Brazilian tech companies preferring New York to São Paulo for their IPOs

. Jun 11, 2019
banco inter ipo tech companies brazil Banco Inter is an unique example of IPO in São Paulo

As Brazil’s startup environment flourishes and becomes one of the most important in Latin America, investors are looking for options to get involved in the opportunities created by the growing industry. Becoming a shareholder is one of the most practical ways to benefit, but it seems that tech companies are preferring to take their chances up north, especially in the U.S., further from Brazilian investors’ reach.

</span></p> <p><span style="font-weight: 400;">Last year, two of </span><a href=""><span style="font-weight: 400;">Brazil’s most promising fintechs</span></a><span style="font-weight: 400;">, </span><a href=""><span style="font-weight: 400;">PagSeguro</span></a><span style="font-weight: 400;"> and </span><a href=""><span style="font-weight: 400;">Stone</span></a><span style="font-weight: 400;">, chose the Nasdaq—the tech-specialized stock exchange based in New York—to list their shares. They were also followed by ed-tech company </span><a href=""><span style="font-weight: 400;">Arco Educação</span></a><span style="font-weight: 400;">. </span></p> <p><span style="font-weight: 400;">Meanwhile, </span><a href=""><span style="font-weight: 400;">Banco Inter</span></a><span style="font-weight: 400;"> was the only fintech to hold its initial public offering (IPO) at B3, São Paulo’s stock exchange—and it remains an outlier. Even considering overall technology or software companies, there’s just a handful of options on B3, such as Linx, Totvs and Sinqia. Consequently, there’s also sparse coverage from specialized analysts or tech investors. &nbsp;</span></p> <p><span style="font-weight: 400;">Fintech Agibank was set to join them, but the company decided to halt the IPO process, amid a cloudy macroeconomic scenario that reflected poorly on Brazilian assets last year.</span></p> <p><span style="font-weight: 400;">“We kickstarted the IPO process in 2018. All was well until we had a significant deterioration of market conditions for emerging markets, spurring a risk aversion mood abroad. Then, the truckers’ strike helped to make the case worse for Brazil. [B3] reached its low for 2018 in the very same week we had scheduled our pricing. So, we decided to wait for a better moment,” explains Paulino Rodrigues, Agibank’s CFO and Investors Relations Director. </span></p> <p><span style="font-weight: 400;">With </span><a href=""><span style="font-weight: 400;">pension reform developments</span></a><span style="font-weight: 400;"> bringing volatility to local markets, other companies, such as Vamos logistics group, </span><a href=""><span style="font-weight: 400;">got cold feet about debuting at B3 in 2019</span></a><span style="font-weight: 400;">. Mr. Rodrigues consider that, if the bill is passed, the overall perception about Brazil may improve, reflecting in better conditions for financial markets and, therefore, more IPOs. </span></p> <p><span style="font-weight: 400;">But while Brazil tries to put some order in the fiscal chaos, the example set by the first trailblazers in New York showed it is possible to follow another path. Now, Agibank is also considering whether it should join the Brazilian club in New York. </span></p> <h2>Tech companies off to America</h2> <p><span style="font-weight: 400;">Mr. Rodrigues points out that the best thing about going public abroad is “to have access to a broader base of investors that do not trade on the B3,” which are also specialized in the technology business. He also mentions that the American market liquidity is way higher than in Brazil, due to the larger number of investors, helping shares to reach higher prices. </span></p> <p><span style="font-weight: 400;">An </span><a href="$FILE/ey-global-ipo-trends-report-q4-2018.pdf"><span style="font-weight: 400;">EY advisory firm report</span></a><span style="font-weight: 400;"> confirms that view. Last year, the three IPOs that took place at B3 amassed USD 2 billion in proceeds and had a median deal size of USD 801 million. Nasdaq and Nyse hosted 205 IPOs, with USD 52.8 billion in proceeds. The median deal size was USD 111 million. In another attractive aspect for Brazilian companies, the report points out Stone’s IPO was the second most profitable of the year.</span></p> <p><span style="font-weight: 400;">But going public in New York is not necessarily a walk in the park. The process tends to be more extensive than it is in Brazil, due to more demanding legislation. A </span><a href=""><span style="font-weight: 400;">PwC report </span></a><span style="font-weight: 400;">comparing IPOs in Brazil and the U.S. show that almost 73 percent of the companies listed in Brazil needed less than six months to go public. In the U.S., the process takes, on average, six to nine months, plus a preparation period of 12 to 18 months.</span></p> <hr> <p><img loading="lazy" class="alignnone size-full wp-image-18985" src="" alt="ipo tech companies brazil" width="1200" height="800" srcset=" 1200w, 300w, 768w, 1024w, 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr> <p><span style="font-weight: 400;">The report also shows that costs are higher in the U.S., ranging from 11.7 percent to 4.0 percent of the amount raised in the IPO, depending on the size of the offer—the bigger it is, the cheaper it gets. In Brazil, fees range between 5.6 percent to 2.5 percent. </span></p> <p><span style="font-weight: 400;">There are other costs to consider as well, such as stock exchange fees, legal advisors and even travel costs for executives. For comparison, B3 charges almost USD 17,300 only for the initial listing tax; on NYSE, the same fee ranges from USD 150,000 to USD 295,000, while Nasdaq charges something between USD 50,000 to USD 295,000 depending on the company’s industry. Companies also pay enrollment fees and annual fees for the exchanges’ services. </span></p> <p><span style="font-weight: 400;">But Mr. Paulino alerts that one process isn’t necessarily better than the other; it is more like a trade-off, and each company must choose what’s best, according to its strategy. Agibank, for instance, is still making up its mind. &nbsp;</span></p> <h2>Only fools rush in</h2> <p><span style="font-weight: 400;">Besides Brazil&#8217;s particular conditions, there’s a worldwide trend for startups to wait longer before they venture into the turbulent seas of financial markets. The utmost example of such trend is Uber, which waited for years before going public last May. The change in strategy is far from being a coincidence, though.</span></p> <p><span style="font-weight: 400;">The decision to join capital markets is normally a way to get access to funding amid a broader plan of investments. However, to be part of it, companies should abide by the laws of the market, revealing their financial and operational data to shareholders, as well as goals and plans. So, in exchange for money, they become way more exposed to the competition, explains Mr. Rodrigues. </span></p> <p><span style="font-weight: 400;">“Going public has pros, such as accessing the capital markets and improving governance, but it also has cons. You become more exposed, everyone knows your strategy. It’s a trade-off, I think companies are waiting longer because of this, and I don’t see this trend decreasing,” he said.</span></p> <p><span style="font-weight: 400;">But startups are widely known for burning tons of cash in order to grow exponentially. This strategic decision to remain outside the stock market could not work without a backup—and that’s where venture capital and private equity comes in. </span></p> <p><span style="font-weight: 400;">Data provided by the Association for Private Capital Investment in Latin-America (Lavca) and published by </span><a href=""><span style="font-weight: 400;">Exame Magazine</span></a><span style="font-weight: 400;"> shows that venture capital investments increased 51 percent in Brazil last year, reaching USD 1.3 billion, versus 2017. The amount corresponded to 65 percent of Latin America’s total. </span></p> <p><span style="font-weight: 400;">The spurring activity is attracting global giants, such as SoftBank, </span><a href=""><span style="font-weight: 400;">Uber’s largest investor</span></a><span style="font-weight: 400;">. The Japanese group assembled the </span><b>SoftBank Innovation Fund</b><span style="font-weight: 400;"> this year to invest USD 5 billion in Latin American companies, mostly in areas such as </span><span style="font-weight: 400;">e-commerce, digital financial services, health, </span><a href=""><span style="font-weight: 400;">mobility</span></a><span style="font-weight: 400;">, and insurance—and it is already pointing at targets in Brazil. </span></p> <p><span style="font-weight: 400;">According to newspaper </span><a href=",nubank-negocia-aporte-liderado-pelo-fundo-japones-softbank-diz-agencia,70002859195"><i><span style="font-weight: 400;">Estado de São Paulo</span></i></a><span style="font-weight: 400;">, they are in talks to invest in Nubank, in a new fundraising round that could gather up to USD 1 billion. Also, t</span><a href=""><span style="font-weight: 400;">hey reportedly have stakes </span></a><span style="font-weight: 400;">in </span><a href=""><span style="font-weight: 400;">Gympass</span></a><span style="font-weight: 400;">—Brazil’s newest unicorn—ride-hailing app 99, and logistics startup Loggi. None of them have moved forward with IPO plans so far.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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