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As Brazilian tech firms seek US listings, B3 looks for a way in

Brazil's IPO market is once again showing signs of life, but some of the country's biggest listings are opting for the U.S. market over the country's primary exchange operator, B3 SA - Brasil Bolsa Balcão.

B3 continues to garner the majority of Brazilian companies filing for initial public offerings, winning eight of Brazil's 13 IPOs in the past two years. However, the U.S.'s two big equity exchanges — the NYSE and Nasdaq Inc. — have won more large listings, including all three that hit above the $1 billion mark since 2018.

The trend is not lost on B3, and company executives have said that they are hoping to curb the so-called "market export" phenomena.

"If you talk about things that worry B3, those IPOs outside of Brazil are definitely on top of their mind," Guilherme Machado, a financial institution director with S&P Global Ratings, said in an interview.

But some argue that there is a limit to what they can do about it.

The three billion-dollar Brazilian IPOs in recent years — XP Inc., StoneCo Ltd., and PagSeguro Digital Ltd. — are all tied to the financial technology space. XP, which recently closed a $2.25 billion IPO on Nasdaq, is a prominent digital broker in Brazil; both PagSeguro and StoneCo, which raised $2.61 billion and $1.50 billion in their 2018 IPOs, respectively, are players in the digital payment processing business.

Industry experts point out that for tech-focused companies, U.S. listings — particularly Nasdaq — just make better sense: They have a far larger pool of sophisticated investors who understand tech business models and are willing to invest; and they have a greater number of peers against which their valuations can be compared.

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Those factors allow for a more liquid trading environment, which can help drive up share prices. XP, StoneCo and PagSeguro are all currently trading well above their initial offering prices.

As such, "those really large deals are out of their scope," Machado said. "It is going to be very difficult for them to do something to attract those players."

Secondary listing potential

But with Brazil's fintech space growing rapidly, B3 executives are still working to get a piece of the pie.

"We have to be quick to attract these companies again," B3 CEO Gilson Finkelsztain reportedly said last year. The company is looking specifically at the potential of these large companies having complementary listings on B3 using Brazilian depositary receipts, or BDRs.

Similar to ADRs in the U.S., BDRs are Brazil-traded securities with backing from shares issued in foreign markets. Issued locally, they enable Brazil-based investors to indirectly hold shares in the company headquartered abroad.

Finkelsztain called BDRs "the first step" in a wider plan to better attract tech players.

However, for companies like XP and StoneCo to do so, Brazil's market regulations will have to change. Currently, foreign-listed corporations which have the bulk of their assets in Brazil are barred from issuing BDRs. In December 2019, securities commission CVM launched a public review process of new investing rules that would allow Brazil-based companies to issue their own BDRs domestically.

"That would actually be a good thing for B3," Farooq Khan, a senior analyst with Moody's, said on the proposal. "Although they missed the initial IPOs abroad, they could get volume on trading for these instruments in the domestic market."

Such a move could help further boost B3's revenues streams, which already have benefited from a solid recovery of domestic capital markets overall. There were roughly 79 billion Brazilian reais worth of follow-on offers in 2019, while average daily trading value hit a record 22.92 billion reais in December 2019.

That momentum is expected to continue into 2020, with several IPOs already in the pipeline, including those of CAIXA Seguridade SA and Banco BV. Overall, B3's Finkelsztain expects between 20 and 30 new offerings this year.

"What B3 can do is maintain its leading position in the Brazilian market, which it does," Khan said.

As of Jan. 27, US$1 was equivalent to 4.23 Brazilian reais.