➤ Between 50 and 60 billion reais are expected in IPO deals in 2021, although volatility might prevail in the short term.
➤ The rise in interest rates in Brazil is not likely to affect deals.
➤ Agribusiness growth in Brazil signals rising demand for investment banking services.
In October 2020, Switzerland-based giant UBS and Brazilian 200-year-old heavyweight Banco do Brasil SA made waves in the Brazilian market when they launched an investment banking joint venture. The new company, known as UBS-BB, aims to provide i-banking services in the country and the rest of Latin America.
The partnership comes years after several foreign banks withdrew from the Brazilian market, a shift which gave an edge to powerful local players such as Bradesco, Itau, BTG Pactual and Banco do Brasil itself. Renewed optimism in Brazilian capital markets, which have grown in volume over the past years, has attracted players, both local and foreign, to the industry.
After a strong year in 2020, UBS-BB expects between 50 and 60 billion reais this year in IPO deals in Brazil, and a slew of local debt offerings in the pipeline. However, they expect volatility ahead as investors show concern about economic recovery and the fiscal position.
Formerly the head of global banking at UBS Brasil Banco de Investimento SA, Daniel Bassan is now CEO of the UBS-BB joint venture. Below is a transcript of Market Intelligence's phone interview with the executive, edited for length and clarity.
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UBS-BB CEO Daniel Bassan
Source: UBS-BB |
S&P Global Market Intelligence: As a former UBS executive, what added value does Banco do Brasil bring to the joint venture?
Daniel Bassan: The partnership is a [combination of] global reach and local knowledge. In emerging markets, and even more in Latin America, having a strong domestic view is very important. We can anticipate and make decisions accurately, while in developed markets you have more time. Also, Banco do Brasil is a bank with customer relations that can go back 50 years when it financed its first truck or its first plant. Finally, it also brings the balance sheet to the partnership. When you do debt capital market [operations], there need to be guarantees of a significant amount on a number of transactions. UBS-BB is responsible for structuring and distributing, and Banco do Brasil for the guarantees.
In terms of clients, does Banco do Brasil's dominance in agriculture reflect an opportunity for investment banking services? Is there any sector that looks the most appealing?
Bassan: Historically, the fee pool of investment banks in Brazil is very well spread across industries, and no single sector represents the bulk of it. Banco do Brasil has a very deep relationship with the agricultural business, but it is still a sector not so deep into capital markets [because] there is no consolidation and clients are significantly smaller. Of course, agriculture is expanding economically and so is its importance in Brazilian exports. Companies are growing and looking to finance themselves more in capital markets, or doing M&A. We do believe that it will be more relevant in the future, but [it] is not the only sector we are going to do business with. Our coverage universe is very well spread.
In terms of equity markets, there has been some volatility recently in Brazilian stocks. How strong do you consider the current IPO pipeline to be?
Bassan: The pipeline is still strong. Things are going to be a bit more volatile in the short term, and some of the transactions will be postponed. Right now, investors are too much focused on [COVID-19] and economic growth, as well as political discussions and fiscal [concerns]. But we do think that clients and entrepreneurs still have the view that Brazil can grow, and are optimistic longer-term. Markets will come back, and we will continue to see transactions. Of course, some may be delayed due to the momentum of a specific sector and how it was affected by COVID, whereas others such as tech are benefitting. On average, we are still going to have a sizable year, but I think we need a little patience.
There has been considerable activity in private equity markets worldwide. Do you consider there is an opportunity in Brazil?
Bassan: Because of global rates, huge liquidity in markets brought a lot of private investors, and because of that some of the IPOs were delayed and rounds of private investments were made globally. I think this would be good for a country like Brazil, where liquidity is something that investors are always looking at when buying in. If you do an IPO when you are valued at $500 million instead of $100 million, you are going to attract more investors. But the problem here is shareholders and founders still prefer to do the IPO as soon as possible like it was the last thing they will [do].
So Brazilian companies might be jumping early into the stock market?
Bassan: Yes, they are doing what they always used to do. You ask a Brazilian client to delay an IPO for five or six years and do a private round instead, and they would still prefer the IPO at the moment. But it is a trend that will come once clients understand that larger companies have better chances of [doing an] IPO in the future. And I think (hospital network) Rede D'Or São Luiz SA is a very good example. They only did it when they were very big enough and had different rounds throughout their history. In the U.S. and the world, IPOs are getting larger and I do think that at some point that will happen in Brazil.
What is the opportunity across Latin America and how is a reversal of rate cuts going to affect the business case?
Bassan: We continue to be optimistic for the region both mid- and long-term. I do not think that interest rates rising will affect the market significantly in terms of new equity offerings or M&A. [The hike by Banco Central do Brasil] is not a structural change but more like an adjustment. I do not think that it will affect a number of deals in the fee pool. We continue to be optimistic in the region ... Of course, Brazil should keep representing the big part of it. In Mexico, we do see that it may be having better momentum in the short term. Overall, [Latin America] is still being perceived by investors as a good place to invest. There are moments, of course. We had a recent exit from international investors [in the Brazilian stock market], but yet an inflow at the beginning of the year. It is the volatility that we usually tend to have.
As of April 23, US$1 was equivalent to 5.50 Brazilian reais.
