After a sluggish first half of the year, the primary equity market is starting to bubble in Latin America. Follow-on offerings are back. And an IPO could break the drought of deals as soon as the fourth quarter, led by Brazil and then Mexico, analysts say.

It’s been slow in Latin America’s primary equity market for the past two years, with fewer follow-on offers and even less initial public offerings. Brazilian digital bank Nubank pulled off the last major IPO at the end of 2021, raising $2.6 billion. Since then, global instability, rising inflation and high interest rates have curbed deals.

But that’s starting to change.

“Things are happening again,” says Marcello Lo Re, head of Latin American equity capital markets at Morgan Stanley in São Paulo.

Marcello Lo Re, Morgan Stanley

The first sign of this recovery is the pickup in IPOs in international markets since September, led by British chip design company Arm Holdings on the Nasdaq stock exchange. Grocery delivery start-up Instacart and advertising technology company Klaviyo have followed suit, a sign that companies once again are agreeing on IPO issue prices and investors are seeing the chance to make money.

“This is a good combination for both sides, for the sellers and buyers,” Lo Re says.

This new wave of IPOs in developed markets is expected to spill over into Latin America, probably starting next year, though maybe as soon as the fourth quarter of this year.

Traditionally the busiest market for IPOs in Latin America, Brazil has a “super healthy” pipeline for deals, Lo Re says. “We are seeing many more companies willing to reengage in IPO conversations. The companies are effectively feeling better about the environment. The momentum is getting better. Companies are willing to allocate time and investment to work on the transactions. It is just a matter of time to see IPOs taking place in the region and outside the region by companies domiciled here.”

There were only six IPOs this year through September 15, fetching $1.7 billion, according to data from Refinitiv. While that was up from $493 million on four deals in the year-earlier period, it paled compared with the 49 deals for $12.8 billion in the same period of 2021.

Follow-on deals have fared better. In the year through September 15, companies raised $13.3 billion through 34 deals, up 6% from $12.6 billion from 28 deals a year earlier and more than the $13.1 billion from 36 follow-ons in the same period of 2021, the data shows.

Back in the game

Evando Pereira, head of equities at Banco Safra in São Paulo, says that follow-on activity is “close to normal,” even after a quiet first half.

“There were some very high profile transactions year-to-date,” such as Brazilian retail warehouse chain Assaí Atacadista, car rental company Localiza, food producer BRF and power generator Companhia Paranaense de Energia, each for around $1 billion. “It’s a relatively normal market.”

Pereira says he expects more companies to do follow-ons in the fourth quarter in Brazil, with the potential of an IPO, followed by a growth in deals as the Brazilian central bank brings down interest rates to around 9% by the end of 2024 from 12.75% in September. The hike in rates to a peak of 13.75% in much of 2022 and 2023 from 2% in 2020-21 led to a flight of funds from equities to safer securities, in particular tax-exempt certificates of deposit now paying some 13% with inflation at around 5%.

But with rates expected to decline, “that should sustain the movement of money into equities again,” Pereira says. “We’re getting ready. We should have a relatively good year for IPOs in 2024.”

We’re getting ready. We should have a relatively good year for IPOs in 2024. EVANDO PEREIRA, banca safra

The recovery likely won’t match the boom of 2020 and 2021, when low interest rates helped spur 64 IPOs in Brazil alone, but it will be from a wide range of sectors, from health to infrastructure, oil and pharmaceuticals, Pereira says.

To fuel more growth in primary equity issuance, Pereira says a key is for foreign investment flows to increase again into Brazil following a period of steady outflows over the past year as investors took shelter in developed markets on concerns of global economic uncertainty.

“The missing link is flows, which have been erratic,” he says.

As the primary equity market recovers in Brazil, this should fuel deals in the region’s biggest markets, led by Chile, Colombia and Mexico, he adds.

Indeed, Mexico led the region’s IPO activity this year through September 15, with real estate developer Vesta Real Estate raising $446 million on the New York Stock Exchange, trailed by the financial institutions Banco Invex and Actinver picking up $364 million and $332 million on the Mexico Stock Exchange, respectively, according to Refinitiv.

More could come to market in Mexico, where nearshoring activities are booming and both issuers and investors are betting that a presidential election in 2024 will bring in a more market-friendly government.

Indeed, Mexico’s Xinfra Fibra E, an energy and infrastructure investment trust, is planning a follow-on offering in the local market for MXN25 billion ($1.46 billion) to finance the acquisition of energy and infrastructure assets, says CFO Lorena Barrientos. Xinfra FE raised MXN1.48 billion in an IPO in July 2022 to buy stakes in a toll road concession in Mexico. LF

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