Latin America Equity Markets | White & Case LLP
Strong performance in the era of the pandemic and a look around the corner
IPO activity in Latin America hit record levels in 2021, with the region’s largest economy carving out the lion’s share of the premium.
In the first eight months of 2021, Latin America recorded its strongest initial public offering (IPO) activity in the past six years. A total of 55 IPOs took place until the end of August. That is compared to 36 new emissions for all of 2020. All this in a year that has seen the region’s economy contract 6.9% due to the COVID-19 pandemic.1—The strongest contraction in the world.2
In addition, the volume of transactions in the first half (32 in the first half) also accelerated compared to the second half of last year, when 27 companies entered the market for the first time. Both value and volume have already exceeded every year since 2015, and, with more companies unveiling plans to enter the market, records may continue to be broken (see Figure 1).
This contrasts sharply with the general trend of the past decade, which has seen Latin American domestic markets struggle to attract new companies to go public, with capital from the US and European markets moving to emerging markets in Asia. -Peaceful.3 This means that the Latin American markets have remained concentrated around a relatively small number of listed companies largely dominated by groups of companies. The recent increase in IPO activity in Latin America is breathing new life into the global IPO scene.
In terms of value, the region also posted solid numbers: the 55 IPOs at the end of August raised $ 15.17 billion, an increase of 41% over the whole of 2020, where 10 , $ 8 billion had been raised.
The wide range of sectors that have seen significant IPO activity is also noteworthy. Since January 2021 in Brazil, there has been a steady stream of IPOs in more traditional industries such as oil and gas, financial services, transportation, and retail. However, we also saw activity in sectors such as healthcare with the IPO of Hospital Care Caledonia; mining with the arrival on the market of the Companhia Brasileira de Alumínio; technology when TC Traders Club SA was listed on the São Paulo Stock Exchange in July; and in telecoms with the arrival on the market of Unique Telecomunicações SA the same month.
Carnival IPO in Brazil
The Brazilian market dominated transactions in Latin America in the first half of 2021, with the country accounting for all but five IPOs that entered the market. The strength of the country’s new issue market reflects the broader rebound of the Brazilian economy in 2021. The International Monetary Fund (IMF) predicts economic growth of 3.7% in Brazil this year, followed by growth of 2 , 6% in 2022; this compares to an estimated drop of 4.1% over 2021 as a whole.
Market analysts also point to the strength of Brazilian stocks in the first half of the year, with the Bovespa stock index rising 8.4% in the six months leading up to June 30. This has seen national and international investors take an increasing interest in the country.
See the full image: IPO activity in Latin America (number of trades, value, market value 2015 – 2021 – September 1) (PDF)
Mexico is back
The Mexican IPO market has been slow in recent years. There have been a number of factors behind this, including the implementation of several regulatory policies that limit private investment in the energy sector and the slowdown in the COVID-19 pandemic. Mexican companies are therefore struggling to find adequate incentives to make offers. However, ongoing transactions demonstrate that investors (especially institutional investors, like AFORES, Mexican pension funds) have an appetite to invest in the equity market.
In 2020, BlackRock Inc. launched its iShares ESG MSCI Mexico ETF (ESGMEX), on the Mexican Stock Exchange (Bolsa Mexicana de Valores), which is the first ETF to track a sustainable index based on the Mexican market (the ESG Mexico ESG Select Focus Index). In the first months of its launch, this ETF reached $ 500 million in assets under management, mainly thanks to investments from AFORES.4
In May 2021, Sempra Energy, the Californian company that invests in energy infrastructure in North America (including Mexico, through its subsidiary IEnova) made an exchange offer on the Mexican Stock Exchange for shares of IEnova. As a result of this US $ 1.8 billion transaction, Sempra Energy now has its common shares listed on the Mexican Stock Exchange, trading as one of the few foreign issuers there.
In addition, in recent years, Mexico has become a hub for financial technology companies, in a country where a large portion of the population lacks formal access to banking and financial services. This trend was supported by the enactment in 2018 of Mexico’s FinTech Law, the first law of its kind in the region. It is likely that the tech sector, and fintech in particular, will drive IPO activity in Mexico in the coming years.
The effect of elections
Despite the recent track record, it makes sense to observe geopolitical factors in the region, which will accelerate or hinder IPO activity in the years to come. Recent research of around 9,500 IPOs that took place in 33 countries between 1995 and 2017 has shown that IPO underpricing is significantly more prevalent just before general elections.5 This underpricing effect tends to be less pronounced in developed democracies characterized by effective corporate governance.6 It has also been shown that IPOs tend to be fewer during election years.7
General elections are expected to take place in Brazil and Costa Rica in 2022, as well as a presidential election in Colombia that year. Legislative elections are also slated to take place in November 2021 in Nicaragua and Chile, with a legislative election scheduled in Argentina in the same month, and a general election in Honduras in December. Venezuela is also expected to hold municipal elections in the coming months.
Political uncertainty can also have a general depressing effect on IPOs for other reasons. If the uncertainty causes the country’s currency to weaken, it can lead to divestment, making it more difficult for IPOs to be successful. Likewise, if uncertainty drives up interest rates, stock markets will be negatively impacted and IPOs more difficult. Moreover, if central banks limit liquidity, economic growth will be depressed.
The fact that Brazil’s central bank found it necessary to hike interest rates three times between February and June illustrates growing nervousness over Brazilian inflation, which hit 8% in May, and new interventions could take place.
The impact of the pandemic
More generally, the uncertainties of the pandemic inevitably mean that further lockdown restrictions cannot be ruled out in Latin America. The World Health Organization (WHO) has warned that the number of cases is rising again in the region. However, traders quickly evolved to overcome the logistical challenges posed by the pandemic, becoming adept at executing IPO processes and roadshows virtually, without face-to-face engagement.
In general, however, short-term factors in Latin America seem to make cautious optimism the most appropriate sentiment regarding the outlook for IPO flows through 2021 and through 2022. Equities (ECMs) in Latin America are relatively small compared to developed economies, indicating significant growth opportunities as the region’s economies mature. Figure 2 shows this clearly, comparing market capitalization to gross domestic product (GDP) in various countries around the world.
View full image: Figure 2: Market capitalization of stock exchanges expressed as a percentage of nominal GDP (2021), in US dollars (PDF)
A bright prospect, albeit uncertain
Latin America’s IPO windfall over the past year is in line with global capital markets in general. More than 6,100 equity capital market offerings were released globally in 2020, a 33% increase from a year ago and an all-time high. ECM activity totaled US $ 1.1 trillion in 2020, a 56% increase from a year ago and the strongest annual period for global ECM activity since the record began in 1980.8
Despite the institutional, geopolitical and other challenges to overcome, the outlook for ECM activity in Latin America, including further IPOs, looks bright.
1 World Bank (2021), World Economic Outlook: Latin America and the Caribbean.
2 International Monetary Fund (IMF) (2021), Short-Term Shot and Long-Term Healing for Latin America and the Caribbean, available at: https://blogs.imf.org/2021/04/15/short-term- shot-and-long-term-healing-for-latin-america-and-the-caribbean /.
3 Organization for Economic Co-operation and Development (OECD) (2019), Equity Market Development in Latin America: Enhancing Access to Corporate Finance.
5 G. Marcato and C. Zheng (2021). Political uncertainty and underpricing of cross-border IPOs. Paper presented at the 2021 Annual Meeting of the European Financial Management Association, Leeds, England, June 30 – July 3, 2021.
6 HN Duong, A. Goyal, V. Kallinterakis and M. Veeraraghavan (2021), Democracy and Pricing of Global Initial Public Offerings. Journal of Financial Economics, available at: https://doi.org/10.1016/j.jfineco.2021.07.010.
7 G. Çolak, A. Durnev, and Y. Qian (2017), Political Uncertainty and IPO Activity: Evidence from the Gubernatorial Elections in the United States. Cambridge University Press. Published online December 4, 2017, available at: https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/physical-uncertainty-and-ipo-activity-evidence -of-us-governor-elections / 8F2EE62C6038B166F009987127269210
8 Refinitiv (2021), Global Equity Capital Markets Review 2020.
9 World Bank website, accessed September 19, 2021, available at: https://data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS ?.