LatAm’s three laws of IPOs

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Best to be big, preferably Mexican and almost certainly not Brazilian.

Three things are becoming so evident with Latin America’s IPOs that they are solidifying into laws. First, as far as investors are concerned, ex-Brazil is better, and Mexico in particular is desirable. Second, size definitely matters – liquidity is crucial. Third, Brazil’s crowded underwriting market is still failing to price deals in line with investors’ expectations. Investors are seemingly taking the bottom of the range and discounting from there.

Grupo Lala clearly proves two of these laws. It is a well-known and large dairy/food company – from Mexico. The IPO raised $1 billion at the top of the range (on October 15, led by JPMorgan, Morgan Stanley and BBVA).

Also from Mexico, but with less liquidity, came airline Volaris (issuance on September 7, led by Deutsche Bank, Morgan Stanley, UBS, Evercore and Santander) and real estate company Fibra Danhos (October 8, led by BBVA, Goldman Sachs and Evercore). Both closed at the bottom of the range.

Then came Brazil’s Grupo Ser: an education company (supposedly one of the hottest sectors for investors) but it is small and the valuation range of R$19.50 to R$23.50 was too rich for the market. It closed at R$17.50 – yet another Brazilian IPO that failed to connect with its target range. Then the deal was suspended, with the regulator, the CVM, saying the prospectus didn’t contain the relevant tax information.

The confusion centres on changes to the tax system governing some education companies made by Brazil’s tax authority, Receita Federal, in September. It’s embarrassing for bookrunners BTG Pactual, Credit Suisse, Goldman Sachs and Santander (and sent Bank of America Merrill Lynch and HSBC scrabbling to update tax disclosures for an upcoming $228 million IPO from another education company, Anima), but it shouldn’t have any material impact on the deal.

What’s more troubling for the market is the perpetuation of law three: investors and bookrunners don’t seem any closer to agreeing on the value of Brazilian IPOs.