B3’s initiatives to navigate the current moment of the Brazilian capital market
The IPOs undertaken by Brazilian companies abroad is a topic on the radar of B3 and the domestic regulatory authorities. An emblematic example that raised a red flag for the Brazilian stock exchange was XP’s IPO at the end of 2019. In an exclusive interview to Viewpoint Amec, Ms. Flavia Mouta, Director of Issuer Regulation at B3, talks about the initiatives developed by the stock exchange to tackle the issue and the resumption of offers in the country.
Responsible for B3’s regulatory improvement and enforcement division, Ms. Mouta gives examples of initiatives and explains how the Brazilian stock exchange has been preparing for the rise in the demand for fundraising deals. “In the short term, we are working to create more competitive and attractive conditions for businesses interested in going public. We have been developing engagement initiatives with Brazilian companies of all sizes and segments,” she says during the interview.
With broad experience in regulatory issues after 14 years as head of the Market Development division at the Brazilian Securities and Exchange Commission (CVM), B3’s Director looks favor on the improvement of BDRs’ regulations with the publishing of CVM Resolution No. 03/2020. Please find the full interview below:
What are the main causes for the phenomenon of IPOs of Brazilian companies abroad?
I would not say it is a “phenomenon” considering that recently more than 95% of Brazilian companies IPOs have been undertaken at B3. The specific cases of some companies that opted to go public abroad is part of the global competitive scenario we are also part of. In some cases, the valuation in specific segments and some regulatory issues are crucial factors for the company’s decision.
Could you please give examples of companies or specific segment?
The valuation is a driver for a company’s decision to go public. As with tech companies, businesses in specific segments feel more comfortable with the evaluation process in the USA because the investor base dedicated to this line of business is larger there. The growth in the Brazilian investor base and the maturation of our market tend to address this issue in the medium and long terms as investors are now more sophisticated and likely to increase their exposure to this type of asset.
Could you please comment on the discussions about the super-voting shares in the foreign market and the lack of the mechanism in Brazil?
The discussion about the adoption of structures with more than one class of common stock with different voting rights, or voto plural in Brazil, is related to the perception, among Brazilian companies, that there is a demand for this type of structure, which would be encouraging them to list in markets where the legislation and regulation allow the model, such as in the United States. It is important to mention the importance of the entrepreneur who leads the company’s business plan, in which the economic dilution is permitted but safeguards the company’s controlling power through the super-voting share structure.
Can the lack of super-voting share structures be a decisive factor for companies to go public abroad? How is B3 tackling this issue?
In a recent survey conducted in 2019 with companies that opted to go public abroad, all of them said that the share structure was an additional advantage, but not a decisive factor. They mentioned the company’s valuation as the decisive factor, which is considered higher in the USA. However, despite that the super-voting share structure was not the protagonist in the decision-making process, it was the option chosen by all Brazilian companies that have undertaken their IPOs abroad recently. B3’s objective is to discuss the issue with the market and, based on these discussions, promote adjustments and changes to the current legislation, preserving the advances in corporate governance practices made in our market.
What has B3 been doing to avoid or even minimize the “export of IPOs”?
In the short term, we are working to create more and more competitive and attractive conditions for businesses interested in going public. We have been developing engagement initiatives with Brazilian companies of all sizes and segments. Our objective is to guide companies during all stages prior to the IPO. Regarding innovations in IPOs, we have been actively working with the regulatory authorities to address key issues for the capital market.
Could you please give some examples of these innovations?
The elimination of the blackout period and the confidential IPO filling process are examples of B3’s efforts. More recently, the change to the rule announced by the CVM that provides all classes of investors with access to the Brazilian Depositary Receipts (BDRs) is an initiative that, in our view, creates opportunities for the dual listing and issuance of BDRs by companies with most operations in Brazil that opted to go public abroad.
Could you explain how this new resolution about the BDRs affects the decision on the jurisdiction chosen for listing?
There are several factors that lead local issuers to go public outside the Brazilian market. The advent of the CVM Resolution No. 3 made the return to the domestic market feasible. Through BDRs, local investors can invest in these companies’ assets on a more simplified way and directly in Brazil. Many countries allow dual listing, such as the Asian and the Israeli markets, for example.
Could you please comment on investors that are not eligible to the BDRs?
B3 understands that the release of unsponsored BDRs by making them accessible to all classes of investors is an important step towards market regulation. In our view, it is a major step as it expands our investors’ ability to diversify their portfolios and ensures more relevance to the Brazilian market. Investors will always pursue good assets for their portfolios, whether in Brazil or in other markets, and they already do that on a regular basis. BDRs provide Brazilian investors with a much simpler way to diversify risks, assets and even geographies.
With the pandemic, IPOs and follow-ons came to a halt, but were back in full flow in the second half of the year. How do you evaluate this recovery?
Especially from June on, we saw a significant recovery in assets prices that, together with the migration of investments to the capital market driven by the historical level of lower interest rates, translates into good prospects for the flow of IPOs in the short term. We are already seeing an intense flow of stock offers, both in IPOs and follow-ons. By now, 23 companies raised funds in 2020 through offers of shares, representing a volume of approximately $55 billion reais. Of these 23 offers, 10 were IPOs and 13 were follow-ons. In 2019, we had a volume of some $90 billion through 5 IPOs and 37 follow-ons. In addition to these, there are other 30 IPOs formally filled at CVM and B3.
Do you also notice this recovery in the debt market?
Yes, the debt issuance in the capital market has gained momentum and offers more favorable terms and costs for the companies. The expectation is that more companies turn to the capital market to finance their operations or even to raise funds to acquire other companies or specific assets.
What are the expectations for the next months?
The expected low level of interest rates and the migration of investments to the capital market and the stock exchange create a favorable ecosystem for new offers, both in shares and debts. If this scenario continues, we expect to see more and more companies going public and using debt instruments available in the capital market.
Could you please describe B3’s actions and projects focused on encouraging investors to engage more with the companies?
B3 has always focused on supporting the engagement debate by listening to both issuers’ and investors’ issues and initiatives. For example, during the last revision of the Novo Mercado segment, from 2016 and 2018, before the hearing restricted to the voting companies, B3 conducted a comprehensive public consultation to provide investors with the opportunity to voice their opinions on topics they considered B3 should be attentive to during the mentioned revision. Additionally, based on our value of being close to our clients and ensuring their satisfaction, we have a highly-skilled relationship team that communicates with all groups of clients, such as companies, banks, buy side and sell side and domestic and foreign investors, including individual investors.