Reports that Latin American payment processor PagSeguro Internet is considering an IPO in New York in the first quarter of 2018 shines a fresh light on the relative lack of liquidity for tech listings within the Latin America region.
A report by Reuters in early December quoted two company sources at PagSeguro as saying they had mandated Goldman Sachs to lead an IPO on the New York Stock Exchange (NYSE) or Nasdaq.
The listing would be the first of a growing wave of Brazilian fintechs that are eyeing access to public capital.
Dan Green, partner at Gunderson Dettmer, a Silicon Valley law firm that worked on Despegar’s recent $332 million issuance on the NYSE in September, says local stock exchanges can’t offer the liquidity available in New York.
“These tech listings will continue to be driven by liquidity and pricing, and both the Nasdaq and the New York Stock Exchange have significantly more liquidity than any of the Latin American exchanges – even the Bovespa,” says Green.
“When we are talking to companies or investors about IPOs, the conversation is almost US-centric, even if there could be a secondary-list element for local marketing purposes.”
As well as New York offering greater liquidity for pure technology stocks, the local Brazilian market is becoming saturated with a growing backlog for more traditional listings.
In December, the Bovespa is expecting three IPOs – from BR Distribuidora, Neoenergia and Burger King – that could raise more than R$14 billion ($4.32 billion) between them, as well as a scheduled follow-on transaction from Sanepar that is expected to raise around R$942 million.
This heavy Brazilian equity pipeline is already blocking potential issuance: for example, Algar Telecom decided to postpone its IPO to the first quarter of 2018 given the weight of equity issuance in the queue for the end of 2017.
Green says there is a small but significant group of technology companies that could satisfy the pre-conditions of IPO investors: scale and regional diversity.
“It’s non-trivial to reach a stage of regional maturity and growth that interests international equity investors,” says Green.
“Developed-market investors tend to think of Latin America as a monolithic bloc, but it takes time to grow and deal with the significant regional challenges – currency, regulation and personnel, for example – that creates an attractive proposition for investors that value diversification so that a downturn in one part of Latin America can be offset by growth elsewhere.”
Investment bankers are otherwise excited about the potential for IPOs in Argentina and Brazil next year – as well as a smattering of other notable transactions in other markets.
Green says he expects fintech to become an important portion of these deals, especially as regional regulators implement fintech-friendly rules.
“You have all these fintech companies emerging to fill market gaps and the regulators are often open to encourage disruption, because in some ways the banks are suppressing innovation and holding the population back from realizing its financial potential,” he says.
Green says that his role on the Despegar IPO transaction – where he worked for the underwriters – showed him that there is a lot of pent-up demand from institutional investors for Latin American technology stocks.
“There is definitely additional appetite that means other tech companies could successfully bring an IPO in the US,” he says. “Especially if they can extrapolate a clear path to continued growth, whether through M&A or organic opportunity.”
However, despite the measured optimism for deal flow, bankers admit that with large political risk in 2018 – presidential elections are scheduled in Chile later in December, and Mexico and Brazil before the end of next year – investor sentiment could turn cautious and limit volumes.
Green argues this isn’t necessarily a barrier to corporate growth if companies have a broad view of equity strategy. The companies he works with have a broad perspective on raising capital that enables companies to navigate the region’s volatile equity conditions.
“Institutional investors look to de-risk as much as possible, but if the IPO strategy becomes unviable there is always the option for high-growth companies to look elsewhere for equity financing,” he says.
“For example, venture capital companies may be comfortable in investing in a tech company that is only focused on one core market – either Brazil or Mexico. In time, these dozen or so names will evolve into a handful of very good IPO candidates.”
Green, who in many cases works with companies on awarding the IPO mandates, also says that the choice of underwriter of fintech IPOs in Latin America still favours the traditional investment banks.
“In Latin America it is very important to select an underwriter that helps investors become comfortable with the company,” he says.
“It’s not like in the US, where some Silicon Valley bankers could lead a deal. In this region, you need to select a top-tier, bulge-bracket firm that signals confidence to potential investors.”