Bloomberg — Venture capitalists are pouring money into Latin America’s startups like never before, minting new regional giants but raising questions about whether soaring valuations can hold as regional economies slow.
A major test is coming: Brazilian digital bank Nu Holdings, the biggest unicorn in the region, is planning an initial public offering next month, when it will seek to debut at twice the $25 billion valuation it achieved in January.
While success would be a boon for its investors, including Warren Buffett’s Berkshire Hathaway Inc., it has also drawn scrutiny as competitors look to capture some of that good fortune for themselves. The IPO for Nubank, as the company is known, will be used as a reference point for many upcoming transactions.
“Private capital investors are buying the idea that startups, empowered by technology, can grow aggressively regardless of a nation’s economic performance,” said Pedro Pereira, head of Latin America tech at Bank of America Corp.’s investment-banking business. “But companies should be mindful of the inflection point in their trajectory as they time their IPOs to a window in which there is also growth ahead for public investors.”
Multibillion-dollar startups such as delivery-services provider Rappi, used-car reseller Kavak and digital real estate broker QuintoAndar have already said they may pursue an IPO. Latin American fintechs could also follow Nubank’s path, including C6 Bank, backed by JPMorgan Chase & Co.; Banco Neon, which is backed by General Atlantic; or Mexican payments firm Clip, in which SoftBank Group Corp. has a stake.
But those firms would be going public just as Latin America’s economy is slowing, with gross domestic product expected at 2.5% next year, below this year’s 6.7% and the average estimate for worldwide GDP of 4.4%, according to data compiled by Bloomberg. Forecasts for Brazil, the biggest economy in the region, are even weaker, at 1.8%.
Despite the expected economic slowdown, the region saw a surge of private investments in startups in 2021, though public equity markets failed to keep up. Startups in the region raised a record $14.1 billion in private capital this year through Nov. 12, more than tripling the amount in all of 2020, according to PitchBook. Those firms raised three times more through private equity markets than they did via public stock exchanges, either locally or in the U.S., according to Pereira at Bank of America. For U.S.-based companies, the ratio was closer to 1.5 times.
Nubank is looking to raise more than $3 billion in an IPO that could value it at $50.6 billion, according to regulatory filings, more than any other financial institution in Latin America. While the region’s traditional banks such as Itau Unibanco Holding SA are highly profitable, with returns on equity as high as almost 20%, Nubank posted a $99.1 million loss in the nine months through September.
“Tech startups can have cost structures much more efficient than incumbents, so investors are pretty rational when pricing higher return rates for them in the future,” said Eduardo Miras, head of investment banking at Citigroup Inc. in Brazil, declining to comment on specific deals.
With almost 700 million people and 8% of the world’s population, Latin America has proved to be an almost ideal environment for startups looking to upend established companies. Financial services are expensive and only available to a fraction of the population, there are bureaucratic barriers everywhere and a high percentage of people own mobile phones.
Closely held Latin American unicorns have became so valuable that the local public markets are now too small for them. With a $30 billion valuation on its last round of private investments in June, Nubank filed its IPO in the U.S. The Brazilian firm, which also has businesses in Mexico and Colombia, is the ninth biggest unicorn in the world, according to CB Insights.
“U.S. markets are the largest and most liquid in the world, much deeper than any other,” said Eduardo Mendez, head of equity sales and equity capital markets for Latin America at Morgan Stanley. Another advantage: Firms with plans to expand globally and potentially acquire others outside their home nation can raise funds in dollars, he said.
It’s also easier in the U.S. for investors to keep a controlling stake with Class A and B shares. Nubank co-founder David Velez, for example, will hold a 75% voting stake after the IPO, according to the prospectus.
Next year, even private equity investors’ resolve will be put to the test. Brazil is set to hold presidential elections that are expected to bring volatility. In Mexico, vulnerabilities are also adding up, including rising public debt. And interest rates around the world are climbing as central banks try to contain inflation -- particularly hurting shares of companies that count on high future growth.
“If volatility and uncertainty in the macro and political environments increase in 2022, investors may reduce valuation expectations, particularly in less liquid private markets,” Mendez said.