Concerns over Brazil’s fiscal stability and elevated interest rates have dampened expectations for a revival of the country’s initial public offering (IPO) market, which has been dormant for nearly three years. Hopes that up to 20 companies could go public this year have faded, as businesses across various sectors now anticipate that the window for IPOs may remain closed until 2025 or even after the presidential election in 2026.

“There is no climate for an IPO in Brazil right now,” stated Matheus Kuhn, CFO of Kallas Incorporacoes e Construcoes, reflecting the sentiment of many companies in the country. The São Paulo-based construction firm, which has long considered an IPO, is now postponing its plans once again, possibly until 2025 or later.

The primary reasons behind this hesitation include Brazil’s ongoing fiscal challenges, high interest rates that push investors toward fixed-income assets, and fears of a potential U.S. recession. These factors have created an unfavorable environment for equity markets, leading companies like Kallas and others to delay their IPO ambitions.

Brazil’s IPO market has been in a deep freeze since 2021, with fertilizer producer Vittia being the last company to go public on the B3 stock exchange in September of that year. The subsequent rise in inflation prompted Brazil’s central bank to raise interest rates aggressively, which, in turn, cooled domestic equity markets and brought the IPO boom to a halt.

Although there were some hopes that IPO activity might resume in 2024, these expectations have been dashed in recent months. The Brazilian central bank’s decision to pause interest rate cuts amid rising fiscal concerns and the potential for resurgent inflation has further dampened optimism. Additionally, the U.S. Federal Reserve’s reluctance to reduce interest rates has strengthened the dollar, making Brazilian equities less attractive to investors.

“We were ready, just waiting for signs from the fiscal side in Brazil and from the monetary side in the U.S.,” said Andre Avelar, CFO of Emccamp, another construction company likely to delay its IPO plans.

The construction sector, known for its capital-intensive nature, has been among the most prominent IPO candidates. However, with the current economic environment, even leading asset management firms like SulAmerica Investimentos have revised their expectations. Initially forecasting a resurgence in IPOs by the second quarter of 2024, the firm now predicts that no such deals will occur until 2025.

Financial advisory experts, such as Daniel Wainstein of Seneca Evercore in São Paulo, share a similarly bleak outlook, suggesting that Brazil may not see another primary share offering until after the next presidential election in 2026.

As a result, companies are exploring alternative financing options, including debt issuance or private equity deals. For instance, Igua Saneamento, a São Paulo-based sanitation company, opted to issue 3.8 billion reais ($696 million) in debentures last year to finance its investments, rather than pursuing an IPO.

While the debt market remains a viable option, many executives argue that listing shares on a stock exchange offers strategic advantages beyond capital, such as increased visibility and the ability to attract and retain top talent. However, until Brazil’s economic and fiscal landscape stabilizes, the country’s IPO market is likely to remain in a prolonged dry spell.

(Adapted from Reuters.com)