IPOs Return To Latin America

After being stuck in the initial public offering (IPO) doldrums for the past two years, Latin American and Caribbean markets are ready for new listings.

Leonardo Resende, superintendent of corporate relations at Brasil, Bolsa, Balcão (B3), Brazil’s stock exchange, notes there are strong listing candidates that will go public in a few months from the health-care, infrastructure, real estate and technology sectors.

Heads of listing at various investment banks say that companies like Pacaembu, the Tegra Group, Diagonal and Kallas in the real estate sector; Rio Energy, CTG and 2W Energy in the energy sector; and Cimed and Eurofarma in the health-care sector may go public in 2024.

Resende adds that more than half of the investments negotiated at B3 come from foreign investors, investors looking to reap good earnings and other benefits by investing in emerging countries’ enterprises. The new investment in these companies brings economic benefits beyond corporate expansion. With more jobs, more money circulates in the economy and increases consumption overall. “Brazil and B3 have been evaluated regarding regulation, infrastructure, processes and confidentiality. It is a great place to invest,” he says.

José Leoni, managing director of corporate consultancy Moneyminds Partners, says that foreign investors face a dilemma: In the US, the risk is lower but earnings are smaller, around 4% annually. The risk is higher in emerging markets, but profitability is also higher due to currency differences. So, for investors eager to earn more despite higher risks, Latin America is very attractive.

He is also confident about IPOs in the region. “This is the right moment, as companies had enough time to organize themselves internally before going public,” says Leoni. “The scenario couldn’t be more appropriate, with lower interest rates, companies prepared, and investors ready to invest their money.”

This is welcome news for investment banks, whose earnings fell 27% year-on-year (YoY) in 2023, the second consecutive year without an IPO on B3, after a 42% YoY revenue decline in 2022, according to data from consultancy Dealogic.

However, Latin American startups raised $2.5 billion in funding during the third quarter of 2023, according to a report published by financial data provider Sling Hub and Itaú BBA, with $1.5 billion coming from equity. An essential indicator to watch is total financing, which fell 26% YoY, including debt.

The Doldrums And Beyond

The dearth of Latin American IPOs started after Brazil’s Nubank fintech listed jointly on B3 and the New York Stock Exchange in December 2021. Before that, renewable-energy firm Raizen and oncology service provider Oncoclinicas had gone public the preceding August.

Meanwhile, Mexico had only one IPO in 2021, Chile’s largest IPO since 2019, and only the third on the nation’s new startup-focused ScaleX Santiago Venture Exchange.

In the 2021 Latin American IPO market, Brazil completed 53 listings, while Mexico had seen two other deals in 2020. Also in 2021, the Brazilian market raised the lion’s share of capital; $16.6 billion of the $18.7 billion regional total.

The stagnation began with the rise in the interest rate, which in Brazil, for example, went from 2% to 9.25% from the end of 2020 to the end of 2021. A similar scenario can be seen regionally. Mexico’s interest rate went from 5.5% to 10.5% between 2021 and 2022, while Chile’s rate rose from 4% to 11.25% during the same period. The average policy rate in Latin America stood at 18.9% at the end of 2022 but has since been falling.

Central banks generally use the policy interest rate to perform contractive or expansive monetary policy. The rise in interest rates is commonly used to curb inflation, currency depreciation, excessive credit growth, or capital outflows. On the other hand, by cutting interest rates, a central bank might seek to boost economic activity by fostering credit expansion or currency depreciation to gain competitiveness.

According to B3’s Resende, as fixed income became more attractive, the window of opportunity for IPOs closed. Yet interest rates stepped back in 2023, and companies took advantage of them to prepare for their IPOs. “Approximately 100 companies are waiting for the right moment to go public at the stock exchange, and we expect the majority of them in the second half of this year,” he adds.

On the other hand, the wars in Ukraine and the Middle East have brought uncertainty to the stock market and global economy. As a result, investors are more cautious; but the scenario is still optimistic due to the low influence of the conflicts on Latin American business.

Growing Investment

In a January blog post, S&P Global Market Intelligence observes that “Latin America is attracting significant and diverse foreign investment, particularly in the critical minerals, renewables and manufacturing sectors.” S&P adds that “a key indicator of investment dynamics will be the launch of bidding rounds in the Chilean lithium sector, and likely further lithium investment opportunities in Argentina.”

S&P expects “headline and core inflation to continue falling in 2024, although more slowly than in 2023. Further declines in inflation will support a less restrictive monetary stance in 2024, particularly in Brazil, Chile and Peru.”

“Most Latin American governments will maintain fiscal sustainability in 2024,” adds the post’s authors. “Indicators suggest low political appetite to return to prior policies of maintaining strongly expansionary fiscal policy combined with debt accumulation and, in some cases, excessive recourse to the central bank ‘money printing.’ Chile, Trinidad and Tobago, and the Dominican Republic will be among the strongest performers in terms of improving fiscal metrics.”

“The largest expenditure cuts across the region will take place in Argentina, where President Javier Milei has promised a reduction in government spending of at least 5% of GDP,” says S&P. “A slight fiscal deterioration is likely in Mexico, with the government likely to increase spending to complete flagship projects before the June presidential election.”

“At the regional extremes,” the S&P bloggers predict, “Argentina will remain in recession, while Guyana is set to grow rapidly in 2024.” Few IPOs are expected in Argentina this year as gross domestic fixed investment will likely fall by 1.7%.

This is a year for exports, especially given 2023’s poor performance, says Orlando Ferreres, former vice minister of the economy for Argentina and president of macroeconomic advisory Orlando J. Ferreres & Asociados.

Chile, Colombia, Argentina and Mexico are very small compared to Brazil—their aggregated stock markets are approximately the size of Brazil’s stock market, according to Moneyminds’ Leoni, who doesn’t expect IPOs in these smaller markets.

Alberto Ajzental, an economics professor at Fundação Getúlio Vargas, says that Brazil is not in its best shape but is on the right track. For him, the most important question for investors is: Who is going public? Overall, companies go public to expand and grow their businesses, which is favorable for investors, companies and the economy. However, some companies go public to pay debts, which in that case is not a good deal.

“It’s better to consider investments in sectors such as real estate, energy and sanitation for this year,” says Ajzental. “In Brazil, for example, retail is quite critical at the moment.” He highlights the latest IPOs, which had much lower values one year after listing. In this situation, follow-on was more attractive, as some were 70% lower than their initial offering, as happened to Nubank in 2021.