IPO: an option for corporate development

January 2024

The first stock exchange in Brazil was created back in 1845, in the City of Rio de Janeiro. But it was only during the second half of the twentieth century, however, that the organized stock market gained relevance in the country, thanks to the gradual advances in the regulatory environment and corporate governance practices. Today, the São Paulo Stock Exchange, the only stock exchange operating in Brazil, is among the largest in the world, with a market capitalization of approximately R$ 3.4 trillion. The stock exchange, however, is still formed by a “select group” of companies, with slightly over 340 listed entities and virtually only a few dozen shares concentrating all of its liquidity. Nevertheless, its attractiveness continues to grow among local business owners, many of which have made it a formal development goal that their companies access the market through an Initial Public Offering (IPO). The recent increase in private equity investors has fueled this trend and unleashed the volume of IPOs in the market, in addition to reinforcing the aspirational appeal that is inherent to this type of transaction. The benefits of an IPO are evident for both companies and shareholders, however it is equally important to identify the prerequisites and risks to be addressed in these transactions. An IPO needs to be viewed fundamentally as an option for corporate development and never as an end “product” in itself. 

The execution of an IPO must be carefully planned, based on the company’s strategic objectives and supported by the understanding and commitment, by shareholders and executives, towards the corporate transformations required for this process. IPO processes take time and can be costly. An efficient transaction takes from 5 to 7 months to be concluded and its related expenses, such as financial, legal, accounting and marketing costs, may exceed 5% of the total offering size. Managing an IPO is also a complex task that requires dedication from the company’s executives, impacting their ability to meet daily business demands. One of the key challenges is to ensure that the company’s shareholders are able to actively and consciously participate in the entire decision-making process.  Developing a sound view of the company’s value, creating corporate relationship mechanisms, and defining the structure and proposed terms for the IPO are particularly important aspects. Additionally, the company’s management must affirm its commitment towards a constructive dialogue with investors and market analysts, supported by a governance structure that ensures compliance with legal requirements and guided by the principles of transparency and accountability. 

IPO processes also commonly result in situations that have potential for conflict of interest that will need to be carefully managed. Choosing the financial institutions who will act as the IPO coordinators is among the first of these situations. The highly concentrated Brazilian banking market leads to situations in which commercial banks that maintain credit relationships with companies preparing for an IPO often try to enforce their participation among the offering coordinators, regardless if they have the appropriate technical credentials for the transaction. Another sensitive matter is that, regardless of which institutions are chosen as the transaction coordinators, they will always maintain a permanent commercial relationship with the investor community, which are the same investors that will be accessed by the company. Even if this relationship occurs at different operating levels within the institutions, the potential discomfort persists for the company and its shareholders, especially at the time of the offering’s allocation. But the company can mitigate these risks. For this, it is fundamental to apply strict technical criteria when selecting advisors and closely and attentively follow-up on how the transaction is being executed. Therefore, it is critical to properly assess the credentials of each financial institution’s teams, especially in terms of experience and reputation of the ECM, equity research and sales professionals. 

Another important aspect is to properly set up the transaction coordinators, combining institutions with complementary distribution capacities in order to expand the universe of potential investors and mitigate conflict risks that may negatively impact the process. Overall, transaction coordinators should demonstrate broad access to prime investors, including those with the ability to “anchor” the IPO. This ensures a balanced final offering that generates high demand from domestic and foreign institutional investors and leads to a broad shareholder base with different investment strategies and objectives. The existence of a private equity investor in the company’s corporate structure also requires special attention. While these investors often have relevant IPO experience and may contribute to the overall success of the transaction, it is important to recognize that they also have their own objectives in terms of return on equity. Ultimately, these goals will define their decision-making process. This particular agenda may lead to a relevant misalignment between their targets and the original shareholders, particularly regarding the timing of the IPO, the structure of the offering and the offering share price. Thus, an IPO is a key challenge for any business, both in terms of corporate evolution and in transaction execution. Being a unique experience for any company and most of its shareholders and executives, it is recommended to rely on the proven experience of an independent and technically competent advisor to monitor all stages of an IPO process. 

An independent advisor, at the operational front, coordinates the selection of the IPO team (banks, lawyers, auditors and others) and is responsible for daily interactions between the company and this group of professionals. This efficiently reduces demand for executives’ time – especially in the early stages of the IPO – and ensures a close monitoring of all the project’s different phases, in addition to strictly controlling costs. The special advisor is also responsible for providing support to shareholders, including an initial impartial assessment of the merits of the IPO, the strategic alternatives available for the company and its shareholders, and the company’s readiness to comply with the requirements inherent to the transaction. Finally, the advisor monitors how the transaction is being carried out by the coordinators, providing impartial clarifications, opinions and recommendations to shareholders whenever necessary. The role of the special advisor is still not widely known in Brazil, but quite common in other markets, especially in Europe. It is important to note that the special advisor is not a financial institution but offers professionals with relevant experience in executing public share offerings. It is, therefore, the latest evolution in the advances to the domestic capital market timeline initiated back in 1845. 

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