Why Are Big Latin American Startups Delaying Their IPO Plans?

SoftBank and Endeavor Catalyst say that companies such as Colombia’s Rappi, Mexico’s Clip and Brazil’s Creditas could debut on the stock exchange this year

Nubank's co-founders David Vélez, Cristina Junqueira and Edward Wible.
March 30, 2023 | 11:51 AM

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Bogotá — According to investment management firm SoftBank and the Endeavor Catalyst fund, there could be a wave of IPOs by Latin American startups once the markets “reopen” toward the end of this year or in early 2024.

In an interview with Bloomberg Línea, the global head of Endeavor Catalyst, María Angélica Enríquez, said that at least a dozen startups from the region were ready to debut on the stock exchange, such as Colombia’s Rappi, Mexican company Clip and Brazil’s Creditas.

And now, SoftBank Latin America Fund’s managing partner, Juan Franck, has said that Rappi could launch an IPO in late 2023 or early 2024 is there is market stability.

He also named Clip and Creditas, and Kavak, MadeiraMadeira and Unico and possible candidates for IPOs.

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“Mature startups such as Rappi were on the road to an IPO before the current market shocks occured,” Franck told Bloomberg.

But why did Latin American startups delay their IPO plans, and what context awaits them should they decide to go public?

In an interview with Bloomberg Línea, the CEO of venture capital firm Cube Ventures, Santiago Rojas, said that the reduction in the number of IPOs for tech firms is due to the “valuation multiples that have dropped in the last two years, from an average of 8.8X sales to 3.7X”.

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Rojas adds that the valuation multiples are a key measure used by investors to evaluate a company’s growth potential and determine its value in the public market.

Thus, “when valuation multiples are high, companies can raise more capital in an IPO and investors get a higher return,” he says.

However, Cube Ventures perceives that in recent years there has been a decrease in valuation multiples for technology companies due to global economic uncertainty and the increase in interest rates by the largest central banks in the world. like the Federal Reserve.

“This has led technology companies to be more cautious when considering an IPO and opt to stay in the private market for a longer period of time until valuation multiples are more favourable,” Rojas said.

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In the view of the co-founder of the technology-based startup accelerator Pygma, Daniel Ospina, the postponement of startups’ IPOs is in response to the rise in interest rates, the situation with global markets and the pressures faced by stocks in the midst of the turmoil in the banking sector after the collapse of Silicon Valley Bank (SVB).

He also cites the effects that the technology sector is suffering due to the lower availability of venture capital.

“All this mix of factors means that these are not optimal conditions to go public, especially when consumer sentiment is shifting towards more traditional savings themes and less exposure to technology. I think that when the stock market recovers and when the international market recovers, there will definitely be an increase in the number of IPOs that we are going to see,” Ospina said.

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In his opinion, Latin America continues to be a region “with very few startup IPOs”, and the probable wave of IPOs would generate “a great impact for better or worse, depending on how the shares do in the first few months of listing.

“But the Latin American market definitely lacks greater liquidity in terms of being able to have more exits in the portfolio, and I think this is a great sign for future investors that there can be IPOs by local companies and generate that liquidity that so many investors are looking for,” he said,

For his part, Cube Ventures’ Santiago Rojas says that despite the possible reopening of the markets, it is difficult to predict what will happen.

“It is like trying to see the future without an oracle,” he said. “However, I believe that a rebound in financial markets is coming from the moment the Federal Reserve stops raising interest rates, since this has been what has happened in every financial crisis of the last 40 years: in 1987 , in 2001 and in 2008. This tells us that the best time to invest in startups again will be from the moment the rates stop rising. It will be a sign that investing in CDTs or other low-risk instruments is no longer going to be attractive enough, so there will once again be opportunities in venture capital that investors will not want to miss out on,” he said.