XP sees IPO drought, however bets on debt and sale of soccer golf equipment in 2023
Last week, at Brazil’s last game at the Qatar World Cup, Pedro Mesquita, head of investment banking at XP Inc., had the opportunity to talk to FIFA president Gianni Infantino about the changes the Brazilian football has passed.
Despite the defeat of the Brazilian team, Mesquita was able to show the first victories that Brazilian football had in the process of professionalization. The biggest of them was the approval by Congress, in 2021, of the figure of the SAF (Sociedade Anônima do Futebol), which transforms clubs into companies and allows the arrival of investors.
XP has been one of the main players responsible for advancing the professionalization of sports in the country. The greatest feat was kick-starting the SAF, by advising on the sale of plots of football divisions in Cruzeiro and Botafogo, last year. And according to Mesquita, given the success of the two operations, there is more to come.
“We already have at least five more clubs of great expression that should be privatized and we think that the operations will happen throughout 2023”, he says to the NeoFeed🇧🇷 “This is a business that we are very invested in and we are very excited about.”
In charge of XP’s investment bank since 2014, the theme of professionalization is what most excites Mesquita, contrasting with his expectations for the capital market.
For those who expected the resumption of initial public offerings of shares (IPO, its acronym in English) in 2023, Mesquita says that the first signs issued by the government of president-elect Luiz Inácio Lula da Silva point out that next year will again be marked by the drought of capital openings.
According to him, the lack of predictability and control on the fiscal side hinders the resumption of operations, despite the existence of companies that are interested in accessing the market.
“It all depends on the government,” says Mesquita. “The expectation is that we have a weak market for IPOs and follow-ons [em 2023] until the new government manages to provide the necessary predictability for an interest rate cut.”
High interest rates have already been a major inhibitor of operations this year. After a historic 2021, with 46 IPOs and 26 follow ons, this year should close with 17 offers, all subsequent. Of this total, XP participated in six, including Arezzo and Equatorial.
With the scenario leading companies to be on hold, waiting for signs of improvement to resume IPO plans, Mesquita says that, in addition to football, who should hit a pool in 2023 within the investment bank will be the debt issue area and the part of mergers and acquisitions (M&As).
Follow the main excerpts from the interview to NeoFeed🇧🇷
How do you evaluate 2022 in terms of number of IPOs and follow-ons? Is it within the expected range?
Yes. And the first thing I wanted to say is that the market has not gone away, it totally follows the yield curve, which represents the future expectations of the economy. As the year 2022 was a year of high interest rates, inflationary pressure in the world, the number of operations was within expectations, because with higher interest rates there are occasional operations. That’s what happened with Iguatemi, Equatorial, which made an acquisition, and the privatization of Eletrobras. It’s not that there was little operation because the market didn’t like the Bolsonaro government or likes another government. It has no government. What it does have are interest expectations, built on top of a framework that includes fiscal predictability and macroeconomic policy.
What to expect for 2023? How has the government transition affected the prospects for operations?
The market sees very low predictability in fiscal policy. Therefore, the future yield curve is high. Economists, who predicted even before the elections cuts in the Selic in 2023, are no longer predicting, with some houses even predicting an increase. And since the new government is not in favor of privatizations, today, the expectation is that we will have a weak market for IPOs and follow-ons, until the new government manages to provide the necessary predictability for an interest rate cut.
Given this scenario, do you not expect IPOs and follow-ons?
We had a deterioration in the market since the elections, with the signs that came from the new government. So, today, the market expects zero IPOs and, at the limit, some much more strategic follow-ons, to finance an acquisition, raise capital to buy a competitor, something like that.
“The market has no party, it follows the yield curve, which represents the future expectations of the economy”
Does this scenario represent a very strong change from what you expected before the elections? Because there was an expectation that the Selic would start to fall in 2023.
Before the elections, and regardless of the candidate, all houses, as the Focus Report shows, predicted interest rate cuts. Most homes in the middle of next year. And, as the market works with expectations, we predicted a very good market, but it was very committed. It is a scenario that can change, it is not given. The new government needs to quickly signal an orthodox fiscal policy, so that the market can see the possibility of a drop in interest rates and thus the economy to return.
Were you structuring operations, expecting a positive scenario in 2023? Were there companies interested in doing IPOs?
Yes. We had a list of interested companies, including several in negotiation. But today all conversations are at a standstill.
Did any industry have more companies eyeing IPOs or follow-ons?
It had a little bit of everything. There was the sanitation sector, which was super hot, but now it should cool down. Brazil is a very big country, it has a lot of industry exponent in Brazil and we have a very small number of publicly traded companies, close to the size of the economy. There is a very large repressed demand for IPOs.
Is a consistent resumption of operations in the hands of the government?
It all depends on the government. The BC is independent and it will only lower the interest rate with predictability and fiscal orthodoxy. So far, the new government has not signaled this. He has been signaling the opposite. The very indication of the members for the economy, the president of the BNDES, does not show, at least for now, the signal that the market wanted. That doesn’t mean they can’t do a good job. Again, it’s not that the market likes or dislikes the person who entered, the market is apolitical. He will look at the drop in interest rates. And this will only happen with a controlled fiscal scenario.
What about M&As?
M&As always happen, with the market better or worse. Of course, having an attractive market is better. It’s not like an IPO, where the window closes. But it enters a more difficult phase, with the scenario that we see, because companies have less appetite to take risks, buy a competitor, put proposals. Funds too. A less attractive market also inhibits some operations, but M&As happen because there are opportunities, companies need cash and funds can buy at attractive prices. It is a market that we see, at least here at XP, that we will grow a lot.
In which areas do you think investment banking has good growth potential in 2023?
The debt market continues to happen, it has been growing. It grew last year and will grow next year. M&A will happen and capital operations will be on hold. Where we see the big difference is in the debt market. This year, a large part of the revenue is coming from debt issuance and next year, according to our analyses, it will also be.
You were pioneers in the SAF market. Is there still interest from the clubs? Are you in talks with clubs?
We already have at least five more big clubs that are going to be privatized and we think that the operations will take place throughout 2023. We foresee a hot market, it is the future of football, of the professionalization of the area, and it has all the discussions about the league [de clubes]🇧🇷 This is a business in which we invest a lot and where we are very excited for 2023.
“The interest of international funds in Brazilian clubs has increased”
Does the economic scenario affect anything?
Perhaps in a better economic scenario, clubs could obtain higher amounts. But it is not the economic scenario that will stop operations from happening.
How did the experiences with Cruzeiro and Botafogo help sell the idea of SAFs to clubs?
The experiences were great. Cruzeiro and Botafogo are on another level and more and more clubs see that this is the only way to compete. Football is a world market, the player is priced in dollars and euros. And clubs lose in revenue compared to the United States, for example. This causes us to lose players to the American league and, increasingly, to the European leagues. The only way for Brazil to compete with other leagues, and I’m not even talking about the biggest ones, like the English or Spanish ones, is to become more professional. The SAF and the development of a league of clubs are the two great levers of Brazilian football.
We see a series of international groups, investors, that bet on football around the world. Is there interest in Brazilian football? Do they think about investing in clubs or having access to players?
There is capital growth, who wants to buy a team to increase the value of the team. And those who want to buy a team to take advantage of the talent factory we have in national football. I can say that the interest of international funds, and investors that are not just funds, in Brazilian clubs has increased. The SAF law is very new, from 2021. We are in the process of closing a big club now and we have several other mandates and conversations going on.
Do you believe that we will still see an IPO of a Brazilian football club?
I think that, for clubs, it is not a good option, given what has been seen around the world. There are several publicly traded clubs on major exchanges around the world, such as Manchester United and Borussia Dortmund. And pricing and understanding is not well seen by investors. Performance is not very good. I believe that football is not a sector for public markets.