The future appears to have finally come for the “pais do futuro“, but is the here and now again asserting itself, asks Todd Crider, a Partner with Simpson Thacher & Bartlett in São Paulo and New York
Though Brazil’s economy continues to grow, the stock market has suffered this year and new issuances are way off the pace expected by most observers for 2011. As Europe and the US threaten double-dip recessions and questions abound as to over-heating in Asia, can the Brazilian dance continue?
It should, though the prospects are less robust than one year ago. The Brazilian economy is a twin-engine jet propelled by the commodities boom and by the rapidly expanding consumer base. While a global contraction would hurt commodities, the consumer economy engine will likely limit Brazil’s vulnerability to a commodities downturn and keep the economy in flight.
The two largest offerings in the world over the past two years have been for Brazilian companies (Petrobras for US$70bn and Santander Brazil for US$7.5bn). Since 2004 a rush of companies has accessed the international capital markets from Brazil attracting banks and law firms from around the world and propelling the BM&F-BOVESPA (Bolsa de Valores, Mercadorias & Futuros de São Paulo) to one of the largest market capitaliisations among global exchanges. The inflows of capital have created a strong currency and, in unreal fashion, turned São Paulo into one of the most expensive cities in the world (significantly more expensive than London or New York).
Capital markets activity has continued to be dominated by local listings in Brazil in conjunction with Rule 144A/Regulation S offering abroad. While the BM&F-BOVESPA dwarfs its regional peers, it has not yet been able to become a regional exchange, failing to attract significant cross-listings from neighboring countries. Indeed, there is a recent mini surge in new listings to US exchanges from jurisdictions lacking liquid exchanges or where potential local instability benefits from the enhanced disclosure and accountability standards provided by SEC registration.
The underperformance of the Brazilian capital markets (both in terms of new offerings and stock prices) this year is a disappointment to many in the banking and legal markets but presents an opportunity to international private equity firms, who must otherwise compete with the liquidity premium afforded by potential IPOs.
Our firm just closed a US$1.5bn fund for BTG Pactual, a record for a Brazil focused private equity fund, and regional private equity fund raisings are at a historical high. At the same time, major international private equity houses are deploying teams in the region, often for the first time. Their arrival means bigger game will be targeted: cheque sizes will, in many cases, add a zero and opportunities will exist for control groups of newly public companies on the BM&F-BOVESPA.
Infrastructure is another piece of the puzzle. With an infrastructure deficit that places a top ten world economy near the bottom quartile in terms of infrastructure development, Brazil’s needs are overwhelming, from ports, to highways, to airports, to city asphalt, diversification of power generation and development of offshore oil fields — not to mention soccer and Olympic stadiums!
The cumulative neglect of generations and slow motion response of planners today is more than an inconvenience, as it places an expensive place to do business at an even greater disadvantage in the world economy. Nor is there an easy or quick solution (no Brazilian “jeitinho” appears likely to build a new airport in São Paulo and train or transportation network in time for the 2014 World Cup). Protectionist measures that require most content in large infrastructure projects to be “made in Brazil,” impose further costs and execution risks. On the positive side, need defines opportunity for providers of capital and services.
Brazil is enjoying a historical moment in which opportunity finally matches its aspirations, but ultimately in a world of contracting capital resources, Brazil must work harder to remain the “Girl from Ipanema” to the global market. Work and challenges are likely to shift but continue to abound for providers of capital and the lawyers who assist them.