Generating new investment boosts liquidity, reduces volatility, and leads to fair market value – all crucial to business success. But what’s the best approach to securing this investment when your entire region is undergoing a period of investor unease and the only companies seeing good liquidity and sell-side attention are the larger corporations?
This is the current situation in Latin America. A declining appetite for investment in listed companies due to political and economic instability has stagnated shareholder bases for several years.
‘The past three years have seen a decline in the economy coupled with difficulties in the capital markets, which means there has generally been no capital raising since the economic downturn began,’ says Nuno da Silva, head of Latin America at BNY Mellon. ‘Companies haven’t attempted them, and the market wouldn’t have been very receptive anyway.’
So what can Latin American companies do to get back on track? A proactive approach to targeting is vital, says Da Silva. ‘Some companies continually take a passive approach and rely exclusively on the sell side, thinking they are solely engaged by – and for – them,’ he points out. ‘The reality is, of course, that the sell-side has a business to run, and its business model will favor those opportunities that achieve profit.
‘By employing a strategic approach to identifying and meeting with compatible investors and using tactics such as detailed target analysis that successfully identifies any pools of investor capital not on the sell side’s matrix, Latin American companies can tap into real opportunities.’
Natura embarked upon its first targeting program in 2013 using Bloomberg data to develop a list of prospects based on criteria such as geography, ESG metrics, and previous investment decisions.
‘We ended up with a list of around 200 institutions that fitted our profiling, then gave ourselves two years to execute that list and make contact with fund managers,’ explains Fabio Cefaly, IRO at Natura. ‘The benefit for us was the opportunity to meet with investors that weren’t necessarily known to our brokers and the fact that we could develop our methodology for contacting them.’
And what was the success of the program? ‘We evaluated two different aspects of the targeting,’ says Cefaly. ‘The first was the execution of our original list of 200 institutions – the final figures for this showed that we visited around 75 percent of those managers. The second consideration was the conversion rate. This is more difficult to measure accurately as we never know who holds funds in our shareholder base. Still, we did see our shareholder base in Asia – one of the key geographical targets on our list – grow from less than 5 percent at the beginning to nearly 15 percent at the end of the two years.’
Despite Latin America’s recent troubles, corporate results from the last quarter show Brazil, Argentina, and Chile all doing well in the first half of 2016, a possible sign the region is starting to turn a corner. Some of it can be attributed to reform programs. ‘There has been a considerable amount of macroeconomic and regulatory reform in Argentina and Brazil, and these changes have been well received by investors, creating confidence in the market,’ says Da Silva. ‘We’re seeing investors start to return to the region on a selective basis – not in the numbers they once did, but not at insignificant levels, either.’
Felipe Saraiva, IRO for Brazil-based Duratex, agrees that things are looking brighter but explains that the potential risk of further market problems has led to Duratex kick-starting its in-house investor targeting program.
‘We believe there is always more to be done at home, so we’re developing a new methodology to identify the profile of our investors and work on better communication practices should market interest fall again,’ he says. ‘For us, the main benefit of doing our investor targeting versus relying on brokers for support is to be closer to the investors – we can optimize the time of our meetings and tailor them to the topics that are more interesting for investors individually.