Bloomberg — Investment bankers came up with an irresistible pitch about six years ago to entice Latin American companies to list in the US — the deep pockets of investors and their familiarity with new economy stocks.
With interest rates at historically low levels, Wall Street saw an unprecedented wave of listings from the region, from StoneCo Ltd. — that lured Warren Buffett’s Berkshire Hathaway Inc. and Alibaba’s billionaire founder Jack Ma — to PagSeguro Digital Ltd, whose business model was similar to Jack Dorsey’s Square. Dazzled by astonishing valuations and blockbuster deals, many smaller firms followed.
But reality painted a different picture.
Trading volumes disappointed, the stocks performed poorly and many analysts didn’t bother covering them, prompting some to refer to them as “orphans.” In some cases, the shares even traded at a discount to peers listed in regional exchanges. Now the tide is starting to turn and Brazilian education company Vitru has announced it’s set to delist in the US and move to a local exchange, while other companies revisit their US ambitions.
“There is no miracle,” said Gilson Finkelsztain, chief executive officer at Brazil’s sole stock exchange operator B3 SA. The go-go years around 2017 were “atypical” and combined a peak of optimism in the US with excessive pessimism in Latin America, he said. “In the end, there is a correlation, and when shares fall in Brazil, they also fall abroad.”
From Brazilian education group Afya Ltd. and alternative asset manager Vinci Partners Investments Ltd. to online travel broker Despegar.com Corp., over a dozen US-listed Latin American companies trade less than $4 million in shares a day.
Lackluster Returns
The underperformance is not much, but it is significant for many companies. On average, Brazilian stocks listed in the US in the past seven years are down about 39% since their debut through Sept. 6, compared with a 35% drop for companies that went public in Brazil between 2020 and 2021, according to data compiled by Bloomberg.
Take Inter & Co. Since the digital bank moved its primary listing to the US last year from Brazil, its average daily trading volume has slumped to $1 million from 82 million reais ($16.5 million).
When Latin American firms decided to list abroad starting around 2017, interest rates in the US had been close to zero for almost 10 years. Capital markets were booming as tech companies lured global investors seeking better returns. At the same time, Latin America’s biggest economy was experiencing a surge in political instability following the impeachment of Brazilian President Dilma Rousseff.
But then came the pandemic, followed by inflation and rising rates, and investors flocked to fixed-income instruments. Smaller regional companies with little-known brands got forgotten, and became the first to be sold by US investors.
“The lack of liquidity in the US weighs more than it does here,” said Cristiano Guimaraes, head of global corporate and investment banking at Itau BBA in Sao Paulo.
As a result, the group of Brazilian companies choosing the US route in the next IPO wave will likely be smaller, according to Roderick Greenlees, global head of investment banking at Itau BBA.
Turning Back
Cosmetics maker Natura &Co has shelved a plan to switch its primary listing to the New York Stock Exchange. At the same time, Dragoneer Investment Group and General Atlantic LLC have proposed a deal to take private education tech firm Arco Platform Ltd., which is traded in the US, because both funds think current valuations don’t reflect the firm’s real value.
For some companies, the US listing still makes a lot of sense. In the case of Inter & Co., the dual-class structure will allow its controlling holder to eventually sell more stock without losing control. JBS SA — the world’s largest meat packer that gets most of its revenues outside Brazil — is seeking shareholder approval for a planned direct listing on the NYSE.
Nu Holdings Ltd., which held one of the largest initial public offerings in the US in 2021, is covered by over a dozen analysts and trades over $148 million in shares daily over the past year.
“For companies that are really global firms and get most of their revenues from offshore markets, this discussion has some merit,” B3′s Finkelsztain says. “You’ve got to study all the nuances.”
--With assistance from Matt Turner.
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