managing Partner at RB Investimentos and Leonardo Resende, Relationship Manager at B3.
After the event, the M&A Community talked to Alexandre Pierantoni about some of the issues raised in the Webinar to better understand this optimistic scenario.
During the event, all the participants demonstrated optimism for the M&A market next year. What justifies this optimism? Could 2021 be a better year?
My vision is that the tone is both positive and optimistic. After a very unusual and also challenging year, there is the perspective of a vaccine, of economies recovering, the continuation of the price recovery for commodities, economic activation, all these are in a global context, but particularly in a Brazilian context, and will involve greater liquidity and an enormous structural change, especially if we consider the interest rates in Brazil.
Even with the positive prospect of reaching, by the end of the year, 3% or 3.5%, against the current 2%, investments in the real economy – the capital market – will remain at the same level of interest, which may bring more attractive returns. The return of consumption in Brazil, combined with liquidity, a low interest rate – the pillar of this whole transformation – makes Brazil more appealing concerning investment in the real economy.
This recovery of the economy and its attractiveness will keep on growing in all sectors of investment. It is a virtuous cycle of the capital market that raises funds to be invested in the real economy for mergers and acquisitions. Even in 2020, we kept to the transaction levels of 2019. About 1,200 transactions were announced, which is substantially more than the historical average of about 800 transactions.
We will probably keep this growth curve, with the possibility of hitting records in 2021 in the IPO market,r several operations and fundraisings, and the mergers and acquisitions market. Banks are talking about figures of more than R$150 billion. Why? Because a large portion involves primary issues designed for companies to become stronger, consolidate, and make acquisitions.
Do you think that 2021 will overtake 2020’s 1,200 transactions? Is there room for that?
All the signs are pointing towards it, and there is room for it. All the variables that I commented on in the first answer will still be there. Through my project pipeline at Duff and Phelps, I can see that it is a growing portfolio. We are also counting on an increase of interest in private equity, a strategy that already exists in Brazil, and an international strategy that is not quite there yet.
Besides, we will still have other essential combinations, like keeping and having concessions and privatizations, which has become a necessary agenda of the government again. All these make us believe that we can, in 2021, hit a record of announced transactions because interest rates will be kept low, and capital markets will remain attractive. Finally, to conclude, we must include the return of international investors to Brazil.
In 2019, the Brazilian stock exchange and the capital market’s whole movement were strongly marked by national investors reallocating funds from a fixed income or financial market investment to the capital market. We only counted on the international investors' presence because, during the pandemic, everyone turned to their ‘own backyards’ to take care of their base. Still, Brazil is positioned to attract foreign investment again in 2021.
It is worth observing that we must keep on creating the conditions to maintain this attractiveness, pursuing the agenda of reforms, following tax security issues, worrying about the budget deficit, the government’s indebtedness – which was expected to reach almost 100% in 2020 – transparency, governance, and communications within the market.
In the surveys made at Duff & Phelps, is there a percentage figure for the impact this reform agenda could have on the market?
It isn’t possible to put a number on it. It is an intangible value in terms of attractiveness. Will the country fail to be attractive because it did not make the reforms? In my view, it won’t fail to be attractive because we have always had investments that still provided a return.
The question is: by executing the reforms, you should become more attractive and reach a better position in the international market because Brazil then becomes one of the available options. When there is world liquidity, chiefly in a moment of global recession, where governments have to encourage it, investors have more predictability and comfort for a country to be well-positioned. The impact is conceptual rather than binary.
Another thing is that we must seriously address the ESG theme, which is today mandatory in investment. This can be a factor for making an investment decision for a country or company, and it winds up being binary. To close this context, the private equity financial industry has matured amazingly well in Brazil over the last few years, it has become increasingly more transparent, better regulated, and participates in the economy, supporting companies. So much so that some time ago, it was the only source of capital because there was little indebtedness at a much higher interest rate.
Even in a slightly more turbulent environment, with uncertainties and without reforms, there was an increase in investment every year and remuneration from the capital invested. On the other hand, due to ESG and its current global impact, I guess it can be more binary in investment attractiveness, mainly foreign investment.
Was the pandemic a factor that leveraged mergers and acquisitions?
The pandemic has anticipated the whole strategic discussion on the adoption of technology. We had to achieve in months what we would, in all likelihood, have taken years to do. This is the first part of the answer to this question. In terms of mergers and acquisitions, the pandemic exposed companies that were more susceptible (from the point of view of capital) or that need to be reinforced to enter new sectors or products or to implement technology that requires investment.
Part of this movement involves restructuring companies that need to raise new funds to survive cash cycles. When we look at private equity financial investment openly, the second and third quarters of 2019 presented record levels of venture capital investment. Those companies needed to raise funds because they were not 100% mature and cash-generating. They needed to raise more to speed up strategic movements, develop products, and take advantage of e-commerce and logistics opportunities that had been positively affected by the pandemic.
Private equity could decrease activity for a while and we’d have to wait and see what would happen. I expected a higher movement of companies’ restructuring. There was growth, no doubt, but given the economy liquidity and access to the capital market, the companies are restructured without bankruptcy.
Undoubtedly, the pandemic increased the movement of mergers and acquisitions, which is one reason for us to maintain the present level. I believe that we are still in a positive scenario, but there is a concern about what will happen in the first half of 2021.
Most likely, it won’t have the same volume of incentive from the Government in the economy, causing consumption to fall. So, will companies be prepared for this first half-year? There will be some difficulties. The largest wave has passed. However, there will be other waves behind it.
Is there optimism concerning the generation of jobs?
For such, you should have a real economic recovery. There is this cultural heritage of inflation and instability. By the way, inflation is a theme that causes little concern in the short term; the General Index of Market Prices is double-digit, between 20% and 25%. As there is investment precaution, there can be employment recovery.
So, we must observe the behavior of the employment curve. Today we have 14% unemployment, a high level, and it was expected to rise due to the pandemic. We should look at the balance of consumption and consumer liquidity, considering that the government will not be close in terms of releasing support funds.
This balance with employment is a calculation that will demand a little more time. The economy will react more slowly. What could help here is another phenomenon: supply chains facing too many ruptures, supplies of raw material, and packaging. One example is the automotive industry that stopped production lines because there is a lack of containers for rental worldwide.
The concern is how logistic supply chains are being reorganized. That will affect economic recovery. I’m sure that this recovery will occur, but the slight adjustments is to know at what speed.
We had elections recently and some people said that the government base was defeated. Does that delay foreign investments and the M&A market?
Political issues always affect the attractiveness and stability in any country, here, in Latin America, the United States, or Europe. We are watching how it will impact the economy. One example is the North American election process. The noise being generated there is bad for everybody.
The Brazilian Chamber and Senate must retake their role in leading the implementation of reforms. I understand that there is a notion of the importance of continuing reforms, chiefly in the context of the pandemic and instability. Obviously, proper communication of the government with both chambers of parliament and other state institutions is vital.
As far as elections go, we know what the situation will be in Brazil until 2022, and this current political climate will not change and that it will not exclude investment from the country. It does though make it necessary for an investor who does not know Brazil to get to know it better, this is true not only for Brazil but is the same situation across Latin America. Latin American countries do, however, have opportunities. The political climate affects investments but does not eliminate them.
If I start an M&A process today, my horizon for closing the process is 10 to 12 months. A lot of water can flow under the bridge while I am still negotiating. This is true for the whole negotiation process and will probably be the same for the next 10 years, even without being able to predict what will happen in the future. Decisions are made in the short term with a long-term notion, and that’s why the issue of the political environment and getting to know one’s ‘backyard’ is essential.
Looking back over the last 50 years, whatever condition the country has been in, there have been fluctuations and expected instability, there remained a knowledge of the market. Brazil is like that, but one can invest, earn money, and over the period in discussion, society, as a whole, has been improving. Purchasing power is getting better. The whole amount of capital invested, in return, benefits society. One can be happy with this environment.
Is there any sector with a greater prospect for improvement for the next year? Are there any sectors that will face more difficulties?
The characteristics of the Brazilian investment and mergers and acquisitions market is multisectoral. There is no dominant sector, which is a good thing and is why the curve grew this year because if the industrial sector dominated Brazil, the merger market would stop.
The technology sector is the one with a more significant business volume because it has transactions of several sizes, most of them small, and represents around 17% and 18% of total transactions. We are in a country where entrepreneurship is encouraged, now even more so, with venture capital and funds more available. Still, it is a country where more than a third of the GDP is agribusiness; the latter is the cornerstone of the economy. The whole structure runs around it.
I would keep on drawing attention to specific sectors like technology, retail, health, education. And also, Healthtech, Fintech, Edutech, Agritech, without forgetting infrastructure, which the country needs and demands. Another interesting aspect is that the infrastructure sector usually presents a lower risk and long-term returns.
How restrained is the demand in these mentioned sectors?
Retail is too often only associated with income. Some years ago, a large part of the population had access to basic items and then to products with more added value. For example, a person used to consume milk and start consuming margarine, cream cheese, and later buying white cheese. Thus, there is a rise in the value chain. There is a need to return to this value creation chain to overcome the pandemic's shock. In healthcare, too, a person can pay for basic health insurance, then when they lose their job, they lose access to the insurance.
The Brazilian consumer had access to products and services with the best added value at all stages. It is worth reminding ourselves, as well, that the infrastructure sector counts on an important social asset, the gas, transport, and sanitation regulatory framework. It is an asset that will always be consumed and brings social benefit; thus, it is something that the private sector is investing in.