Latin American and Caribbean markets, mired in initial public offering (IPO) woes for the past two years, are poised for new listings.
Leonardo Resende, superintendent of corporate affairs at the Brazilian stock exchange Brasil, Bolsa, Balcão (B3), notes that there are strong listing candidates that will go public in a few months from the healthcare, infrastructure, real estate and technology sectors.
Listing executives of various investment banks say that companies such as Pacaembu, 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 healthcare sector could go public in 2024.
Resende adds that more than half of the investments agreed to at B3 come from foreign investors, investors who want good returns and other benefits from investing in developing country businesses. New investments in these companies bring economic benefits beyond corporate expansion. The more jobs there are, the more money circulates in the economy and overall consumption increases. “Brazil and B3 were assessed for regulation, infrastructure, process and privacy. This is a great place to invest,” he says.
Jose Leoni, managing director of corporate advisory firm Moneyminds Partners, says foreign investors face a dilemma: In the US, the risk is lower but the returns are lower, about 4% a year. The risk is higher in emerging markets, but the returns are higher due to currency differences. Thus, for investors seeking to earn more, despite higher risks, Latin America is very attractive.
He is also confident in the possibility of an IPO in the region. “This is the right time because companies have had enough time to organize internally before going public,” says Leoni. “The scenario could not be more appropriate: lower interest rates, prepared companies and investors willing to put their money to work.”
This is welcome news for investment banks, whose revenue fell 27% year-on-year in 2023, the second year in a row without an IPO on B3, after revenue fell 42% year-on-year in 2022, according to consultancy Dealogic. .
However, according to a report published by financial data provider Sling Hub and Itaú BBA, Latin American startups raised $2.5 billion in funding in the third quarter of 2023, of which $1.5 billion came from equity. An important indicator to watch is total funding, which fell 26% year-on-year, including debt.
Depression and more
The shortage of IPOs in Latin America began after Brazilian fintech company Nubank jointly listed shares on B3 and the New York Stock Exchange in December 2021. Before that, renewable energy company Raizen and cancer services provider Oncoclinicas went public last August.
Meanwhile, Mexico had just one IPO in 2021, Chile’s biggest IPO since 2019, and only the third on the new startup-focused national venture exchange ScaleX Santiago.
In the Latin American IPO market, Brazil saw 53 listings in 2021, while Mexico saw two more deals in 2020. Also in 2021, the Brazilian market attracted the lion’s share of capital; $16.6 billion of the $18.7 billion regional total.
The stagnation began with an increase in the interest rate, which, for example, in Brazil from the end of 2020 to the end of 2021 increased from 2% to 9.25%. A similar scenario can be seen at the regional level. Mexico’s interest rate rose from 5.5% to 10.5% between 2021 and 2022, while Chile’s rate rose from 4% to 11.25% over the same period. The average interest rate in Latin America was 18.9% at the end of 2022, but has been falling since then.
Central banks typically use the interest rate to conduct contractionary or expansionary monetary policy. Raising interest rates is typically used to curb inflation, currency depreciation, excessive credit growth, or capital flight. On the other hand, by lowering interest rates, the central bank may try to increase economic activity by promoting credit expansion or depreciating the currency to improve competitiveness.
As fixed income has become more attractive, the window of opportunity for IPOs has closed, according to B3’s Resende. However, in 2023, interest rates dropped and companies took advantage of this to prepare for IPOs. “There are about 100 companies waiting for the right time to go public, and we expect most of them in the second half of this year,” he adds.
On the other hand, wars in Ukraine and the Middle East have brought uncertainty to the stock market and the global economy. As a result, investors become more cautious; but the scenario is still optimistic due to the low impact of conflicts on Latin American businesses.
Growing Investments
In a January blog post, S&P Global Market Intelligence noted that “Latin America is attracting significant and diverse foreign investment, especially in the critical minerals, renewable energy and manufacturing sectors.” S&P adds that “a key indicator of investment momentum will be the launch of trading rounds in the Chilean lithium sector and likely further lithium investment opportunities in Argentina.”
S&P expects “headline and core inflation to continue to decline in 2024, although at a slower rate than in 2023.” A further decline in inflation will support less restrictive monetary policy in 2024, especially in Brazil, Chile and Peru.”
“The governments of most Latin American countries will remain fiscally sound in 2024,” the authors of the post add. “Indicators point to low political appetite for a return to previous policies of maintaining tight expansionary fiscal policy coupled with debt accumulation and, in some cases, excessive recourse to central bank money printing. Chile, Trinidad and Tobago and the Dominican Republic will be among the leaders in improving fiscal performance.”
“The biggest spending cuts in the region will come in Argentina, where President Javier Miley has pledged to cut government spending by at least 5% of GDP,” S&P said. “Mexico is likely to experience slight fiscal deterioration and the government is likely to increase spending to complete flagship projects ahead of the June presidential election.”
“At the extreme,” S&P bloggers predict, “Argentina will remain in recession while Guyana will grow rapidly in 2024.” Argentina is expected to see few IPOs this year as gross domestic fixed investment is likely to decline by 1.7%.
This is the year for exports, especially given the poor performance in 2023, says Orlando Ferreres, Argentina’s former vice minister of economy and president of macroeconomic advisory firm Orlando J. Ferreres & Asociados.
According to Moneyminds’ Leoni, Chile, Colombia, Argentina and Mexico are very small compared to Brazil—their combined stock markets are roughly the size of Brazil’s stock market—and he doesn’t expect IPOs in those smaller markets.
Alberto Eisenthal, professor of economics at the Fundação Getúlio Vargas, says Brazil is not in the best shape, but is on the right track. In his opinion, the most important question for investors is: who will go public? In general, companies go public to expand and develop their business, which is good for investors, companies and the economy. However, some companies go public to pay off debt, which is not a good deal in this case.
“This year it is better to consider investments in sectors such as real estate, energy and sewerage,” says Eisenthal. “In Brazil, for example, retail is very important now.” He highlights recent IPOs that were much lower in value a year after listing. In this situation, subsequent offers were more attractive as some of them were 70% lower than the initial offer, as happened with Nubank in 2021.