Latin America's equity capital markets are unrecognizable from
the late-1980s. What started as a few Chilean banks raising
less than $100 million via SEC listings has in recent years
unleashed some of the world's biggest deals.
Multi-billion dollar issues are now common, with domestic
and international investors participating in ever more
Companies in the region have issued more than $20 billion in
each of the last eight years, up from annual volumes of less
than $10 billion in the 1990s. The rise has hardly been a
smooth one, however.
In the 1990s, a US registration was needed to raise any
funds. A few Chileans, Brazilians and others headed abroad -
even Venezuelans and Argentines had access. In 2013
US-registered deals still happen, but are the exception.
Privatizations including Telebrás, Telmex and YPF led
to a few larger deals in the early years, but macroeconomic
uncertainties, and a small buyer base meant IPOs and follow-ons
were not much of an option for Latin fundraisers.
"Before the early 2000s, banks didn't have anybody focused
on LatAm equity capital markets," says Javier Vargas, co-head
of LatAm banking at Credit Suisse. "That wasn't part of the
offering for clients."
Boom from bust
A few telecoms and banks brought big deals in the 1990s, but
the party didn't start until well into the 2000s.
The dotcom bust in the US provided a spur for investors to
look harder for alternatives. Some LatAm countries with
stabilizing macroeconomics and politics began to look
Nowhere was this truer than in Brazil, where incoming
president Luiz Inácio Lula da Silva's administration
proved more market-friendly than expected and global demand for
commodities accelerated the economy. Transactions done under
the 144a format allowed easier access than SEC-registered
Brazil became home to a new wave of public companies. The
$167 million IPO from Companhia de Concessões
Rodoviárias (CCR) in 2002 was an early 144a example.
Natura reopened the market after a two-year hiatus in 2004,
raising $241 million and setting off an intense period of
issuance that would last more than three years.
With locals and international issuers participating, deals
of various sizes were sold, almost daily. This coincided with a
shift in Brazil's entrepreneurial culture. With examples of
visible and successful private businesses increasing, more of
an effort was made to formalize business practices and adhere
them to the Novo Mercado, the listing segment of the BM&F
Unrepresented or underrepresented industries emerged:
consumer products, technology, real estate, financials. The
market peaked with a $51 billion year in 2007 - 76% of it
issued by Brazilians, including 66 IPOs from the country,
according to Dealogic.
But even before the financial crisis of 2008-2009, it had
started to become clear that the rush to the Bovespa was too
much of a good thing. Many Brazilians came to market - and many
performed poorly. The market has restarted since the crisis,
but many new issuers - particularly small ones - still have
trouble hitting the midpoint of their pricing target.
To the delight of investors and issuers alike, equity
markets have become more regionally focused over the past two
to three years, with growing opportunities for companies
outside Brazil to list.
Chile has always been able to support issuers, including
small ones, thanks to its pension funds holding more assets as
a portion of GDP than in other countries. Hortifrut, Moller y
Pérez-Cotapos and Echeverría Izquierdo are
examples of recent sub-$100 million debutants, done largely
without international support.
Beyond Chile, local buyers in most countries step up when
international investors are skittish.
Brazilian equity deals traditionally attract 70%
international buyers, and 30% national. When conditions
tighten, sizes go down and the frequency of deals decreases,
however, transactions still get done, with 50% to 70% of the
buying coming from Brazil. The situation is similar in Mexico,
with a 50% international-50% local split normal in most times
but locals taking 60% to 70% when things get leaner.
"Right now local investors are critical to most LatAm ECM
transactions," says Lisandro Miguens, co-head of investment
banking for Latin America at JPMorgan. "We need to bear in mind
that pension fund systems are developed and sophisticated in
Chile, Colombia, Peru and Mexico. Additionally, in Brazil the
local asset management community is not only large and liquid,
but it also acts as a thought leader."
By 2005, 144a deals were well accepted from Mexican issuers.
The pace picked up in 2006-2007 though only in 2013 is the
market truly flourishing. Favorable macroeconomic conditions
and prospects for reforms have meant fresh international
attention, and finally a consistent pipeline. Mexicans had
raised more than $9 billion in 2013 through to July, already
setting a new record, and have opened new sectors.
A big lift came from changes to pension fund regulations,
allowing the afores, as they are known, to pick stocks.
Supermarket operator Grupo Comercial Chedraui was the first to
take advantage of support from the afores, in 2010, raising
$423 million in the first Mexican IPO in about two years.
Santander Mexico's $4.1 billion 2012 IPO is the country's
largest yet. At the same time, the breadth has greatly improved
in recent years, with Fibra Uno leading six fibras - real
estate trusts - to market and IEnova offering long-desired
energy sector exposure.
Colombia's market has emerged as the country has put
difficult years behind it, although investors would still like
to see more opportunities. The country must make more progress
on regulations that make it complicated for international
investors to buy.
Last year's $1.15 billion IPO of Cemex LatAm marked a
turning point for Colombia. The issuer set a price range before
the sale and waited until pricing to divide shares into local
and 144a tranches. This is taken for granted in other
countries, but is a novelty in Colombia, where deals previously
needed to set a price before taking orders for two weeks,
remaining open to market volatility. The use of greenshoe
options could come next.
"Colombia has been moving in the right direction," says Juan
Carlos George, head of LatAm capital markets at Citi. "Now you
have a bookbuilding process that has been used in different
The convergence of stock markets across the Andean region
through MILA, the proposed integrated Latin American market, as
well as looser restrictions for pension funds' investments
should mean more deals from Chile, Colombia, and Peru.
Investors want access to Peru, but it still remains behind
other countries in terms of new issuance. However, its rules
are more in line with international standards than Colombia or
Chile, which lacks a bookbuilding process to match the US,
Mexico or Brazil.
"Regulations are going to evolve, mainly as a result of the
growth in the size of the funds that institutional investors
have to invest," Vargas says. "As those pools grow they will
need more diverse forms of investment."
Still, in recent years, LatAm issuers have proved they can
deliver transactions as big as those anywhere in the world,
even if investors' reactions aren't always positive. Petrobras'
$70 billion 2010 follow-on - or $20 billion if you prefer to
count the market-oriented portion - upset minority holders.
Santander Brasil's $7.5 billion IPO set a benchmark in 2009,
but traded poorly. Buyers of OGX's $4 billion 2008 IPO likely
were regretting it in 2013.
Santander Mexico has so far fared better than its Brazilian
counterpart. This year, Banco do Brasil's $5.7 billion
carve-out of its BB Seguridade insurance business was well
One of the main difficulties ahead may be for smaller
issuers. They still lack the access to the equity market that
their US counterparts have, although there are exceptions
including several Chileans and Brazilian Linx, which raised
$265 million this year. Brazil's Bovespa Mais platform for
smaller companies was a start, but only counted three stocks as
"We still haven't developed a market for smaller companies
to list," says José Olympio Pereira, CEO of Credit
Suisse in Brazil. "We're seeing many relatively smaller
companies go public in China and India. There is still a lot of
potential. We'll eventually get there." LF