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Behind the “IPO of the decade”: the story of XP Investimentos

. Dec 09, 2019
xp investimentos

From two unemployed youngsters teaching people how to invest in the stock market, to the leading investment platform in Brazil, co-owned by the largest bank in South America. In the space of 18 years, XP Investimentos is now on the cusp of the “hottest IPO of the decade.”

Brazil’s largest digital investment platform is set to list its stocks for the first time later this month. The IPO will happen on Nasdaq, the American stock exchange famous for floating the largest tech companies in the world. If there’s enough demand, the offer may reach up to USD 2.1 billion, bringing XP’s valuation up to nearly USD 14 billion, according to estimates.

</p> <p>But in a country where just five banks control more than 90 percent of the assets under management, how can we explain investors’ excitement around a company that has only three percent of the market? The answer lies in an innovative business model and the chance to make the most of a <a href="https://brazilian.report/power/2019/05/13/brazil-hotspot-fintechs/">booming sector</a>. According to a report by consulting firm Oliver Wyman, commissioned by XP itself, the market share of investment assets held by independent investment firms in Brazil will grow from 7 percent in 2018 to 25 percent in 2024. And no other company is in a better position to enjoy this boom than XP.&nbsp;</p> <h2>Turning lemons into lemonade&nbsp;</h2> <p>XP started in 2001, after current CEO Guilherme Benchimol was fired from a brokerage job in Rio de Janeiro, and moved to the southern city of Porto Alegre. There, he met his business partner Marcelo Maisonnave, and the two set up shop as autonomous investment agents. They soon realized there was a gap in the market for a company that not only helped people invest, but actually taught them how to do it.&nbsp;&nbsp;</p> <p>In 2007, they decided to buy a brokerage in Rio de Janeiro, aiming to create a “financial shopping center” for retail investors—an unprecedented move in Brazil—as Mr. Benchimol explained in a 2013 interview to magazine <a href="https://exame.abril.com.br/pme/guilherme-benchimo-o-professor-de-financas/"><em>Exame</em></a>. The company realized that by offering different products than just stocks they could get more sources of revenue and a larger chunk of clients’ portfolios. Moreover, they managed to do this on a digital platform, allowing them to grow faster, at lower costs.&nbsp;</p> <p>In the words of finance professor Ricardo Rocha, speaking to newspaper <a href="https://www1.folha.uol.com.br/mercado/2018/08/em-17-anos-xp-muda-industria-de-investimentos-e-incomoda-bancos.shtml"><em>Folha de S.Paulo</em></a>, a great deal of XP’s success came because “it stopped to think about the product, as banks did, and started to think about the clients’ needs.&#8221;&nbsp;&nbsp;</p> <p>Meanwhile, XP grew by way of acquisitions, expanded their business abroad—opening offices in Europe and the United States—and became a hotspot for the <a href="https://epocanegocios.globo.com/Economia/noticia/2019/05/epoca-negocios-uma-revolucao-fora-dos-grandes-bancos.html">Brazilian investment funds industry</a>, giving retail investors access to more asset management firms than banks, which used to only offer their own products. Currently, XP&#8217;s portfolio includes more than 600 financial products.&nbsp;</p> <p>As it grew, XP attracted important investors, such as private equity funds Actis and General Atlantic. In 2017, plans for an IPO were delayed after Itaú Unibanco made a bid of BRL 6.2 billion for 49.9 percent of the company. The deal was approved, but Itaú is forbidden to meddle in XP’s decisions and any further share acquisition in the company is limited to 40 percent of the voting capital, subject to regulatory approval.&nbsp;&nbsp;&nbsp;</p> <h2>What makes it worth it?</h2> <p>With 1.5 million customers and BRL 350 billion in assets under management, XP Investimentos is the largest digital investment platform in Brazil. <a href="https://sec.report/Document/1787425/000119312519303714/d829388df1a.htm#toc829388_8">According to documents </a>sent to the American Securities and Exchange Commission (SEC) in November, the company amassed a BRL 699 million net income year-to-date as of September, a 98 percent increase from 2018 levels for the same period.</p> <p>Research from Levante Investimentos suggests XP profits may end 2019 67.2 percent higher than the previous year, at BRL 774 million, reaching BRL 1.3 billion by 2021 and a staggering BRL 4.3 billion in five years. The strong growth is “underpinned by the increase in held assets, cross-selling products and the efficiency brought by the digital distribution of services”.&nbsp;</p> <p>Following their estimates, Levante analysts believe that XP shareholders may have a 10 percent yearly return in USD from 2019 to 2023. “We recommend investors to purchase XP stocks on its IPO, at the limit price of up to USD 25 per stock, because the expensive price in comparison to earnings will be more than worth it, considering the strong earnings growth in the future,&#8221; the analysts wrote.&nbsp;&nbsp;</p> <h2>What is at stake in this IPO?&nbsp;</h2> <p>IPOs exist to raise money or give an opportunity for early investors to profit—the case is no different for XP. The company has said it intends to use the funds to boost its working capital, invest in marketing to attract clients, invest in professionals and in its business, besides funding further acquisitions and expenses. More importantly, they also aim to invest in new financial services such as digital banking, payments, and insurance.&nbsp;</p> <p>Sought out by <strong>The Brazilian Report</strong>, XP Investimentos representatives declined to comment, as the company is in its quiet period before the IPO.&nbsp;&nbsp;</p> <p>Of the 72.51 million stocks offered on the IPO, 25.95 million belong to shareholders such as General Atlantic and Dynamo and, therefore, the money raised on their sale will not got to XP. Meanwhile, Itaú Unibanco will not sell shares on the offer.&nbsp;&nbsp;</p> <p>For Bruce Barbosa, stocks analyst at Nord Research, XP needs the money to maintain its disruptive business model, which will ultimately be its biggest advantage versus the rising competition of banks. “The risks for XP is that the company stops being innovative and is surpassed by better companies,” he wrote in a report.&nbsp;</p> <p>XP itself notices this threat, saying in the prospect that “if we cannot make the necessary investments to keep pace with rapid developments and change in our industry, the use of our services could decline, reducing our revenues.”</p> <p>Mr. Barbosa also sees the slow pace of regulation as a threat, not to mention recent regulation towards autonomous agents, an important part of XP’s business. “So far, the agents are connected to a single brokerage. But regulation is changing. Soon, they will be able to take their customers to any platform they want,” he wrote. However, in spite of the risks, he believes the business is worth it.&nbsp;</p> <h2>Far from reach&nbsp;</h2> <p>While Brazilians are the main clients of XP, listing its shares in New York makes the company fairly unattainable to domestic retail investors. First of all, normally only institutional investors take part in American IPOs, leaving Brazilians no other option but to buy them already on Nasdaq, or investing in an investment fund.&nbsp;</p> <p>In Brazil, Vitreo asset management <a href="https://www.seudinheiro.com/gestora-vitreo-lanca-fundos-para-investir-no-ipo-da-xp/">created two funds</a> for Brazilians interested in investing in the company. However, XP has been r<a href="https://www.seudinheiro.com/xp-vai-barrar-fundos-brasileiros-criados-para-investir-no-ipo/">eportedly giving priority to foreign investors</a> in the IPO, in order to avoid any eventual compliance issues with Brazil regulators—in spite of the process being entirely held in the US.</p> <p>While it is quite common for <a href="https://brazilian.report/tech/2019/06/11/brazilian-tech-companies-new-york-ipo/">Brazilian fintechs to join Nasdaq</a>, looking for a more developed market and investors willing to pay higher valuations for their business, Levante believes there’s more than that behind XP’s decision.&nbsp;</p> <p>“Perhaps Brazil is becoming too small for XP. The company may be thinking in a second wave in the process of making investments more democratic. After all, only a small share of Brazilians invest abroad,” the analysts wrote in a report.

 
Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, she worked as an Editor for Trading News, the information division from the TradersClub investor community.

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