The financial crisis has given Brazilian companies a few heads-up. One was to remind them that they shouldn't put all their eggs in the same basket. This teaching – widely employed by personal finance specialists to show new investors the risks of concentrating their assets – is also important when it comes to public company shareholder bases. The companies that went public in recent years usually started out with more than 70% of their shares in the hands of foreign investors – foreign meaning mostly institutional investors such as hedge fund managers. This non-diversified profile showed its dark side during the recent months of financial instability: mass investment flight and significant price drops. Enter the local investor. Brazilian asset managers took the low prices as an opportunity to buy the stocks that they couldn't grab up at IPO time due to unaffordable prices or lack of issuer interest in selling to the domestic public. Individual investors also surprised the market. They held on firmly to their positions despite the general downslide in share prices.
The numbers attest to the cool-headedness of these investors. In September 2008, when Lehman Brothers collapsed and triggered the most critical period of the crisis, individual investors and investment clubs represented 27.5% of operations in the BM&FBovespa. At that time, foreign investors accounted for 36.8%. In November, the tables had turned. Individual investors became the majority and accounted for 34%, while foreigners had 33.5%. Throughout the last quarter of 2008, the Bovespa recorded an average 542.4 thousand individual investors, 50% more than the same period in 2007.
Moral of the story: international investors are essential, but not enough. That was the cue for Brazilian companies to concern themselves less with international trips and start breaking ground in Brazil. "The crisis showed the need for medium-sized companies to manage their shareholder bases. It’s inevitable that they’ll take this route", says Geraldo Soares, president of the Brazilian Investor Relations Institute (IBRI).
The routes that once branched out from traditional finance centers such as New York and London and extended into alternative markets such as Dubai, Hong Kong and Singapore are now originating in São Paulo and Rio de Janeiro and advancing into the interior of São Paulo state, Minas Gerais and northeastern Brazil. SulAmérica Seguros is an example of this change in focus. Last year, it was still investing in diversifying its foreign shareholder base. The insurance company embarked on five non-deal roadshows with stops in the traditional venues and in some that were a little off the beaten track, such as Sydney, Australia. At the end of the year, it became clear that the investors were hesitant to acquire positions in emerging markets. The solution was to focus more on the domestic audience. Meetings were held this year in Recife, Minas Gerais and the Federal District. The company has also scheduled visits in 2009 to Fortaleza, Salvador, Porto Alegre, Uberlândia and Ribeirão Preto.
The effort has already had some effect. At the SulAmérica IPO, about 90% of the free float was held by foreigners. Now they are only 52%. At some moments, local individual and institutional investors have even made up the majority. An additional accomplishment was the lower concentration of shares per investor. SulAmérica currently has 24% more investors than when it premiered in the stock market.
And just who is SulAmérica's dream investor? "We want investors who are in line with the company's long-term vision. We like shareholders who demand corporate governance", says Arthur Farme D'Amoed Neto, the insurer's vice-CEO and investor relations VP. To achieve its target the company is investing in analysts, whether they work for brokers (sell side) or investors (buy side). Currently, seven stock research centers are tracking SulAmérica's securities, and an additional three promise to start issuing reports about the company before the end of the year.
INTEREST IN SMALL CAPS — At some companies, the crisis itself took charge of diversifying the shareholder base. At Marfrig, which debuted with 75% of its free float in the hands of foreigners, the individual investors’ base grew 40% this year. "The volatility has created an opportunity for new investors to buy shares in the company", assesses Ricardo Florence dos Santos, the group's planning and investor relations director.
A similar situation took place at ABnote. Before the crisis, in August, foreigners held 70% of the company's free float. In September, the number of shareholders plummeted by 40%, with individual investors among those fleeing. Immediately after, with the shares now costing an attractive R$9 – versus R$ 17 at the IPO –, domestic investors started betting their chips on the company once more. "Today the number of individual investors is back to normal, but they hold a more relevant stake", says Fábio Bueno, ABnote's investor relations coordinator. The fact that individual investors seek a company of their own free will does not exempt IR departments from promoting special efforts aimed at that public. "We have assigned one of our department's staff members to focus exclusively on individual investors", says Santos from Marfrig.
The National Association of Capital Market Analysts and Investment Professionals (Apimec) wants to attract companies that are interested in promoting roadshows across Brazil. The entity's president, Lucy Souza, is assessing the possibility of offering lower prices to companies that are willing to give roadshows collectively with other companies, including stops at cities outside the Rio-São Paulo axis. "We want to encourage them to go to the interior of Brazil", says Souza. As part of this project, the Apimec also altered the format of its annual award. For the 2011 award, which will be for activities in 2010, the only companies that will be eligible are those that make presentations at all of the association's six regional sites: Rio, São Paulo, Federal District, Minas Gerais, Southern Region, and Northeast Region.