BRAZIL: An Introduction to Capital Markets

Since the early 2000s, the Brazilian capital markets have developed considerably, undergoing constant and significant reforms in the regulatory framework to promote higher standards of transparency and corporate governance, expedite the offering registration process, simplify rules, and reduce registration costs.

The Brazilian equity capital markets are mainly regulated by the Brazilian Securities and Exchange Commission (“CVM”), jointly with the National Monetary Council (“CMN”), the Brazilian Association of Financial and Capital Market Entities (“ANBIMA”) and B3 SA – Brasil, Bolsa, Balcão (B3), the Brazilian stock exchange. The CVM is also responsible for supervising publicly held companies, underwriters, investment funds, portfolio managers, investors and other capital market participants.

The improvement of the overall regulatory conjuncture of the Brazilian capital markets has strengthened the confidence of existing investors and is attracting new investors.

The Year 2024 in Review

The transactional activity on the equity capital markets decreased in 2024, with eight follow-ons priced as of October, the largest being Sabesp, Energisa, Eletrobrás’ CTEEP, Serena Energia and Companhia Brasileira de Distribuição (GPA). In addition, 2024 was the third consecutive year without a company debut in the Brazilian stock markets, in contrast to the international markets that had successfully priced IPOs, including Puig in the Spanish stock exchange, and Walmart’s iBotta and Reddit in the US markets. However, debt capital markets were impressively active in Brazil and although financial experts are not enthusiastic about the the performance of the Brazilian market in 2024, they believe that the successful pricing of the follow-on deals, jointly with any improvements in the macroeconomic scenario, may reattract foreign investment, thus setting up a more favourable environment for IPO debuts in 2025.

The Brazilian capital markets in 2024 will be marked for the privatisation of Companhia de Saneamento de São Paulo – Sabesp, carried out through a secondary offering of common shares held by the State of São Paulo, totalling BRL15 billion. The deal was highly anticipated by the markets, since the new state government took office in January and was positioned with a standout investor demand of BRL180 billion. It was the largest equity deal of the year in Brazil and the third largest in the world. Also, the deal was very complex, as any privatisation process must comply with strict administrative regulations. The company aimed to attract the largest number of investors possible – retail, employees, pension plan beneficiaries, and professional investors in Brazil and abroad – and obtained registration in Brazil with the CVM and in the United States with the SEC. The structure of the deal was innovative in the Brazilian capital markets, following the strategic orientation of the State of São Paulo in searching for a reference investor committed to achieving sanitation universalisation by 2029 (rather than by the legal target of 2033). The offering was structured to permit the selection of an “anchor-investor” with lock-up until 2029 within the public offering, by means of a priority tranche, making innovative use of the existing priority offering mechanism provided in the capital markets regulations. Even though the effectiveness of the tax reform approved by the Brazilian Federal Congress in 2023 is still uncertain, it will certainly be well received by the markets. The proposed reform includes a new unified value-added tax, and relevant changes to income tax, such as taxation of offshore investment, exclusive investment funds and the distribution of interest on share capital (JCP), are currently under discussion.

In September 2024, the US Federal Reserve cut the interest rates for the first time in four years,to a range of 4.75% to 5%. Although it is still too early to say this was the start of a reduction cycle, the half-point cut was a positive surprise for the markets in general.

A Look Ahead

After a sluggish year for equity deals, investment banks project that capital markets will accelerate again in the first semester of 2025, mainly in consideration of the expected turnaround in the global economy, further decreases in interest rates in the US and local economies, and the fact that companies often resume plans to raise money in the Brazilian stock market early in the year. The market agents have great expectations for a turnaround in corporate transactions, including IPOs, follow-ons, and mergers and acquisitions in 2025.

Brazil also stands to receive greater investment due to investors increasingly seeking to replace offshoring in other emerging economies, selecting politically aligned or neutral partners with whom to do business. Financial experts believe Brazil is well positioned to receive foreign investment, with solid companies performing well and a ministry of finance engaged in reattracting investors. After the investment euphoria and risk taking in 2020/21, local investors have adopted more rigid internal investment policies. It is expected that improvements in the global economy will foster international investment in emerging markets, and Brazil is believed to be strategically positioned to benefit from this.

The ongoing shift in Brazil’s environmental policies towards preservation is likely to continue attracting ESG-conscious investors. Bankers are expecting a return from foreign strategic investors looking for long-term investments in the local markets. These investors made a relevant contribution to the Brazilian markets in the past, but have ceased to invest in Brazil in the last three years.

Compared to other markets, the macroeconomic picture for Brazil in 2025 is positive, with more controlled inflation rates, new cycles of interest rate reduction expected, and growth of economic activities. Should the tax reform become effective, this is likely to foster economic growth and promote monetary stability, which may help ease tensions in the local market.

Finally, although it is a little early to have a sense of how the markets will behave in 2025, we have an optimistic view and believe the year might present great opportunities for companies wanting to access the capital markets in Brazil.