Marcel Malczewski is very much the new breed of Brazilian entrepreneur. Fluent in English, well-travelled and a polished presenter, he is the executive director of Bematech, a specialised technology company in the well-ordered southern city of Curitiba. This April, the company he helped found carried out an initial public offering on the São Paulo stock exchange, Bovespa, raising $200m.
“Getting this kind of financing would have been unimaginable just a few years ago,” says Mr Malczewski. When he and his co-founder set up Bematech in the late 1980s, inflation was running at 70 per cent per month and banks flatly refused to lend to them, he recalls. They finally secured a $150,000 loan from BNDES, Brazil’s national development bank, which helped them to scrape together finance from individuals and family offices to get the company off the ground. Bematech, which makes hardware and software for small and medium-sized banks and retailers, required complex negotiations for cash every time it looked to expand.
That was then. Now, a wide range of institutional investors from Europe and the US owns 35 per cent of the company and investor interest has already pushed the share price from the launch price of R$14.5 to near R$20 in just two months.
“The opening of the Brazilian equity and debt markets has revolutionised company funding,” says Ricardo Lacerda, managing director and head of Brazilian investment banking at Citigroup in São Paulo. And it is starting to have a significant impact on the whole economy. Capital markets are providing cheaper financing to quality companies, enhancing productivity. These market-fuelled gains account for nearly one-third of the recent growth in GDP in Brazil, adding 1 percentage point or a little more to GDP per year, Mr Lacerda estimates.
Equity markets are more democratic than in the late 1980s and support a far more diverse cross-section of industries and company types. Alexandre Bettamio, managing director and head of Brazilian investment banking for UBS-Pactual in São Paulo, notes that companies involved in alternative fuels and the agro-industry, consumer goods, and real estate are all using equity market financing. Companies in more esoteric areas such as education, health, logistics, meat packing as well as banks and financing companies are swelling their ranks, he says. Just five years ago, Brazil had seven companies with a market capitalisation of more than R$1bn; now there are more than 90.
Companies are even starting to join a mergers and acquisitions frenzy. Mr Lacerda believes M&A could account for as much as R$70bn-R$100bn this year compared with R$37bn last year. Partly, that money is being spent on companies buying domestic rivals, speeding consolidation. Real estate and alternative fuels have traditionally been highly fragmented in Brazil, dominated by families and often saddled with mind-numbingly inefficient structures. Leading developers such as Gafisa and Cyrela have seized the opportunity offered by cheaper funding to snap up land cheaply and absorb rivals. Gafisa, for example, bought AlphaVille Urbanismo, the largest community development company in Brazil, last year.
This wave of M&A is being used not only by Brazilian companies fostering efficiencies at home. Giant mining company Companhia Vale do Rio Doce’s R$18bn takeover of Canada’s Inco last year created the world’s second-largest mining company and was Brazil’s largest foreign acquisition ever.
The capital markets boom may even help reconcile some of Brazil’s squabbling, wealthy families who own many of the companies that are eligible to come to Bovespa. Family members must unravel complex shareholding arrangements, clean up management and yield control if they are to get the interest of investors and maximise their share price. “That’s already happening as original shareholders become uncomfortable holding less than 50 per cent,” says José Olympio, managing director and head of Brazilian investment banking at Credit Suisse in São Paulo. He points out that Elie Horn, president of the real estate giant Cyrela, now holds less than half of his own company. That bitter pill may be easier for Mr Horn to swallow knowing that the sale of those shares catapulted him on to the rarefied list of Brazilian billionaires. Other families are sure to follow suit.
Companies are gearing up to use the corporate debt market too. Brazil is on the cusp of a coveted investment grade, having been raised to one notch below by the three leading ratings agencies. When that happens: “We will start seeing totally different investors, including huge European and US pension funds, enter the corporate debt markets,” according to Hamilton Agle, head of Brazilian debt capital markets at Citigroup in São Paulo. An investment grade will help them refinance outstanding debt cheaply and provide alternative funding if equity markets turn south.