Capital markets essential for scaling up Portuguese companies and appetite for IPOs to recover in 2023

 In AmCham, Capital markets, News

After a sharp drop in capital raises in 2022 in Portugal and Europe, a decrease in market volatility caused by inflation and interest rate increases looks set to abate this year meaning the securities market is starting to recover as investors look less pessimistic than they did last year.

This was the essential reading of the capital markets by two Portuguese experts in the field – Luis Laginha Sousa, the chairman of the board of directors at the Portuguese securities market regulator and supervisor CMVM and Isabel Ucha, president of Euronext Lisbon (The Portuguese stock market) who gave their take on the markets in 2022 and the prospects for 2023 at the debate ‘Financing Systems – Investment in Portugal’ organised by the American Chamber of Commerce in Portugal (AmCham) in Lisbon on Thursday.

Luis Laginha Sousa, the chairman of CMVM, whose role is to protect the investor and contribute towards the positive development of the capital markets in Portugal, says that Portugal’s companies were an undeniable element for wealth generation and the prosperity of the Portuguese economy.

“The capital markets can encourage and empower the economy, it also is often a reflection of the companies’ network and a very important focus on understanding the enormous challenges faced by our companies is the need to gain scale”, he said.

Overwhelming competition from overseas

“We are an open market, open to the capital markets, and therefore have a great opportunities overseas for a country of just 10 million people (plus an overseas community of expats and descendants of eight million), and so we need to be open but aware of the competition abroad,” added the CMVM head.

Dealing with this competition and this overwhelming force of international players, national companies needed to have the capacity to face this competition head on. “There are no protected sectors and even in the areas that are not obvious we encounter international competition.”

Luís Laginha Sousa gave the not obvious example of undertakers which are generally strongly linked to the culture of Portugal but face competition from multinationals. “There will continue to be space for micro, small and medium-size companies, and we should really appreciate all those companies that make an effort and take risks to develop their businesses. However M&S companies can only pay small and mini salaries and make small and micro investments”.

“A country also has to have the capacity to pay medium and high salaries and make large and very significant investments,” he added. This required scaling up so that more companies could have the ability to deal with the competition from larger overseas companies, project themselves on the international stage better, taking advantage of the efficiencies that come with scale, better remunerate from the capital employed, and attracting and paying better wages to talent.

Luis Laginha Sousa stressed that it was a “huge challenge” for Portugal and its companies o act on what was a necessity, but added that this could not happen if the resources were not available for these companies to grow and that they needed financial resources. “We can’t do this in a country like Portugal just through traditional financing mechanisms (local banks, etc) and the capital markets are an essential part for this process”.

Using the well-worn but true cliché ‘capital has no country’ and the fact that it flows where it is needed and is well looked after, he said that Portugal had known how to treat overseas capital investment well. This is an enormous opportunity even if the banking sector cannot resolve all company problems (of getting capital), the capital markets is an alternative.

Looking at the numbers and quantities of overseas investors in Portugal* (See footnote) securing capital was fundamental as well as an aligned government policy to create an attractive investment environment.

“Our country is not an isolated island, everything that affects the rest of the world also affects us, but our size almost affords us some protection too, and within this current global backdrop and the point at which we are now, we have the capability and margin for some progression to grow a lot more even given the current global scenario”, said Luis Laginha Sousa.

Euronext – a unique value proposal

Isabel Ucha, President of Euronext (The Portuguese stock market) speaking about the evolution of the capital markets, pointed out that Euronext was a market leader in Europe with a significant weight compared to the other European stock markets because it had gradually integrated other stock markets in Europe (five years ago it had Portugal, France, Belgium and the Netherlands) but has since then acquired Ireland (the main market for bonds listings worldwide), Norway, Italy (the third largest in Europe for listings, particularly green and renewables companies)

“Today Euronext, which has 14 countries in terms of listings, has double the number of companies listed compared to London and is three times the size of Frankfurt”.

Euronext, she said, can offer a unique value proposal in the European capital markets in one platform where the 2000 companies that are listed in these countries can do business with a platform listing the supply and demand for all of the shares and bonds and securities of these companies under the same trading rules and a regulator (College of Regulators which includes the CMVM) that regulates efficient trading within Europe. This enables investors to trade under exactly the same conditions in any of the stock markets within the Euronext Group.

“This is a concept that is completely different to the other stock markets that exist, and offers a wide and very diversified access to European international investors working globally since US and Asiatic investors also access the platform because of the diverse number of companies listed from so many different European countries represented by the group”, she explained.

Retracing back to 2020/2021, because it helped explain the volatility that the markets are going through but also the structural trends for the future that were determining opportunities for financing and investment, said Isabel Ucha.

2020/2021 – extraordinary years for newly listed companies

“2020 and 2021 were absolutely extraordinary and record years for new companies joining the European stock market listings with around 430 Initial Public Offerings (meaning the public can buy shares in a company after it has been listed on the sock market), which is an absolute record for the past 15 years which raised around €150,000 million,” said Isabel Ucha.

These extraordinary numbers were based on companies from many different sectors, but there has been a greater concentration in two specific theme areas: sustainability, and energy transition and the circular economy, with companies in new/renewable energies (hydrogen, solar and renewables in general), also companies linked to water efficiency, as well as digital which has grown since the pandemic and remote activities brought opportunities for some digital companies to accelerate their digital agendas.

Equally remarkable as the increase in IPOs was the amount of capital increases for the period which saw a record volume of capital raising from listed companies with around €750,000 million in Europe (double the amount in the primary markets in IPOs**.

“This is because companies saw and are continuing to see these medium to long-term opportunities or the medium to long term needs for these companies to make savings on energy and convert to digital, their need for financing, and the fact that the market is fairly favourable with huge amounts of savings and the availability of capital for investment for these operations”, said Isabel Ucha.

Even in Portugal, where the capital markets had a level of use below what is desirable, there has been interest to help finance and develop Portuguese companies. “We had the IPO of GreenVolt (a totally renewable energy company) which became listed in 2021 and has already raised €500 million from this IPO, in two capital raises of €250 million in green bonds.

Other Portuguese companies too such as EDP (Portugal’s multinational energy company) and EDP Renováveis (EDP’s renewables arm), Mota Engil (Portugal’s largest multinational construction and mining company), and Sonae (a shopping centres developer and supermarkets holding company) carried out capital raises during the pandemic period, while in early 2023 both EDP*** and EDPR*** carried out successful capital raises. (***See footnote)

“There are listed companies that are making the most of the market to raise very significant amounts of capital and which are helping (in the case of EDP in energy transition) and in other cases other types of investments.

In 2022 we were surprised by the war in Ukraine, accelerated inflation and an extremely aggressive monetary policy (from the ECB) to deal with it, which ended up by causing volatility and a general fall in share indices of around 10-20% of their value in 2022.

Nevertheless, there were around 100 IPOs in Europe in 2022 compared to 430 in 2021, raising around €16,000 million compared to the €75,000 million in 2021. 80 of these IPOs were via Euronext stock markets. (70-80% market share in the IPOs in the European market over the past 3-4 years).

But despite a very sharp fall in the primary markets, there was a very significant volume of capital raises, with investors carrying on within a climate of risk that they already knew and investing in companies they are familiar with, investing €75,000 million in capital raises in 2022.

Investors not so pessimistic

So far for 2023, the amount of IPOs in the pipeline has been “rather limited” with 20 operations in Q1, €1.7 thousand million raised, but then in the meantime the markets were faced with some instability from the financial sector (Silicon Valley Bank, Credit Suisse etc) which brought in more volatility.

However a “window is starting to open” for further operations in a few months time with European stock market indices being in positive terrain (Up between 9-15%) which while not having yet recovered the losses in 2022, have recovered significantly, showing that investors are not as pessimistic as they were in 2022.

The PSI 20 (the Portuguese index) was the only index that did not fall in 2022, rather it rose by 5% to which was added an increase of 9% in Q1 of 2023, so that the average listed companies in Portugal enjoyed a good performance.

In a final note on opportunities for financing, Isabel Ucha highlighted private securities and bonds. “Bonds within the context of higher interest rates (After 0% interest for almost 10 years when bank financing was more attractive than the private bonds/securities market), now with a Euribor above 3,5% there are other conditions and opportunities to obtain financing, albeit dearer than before, through private bond/securities issues.

“This year is looking more active in terms of company securities issues than in 2022, which also suffered from higher interest rates, but 2023 is looking more stable with more companies likely to issue securities, particularly green bonds which are seeing growing demand,” concluded the President of Euronext Portugal.



*At the Exports and Investment 2022 Conference” organised by the Portuguese Foreign Investment and Trade Agency AICEP in Viseu, the Prime Minister, António Costa said that FDI had grown year-on-year. According to the April issue of Portugal Global magazine, the Portuguese Agency for Investment and Foreign Trade (AICEP) facilitated 47 productive investment projects in 2022, resulting in the creation of 7,233 job opportunities and a total foreign direct investment (FDI) of €2.678Bn)

**A primary market is a source of new securities. Often on an exchange, it’s where companies, governments, and other groups go to obtain financing through debt-based or equity-based securities. Primary markets are facilitated by underwriting groups consisting of investment banks that set a beginning price range for a given security and oversee its sale to investors.

***The capital increase of €1.0Bn in EDPR was within the context of EDPR’s Business Plan 2023-26, disclosed to the market on March 2, 2023, to partially finance EDPR’s updated investment plan of €20 billion to deploy17 GW of renewables additions until 2026)

*EDP – Energias de Portugal, S.A. (“EDP”) announced, following a decision taken by its Executive Board of Directors, the completion of an equity raise in the total amount of €1,000,000,002.96, through the placement of 218,340,612 shares.
The total number of shares subscribed represented 5.5% of the existing share capital of EDP at a price of €4.58 per share, corresponding to a nominal amount of €1 and a share premium of €3.58 per share, representing an increase of share capital of €218,340,612.00 and a global share premium amount of €781,659,390.96.
Investors received the allocated shares on March 7, 2023. The investors were entitled to all economic and voting rights inherent to the shares from that date onwards.
The equity raise at EDP were used to fund EDP’s takeover offer to acquire the shares held by the minority shareholders of EDP Energias do Brasil, S.A.

On Wednesday we will hear about the Venture Capital market from Stephan Morais of Indico Capital Parters.