Revisiting the IPO – To be or not to be

Have you ever sat down to write an article with the feeling that you were inevitably "stating the obvious"? Yet, I remain convinced that it's necessary to put things "in black and white", because, as a colleague of mine used to say, "the obvious is only obvious after someone has brought it to light". Therefore, I will insist on well-known concepts, which today have taken on a different importance and may influence financing decisions that were somewhat "off the radar" until recently. Perhaps because, due to the pandemic, initial public offerings (IPOs) have been in a state of dormancy since the second half of 2021.

The most obvious part: with the current level of the Selic rate and still considering that the market expects the COPOM to make some cuts in 2024, many conservative, cautious investors who favor fixed income continue to cling to this investment mode. However, we notice that gradually, investment funds and financial advisors are working with the idea that the market will tend to opt for higher-risk investments, i.e., migrating to portfolios with more variable income content. In this moment of uncertainties, and still not knowing the real impact of the floods in the South, this migration might be somewhat more moderate than it would have been if the Selic cuts had continued as planned at the beginning of the year.

In this scenario, companies whose planning includes medium to long-term investments will need to "raise" financial resources to finance their growth and their expansion plans, acquisitions, etc. Would the solution be to turn to banks? The bank spread usually deters entrepreneurs from seeking this alternative. What about the BNDES? Only for certain types of equipment investments. So where to turn? One option stands out: raising investments from the market. In other words: going public, issuing shares in the market.

Does this mean that companies need to rush to go public in just a few months? Certainly not. The direction of the economy and the basic interest rate must be observed. But we can already see that companies in this situation are looking towards the fourth quarter of this year and the beginning of 2025 as a possible horizon for going public. Beyond business planning itself, the prospect of going public implies a serious arrangement of governance conditions, which tends to be one of the weak points of many medium-sized companies, especially those of family origin or those that still have the family in control of the business.

Preparing for an IPO is not easy and there will surely be companies that, even with the intention of tackling this process, will hardly be able to do so, at least not immediately or quickly. "Getting the house in order" in terms of corporate governance, internal controls (including the design and implementation of a robust internal audit), and adoption of accounting standards required by Brazilian law, makes the task quite challenging. There do not seem to be many companies that can go through this process with their internal resources. Often, because these internal resources do not exist and hiring or training them would require a lot of time and financial resources. Other times, it's a matter of cost-benefit, when management concludes that it is much more convenient to hire a team of specialists, well-trained in this type of processes, which will make the process faster and less "painful".

On the international scene, it is relevant to observe how China may change its investment and trade policy with many of the countries "aligned" with the United States. Taking into account the impacts that any movements or decisions of the Chinese may have on the local market and Brazilian exports, local entrepreneurs should consider this circumstance when calibrating the time to go public, in order to negotiate shares on the market at the highest possible value, which, apparently, does not happen at this moment when the market is "low" or depressed. The form and extent to which the two currently ongoing wars may impact business are also points of attention in any planning.

Conclusive Summary

The course of the basic interest rate in Brazil, even if it enters a slower pace than expected, will gradually drive investors away from fixed income, who will gradually direct resources to variable income. It is the perfect occasion for companies to seek to go public as a way of financing their growth or for major shareholders to take advantage of the "wave" as a "way out" to realize profits and/or diversify investments. However, the process is not easy, especially for medium-sized companies. Those who decide to move forward in this path must rely on an army of professionals experienced in such processes: lawyers, banks, financial advisors, and, crucially, professionals who prepare the company in terms of accounting, governance, and sustainability.