Brazil's once-hyped market for initial public offerings may not recover as swiftly as some bankers have been expecting, as an unpredictable economy and the risk of overpriced deals scare investors away.
The hurdles facing tourism company Brasil Travel Turismo, which withdrew its IPO plan on Thursday, and the Brazilian unit of Norway's Seadrill, which is reworking the terms of its offering, provide a chilling prelude to a market that many only recently thought was set for a hot year.
Seen for most of the last decade as a symbol of Brazil's buoyant capital markets, IPOs have languished in the past two years as prices sank for many names that went public. While most markets have gradually recovered from the global financial crisis of 2008, IPOs remain out of favor.
The trend underscores how investors in Brazil are still reluctant to take on risky bets like IPOs, the mechanism that small and sometimes inexperienced companies use to raise capital. Instead, investors are more willing to pour money into existing equity and bonds, where it is easier to assess risks.
"Why bother betting on a company you have never heard of when you have so many other good names trading on the stock exchange?" said Frederico Misnik, who helps oversee more than $40 million in assets at Humaitá Investimentos in São Paulo. Last year, investors drove the benchmark Bovespa index down 18 percent. Only 11 initial public offerings were completed in 2011, with eight pricing at the bottom or below the suggested price range, data by Ernst & Young showed.
That is a sharp drop from 2007, when more than 70 companies went public, and seven of every 10 deals priced within the suggested range. In fact, Brazilian companies raised more funds through IPOs between 2006 and 2008 than they did in the two preceding decades.
Foreign investors, traditionally the biggest buyers of local IPOs because of their strong shareholding culture, snapped up more than three-fourths of such deals in 2006-2008, hoping the newly listed companies would deliver stellar profits.
But they are slowly moving to the sidelines as the perceived quality of stock market debutants slipped. Foreign investors' take of local IPOs fell to 56 percent last year, and analysts expect that percentage to keep falling.
"A more conservative mood has overtaken markets, and you can be sure that many IPOs will be challenged," said Paulo Dortas, an Ernst & Young partner who specializes in Brazilian IPOs. "Investors won't abide by a price or a structure that doesn't reflect the return they are aiming for." Investors have also balked at what they deem as timid government efforts to combat inflation, which reached seven-year highs during 2011. The central bank began cutting interest rates in August, after five consecutive increases.
Efforts to stem massive gains in Brazil's currency, the real , led President Dilma Rousseff's administration to raise taxes on some financial transactions, making it more expensive for foreigners invest in Brazil.
"The economic scenario has not been supportive of IPOs, either," Dortas said.
The lethargy afflicting IPOs in Brazil contrasts with record foreign inflows into the Bovespa and a frenzy of Brazilian corporate bond sales abroad this year.
A record $7.2 billion of foreign money flowed into the Bovespa in January. Investors bought $15 billion worth of corporate debt sales by Brazilian firms in the year through Thursday. Yet, some industry leaders are still betting big on IPOs.
Edemir Pinto, chief executive officer of financial exchange operator BM&FBovespa, expects up to 40 Brazilian IPOs to price this year, almost double the combined 22 transactions of 2010 and 2011.
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