Nubank, backed by Buffett, tests tech fever in Latin America during its IPO

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(Bloomberg) – Venture capitalists are investing money in Latin American startups like never before, creating new regional giants, but raising questions about whether soaring valuations can hold up as regional economies slow .

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A major test is coming: Brazilian digital bank Nu Holdings, the region’s largest unicorn, is planning a first public offering next month, when it looks to surpass the $ 25 billion valuation reached in January. But the challenges add up, with a recent global rout in tech stocks leading Nubank, as the company is known, to consider lowering its valuation ambitions on the deal, Bloomberg News reported on Monday.

While a successful IPO would be a boon to its investors, including Warren Buffett’s Berkshire Hathaway Inc., it would also attract close scrutiny from competitors as it will serve as a benchmark for many transactions to come.

“Private equity investors buy into the idea that tech-empowered startups can grow aggressively regardless of a country’s economic performance,” said Pedro Pereira, chief technology officer for the Latin America at Bank of America Corp. “But companies need to be aware of the inflection point in their trajectory when scheduling their IPOs in a window in which there is also growth ahead for public investors.”

Multi-billion dollar startups such as delivery service provider Rappi, used car dealer Kavak and digital real estate broker QuintoAndar have already said they could pursue an IPO. Latin American fintechs could also follow Nubank’s path, notably C6 Bank, backed by JPMorgan Chase & Co .; Banco Neon, which is supported by General Atlantic; or the Mexican payment company Clip, in which SoftBank Group Corp. holds a stake.

But these companies would go public just as Latin America’s economy slows, with gross domestic product expected at 2.5% next year, lower than this year’s 6.7% and the average estimate of Global GDP of 4.4%, according to data compiled by Bloomberg. The forecast for Brazil, the region’s largest economy, is even lower, at 1.8%.

Despite the expected economic slowdown, the region has seen an increase in private investment in startups in 2021, although public stock markets have not followed. Startups in the region have raised a record $ 14.1 billion in private capital this year through Nov. 12, more than triple the amount for all of 2020, according to PitchBook. These companies have raised three times more in private capital markets than on public exchanges, either locally or in the United States, according to Pereira of Bank of America. For companies based in the United States, the ratio was closer to 1.5 times.

Nubank was initially looking to raise more than $ 3 billion in an IPO that could value it at $ 50.6 billion, according to regulatory documents. The company has considered accepting a lower valuation, but no decision has yet been made, according to people familiar with the matter.

Still, it is likely to become Latin America’s most valuable financial institution. While traditional banks in the region such as Itau Unibanco Holding SA are highly profitable, with returns on equity reaching nearly 20%, Nubank recorded a loss of $ 99.1 million in the nine months to September. .

“Tech startups can have much more efficient cost structures than incumbents, so investors are quite rational when setting higher rates of return for them in the future,” said Eduardo Miras, head of investment bank at Citigroup Inc. in Brazil, declining to comment on deals.

With nearly 700 million people and 8% of the world’s population, Latin America has proven to be an almost ideal environment for startups looking to shake up established businesses. 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 cell phones.

Tightly-held Latin American unicorns have become so valuable that local public markets are now too small for them. With a valuation of $ 30 billion in its last round of private investment in June, Nubank filed for its IPO in the United States. The Brazilian company, which also has operations in Mexico and Colombia, is the ninth largest unicorn in the world, according to CB Insights.

“The US markets are the largest and most liquid in the world, much deeper than any other,” said Eduardo Mendez, head of equity sales and capital markets for Latin America at Morgan Stanley. Another plus: Companies that plan to expand globally and potentially acquire more outside of their home country can raise funds in dollars, he said.

In the United States, it is also easier for investors to maintain a controlling stake with Class A and B shares. Nubank co-founder David Velez, for example, will hold 75% of the voting rights after the IPO. stock exchange, according to the prospectus.

Next year, even the resolve of private investors will be tested. Brazil is on the verge of holding presidential elections which should bring volatility. In Mexico, vulnerabilities are also mounting, including rising public debt. And interest rates around the world are climbing as central banks try to contain inflation, particularly hurting stocks of companies that rely on high future growth.

“If the volatility and uncertainty of macroeconomic and political environments increase in 2022, investors could lower their valuation expectations, especially in less liquid private markets,” Mendez said.

(Updates with the report on Nubank’s reduction on the deal’s price bracket from the second paragraph.)

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