Rodrigo Amaral is a freelance journalist based in the UK.
In the past few years Brazil has become one of the fastest growing emerging markets in the world. Rodrigo Amaral analyses what impact this has had on the country's family businesses and the unprecedented rise of the IPO …
It is four years since the seminal Goldman Sachs report into emerging markets that first coined the BRIC acronym to describe Brazil, Russia, India and China, and which predicted they would account for more of the world's economy than France, Germany, Italy, Japan, the UK and the US combined by 2033. But while the Asian powerhouses have been grabbing the majority of headlines, and Russia has been embroiled in political controversy, Brazil has been quietly outperforming them all.
The main index of Bovespa, the São Paulo Exchange, has risen six-fold since the report was published – compared to three-fold increases by the other three countries – reaching levels that surprised even the most sanguine market analysts.
One of the main consequences of this economic renaissance has been a marked increase in Initial Public Offering (IPO) activity. Brazil is currently in the third year of an IPO wave whose origins can be traced back to mid-2005, when, after more than a decade of Spartan economic policies, the country started to show signs that it would fulfil at least part of its fabled potential. That year, seven IPOs were launched, but they proved to be the pioneers of a much larger movement. In the first nine months of 2007 alone, the number of new IPOs reached 48.
The large majority of these companies are owned by family groups according to Roberto Faldini, a leading family business advisor in Brazil. He estimates that nine out of 10 companies in the country are family-owned, which gives an idea of the potential for new IPOs in the forthcoming months. "Many of them are going to the market in a quest for partners that will help to fund the expansion of their businesses," he says.
"Families are looking for external investors, so they can reduce the risk for their private wealth, while at the same time being able to fulfil the potential of their businesses," expands René Werner, another leading family business advisor. Heavyweights like Natura, a large producer of beauty products, and GOL, a low-cost airline company, have already followed this path with success. GOL, for instance, ended up buying Varig, Brazil's troubled traditional flagship carrier, earlier this year.
The family business and the IPO
Inpar, one of Brazil's largest real estate and construction companies, with a turnover of $161 million (€113 million), is owned by the Parizotto family and launched an IPO on 6 June 2007. In theory at least, the decision to open up the capital of your company to external investors is never an easy one, but the Parizottos had reasons to believe that the prospects for its own IPO were fairly good. Foreign investors were flocking to the country to buy stakes in companies in several sectors, with construction a particularly magnetic one.
Brazil can be a tough country to do business in, but the good feeling the São Paulo-based firm had about the whole IPO process proved right on the money. Thirteen days after the offering was launched, the process was completed, with Inpar attracting $417 million after floating a 45% stake of the company. "In the end it was a very successful process," says CEO Cesar Parizotto, who is preparing the company for an ambitious expansion programme.
By contrast, the late 1990s and early 2000s were not easy times for Brazilian companies, as the country had to function under the limitations of an economic policy designed to put down its proverbially resilient inflation. The sacrifices would eventually pay off handsomely: Brazil now has gone through almost 15 years free from the old inflationary foe. But sky-high interest rates, which reached 26.5% in 2003, and other belt-tightening measures convinced Inpar and many other companies to put on hold for some years any plans of further growth.
The situation improved in 2005. "Interest rates started to go down and haven't stopped," Parizotto says. The current rate, 11.25%, albeit still very high by most standards, can be seen as a pittance in the context of Brazil's recent history. "We noticed that opportunities in the real estate sector were huge, and that we had very good prospects, as the interest rates are the main factor behind the performance of property markets," he recalls. "So we decided that the best option for us was to seek funds to finance the expansion of our business."
The benefits of an offering
The successful capitalisation means that the firm is now much better positioned to achieve its goal of becoming one of the top three property developers in the country by 2008. The acceleration of the business is shown by the numbers. In June, Inpar had a presence in three Brazilian cities. By October, the number had reached 25.
The listing doesn't mean, however, that the Parizotto family has lost control of the business. Cesar Parizotto kept the position of CEO, and his father, Alcides, remains as chairman of the board. One brother and two sisters occupy three of the 14 top executive positions at the company. But Parizotto says Inpar had professionalised its management structure even before the IPO. "All we had to do when the time came was to improve our corporate governance practices a little."
The interest of foreign investors have played a big part in the Brazilian IPO boom. Parizotto estimates that over 70% of the shares sold by his company in June have been acquired by international institutional investors. Similar percentages are commonly mentioned by market analysts for other IPOs; Bovespa itself claims that foreign investors answer for more than 74% of all investments made in its public offerings this year.
International pension funds and other investors have been drawn by the strong performance of equity markets, to which IPOs are no exception. Inpar's shares, for instance, gained almost 29% in the first four months of trade. But the case of Inpar is far from isolated – other companies have posted an even more impressive performance: the value of a stake at Telecom group GVT Holding increased more than 116% after its IPO in February.
A bright future for Brazil
Bovespa's Ibovespa index breached the record 60,000 mark in late September, a 32% increase over the first session of the year, and has shown no signs of slowing down. But that would hardly be an argument for cautious investors to come to Brazil so long as the country had not to a great extent mended its ways.
The São Paulo exchange is at the forefront at such efforts, having implemented a whole set of new corporate governance rules for companies that want to list there. Their aim is for minority shareholders, historically an ill-treated category in Brazil, to have a much less miserable time with their investments. "Nowadays there is much more awareness from businesspeople who list their companies that it is necessary to respect other shareholders," Faldini points out. "I believe at least 100 other family groups meet the necessary
requirements to go public in the near future."
Some analysts have been warning that the IPO wave may be close to an end, since they have identified signs that many of the most recent offerings seemed overpriced. But Werner forecasts only a temporary slowing down. "I think 2008 will see a much less active market for IPOs," he says. "But in 2009, when Brazil should already have been granted investment grade status, a new wave is likely to take place."
In profile: Brazil
Population: 186 million
GDP: $1,067.4 billion
Brazil is leading Latin America in joining international trade with the number of companies listing on its Bovespa Stock Exchange. Family businesses in Brazil are choosing to float part of their equity to raise expansion finance from a booming market – rather than sell out entirely – leading to a boom in family offices.
Being a major producer of coaches and buses, the contribution of Marco Polo – one of Brazil's most successful family companies, now listed on the stock exchange but managed by the Bellini family – to the development of the economy demonstrates how key family businesses are.
Other notable names include Grupo Pão de Açúcar, a supermarkets-to-electricals chain owned by the Diniz family, and food retailer Groupe Casino. Corruption, however, has long dogged Brazilian business and changing this will be a long haul.
Family Business Friendliness Ranking: 3