Fees on the Nubank IPO were among the lowest of the year, Bloomberg revealed this week. Of the $2.6 billion the Brazilian fintech’s parent company, Nu Holdings, raised in the operation, only 1.6% are going to its underwriters, which included Goldman Sachs, Morgan Stanley, Citigroup and others.
“Among 490 IPOs in the U.S. so far this year, only three paid a smaller percentage,” Bloomberg noted.
The Brazilian press was quick to report that Nubank got itself “a bargain.” Their term, but it did indeed land a better deal than three other Brazilian fintechs that went public before it did: PagSeguro, which IPO’d on the New York Stock Exchange in 2018; StoneCo, which shed a lot of value since its 2018 IPO; and broker XP, which went public in 2019.
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According to Bloomberg, these respectively paid 2.4%, 3.6%, and 4.3% in fees. The difference is also stark in absolute terms, with Nubank set to pay $41.6 million in commissions and discounts, compared to $83.2 million for XP.
While this might speak of Nu’s bargaining power — and that its exit was one of the hottest operations of the year — it got us thinking: Could it also be a sign of some of the changes we are planning to track in 2022? Let’s explore.
Hot or not
IPO fees are subject to market dynamics. But it’s not merely the total fee percentage that matters; other elements can also show a company’s market strength viz banks competing for its IPO business.
For example, when DoorDash went public just over a year ago, The Exchange noted that the company had “no shares set aside for its underwriting banks to buy at its IPO price.” Normally, underwriting banks get the option to purchase a block of shares at a company’s final IPO price if they so choose. This gives the banks something akin to an avenue to free profit if the company they are helping take public performs well.
Briefly: If underwriting banks secure access to, say, 5 million shares in an IPO, and the company prices at $20 but opens at $30, the banks can lock in a neat $50 million. Obviously, it’s more complicated than that, but illustrative math can deobfuscate.
More importantly, when DoorDash opted against reserving shares for its underwriting banks, the company was effectively telling the market that it was a hot deal and that it had managed to get a pretty cheap IPO put together in effective fee terms.
Nubank feels similar; its slim fee rate implies strong competition for its business. Which makes sense – after all, Warren Buffett is one of its backers.
But there is more than just individual round “hotness” determining IPO fees. The SPAC boom has provided public-ready private companies with a host of new paths to going public, given the sheer number of blank-check companies in the market looking for combination partners. So, more competition leads to falling fee rates.
Good news for startups? Yes. And there’s more: It’s not just applying to U.S. stock exchanges.
Global competition
Stock exchanges in the U.K. and Europe are competing against each other, and this includes efforts to make themselves more attractive to SPACs, we noted a few months ago. But with continental exchanges hoping to position themselves better in a post-Brexit world, it is fair to assume that this competition will also affect IPO fees.
There’s one more reason to think so: There are an increasing number of alternative or local markets on which tech companies can now consider listing – or at least double-listing. Again, look no further than Nubank: It double-listed on Brazil’s B3 stock exchange, which only recently emerged as a destination for tech IPOs. “[B]efore 2020, the technology sector was underrepresented at B3,” B3 representative Rafaela Vesterman Araujo told TechCrunch last August.
Luring retail investors
High-profile tech IPOs are particularly attractive for stock exchanges, we understand, because they lure more retail investors into the market. In Nubank’s case, 7.5 million “CPF” holders became Nu stockholders as part of the company’s NuSócios initiative to distribute Brazilian Depository Rights (BDRs) to clients, O Globo’s Capital blog reported. Brazil’s CPFs are individual taxpayers’ registrations, and therefore a proxy to count retail investors.
We don’t know how many of these are entirely new to stockholding, but it is likely a fair share, keeping in mind that the proportion of retail investors is much lower outside of the U.S. than inside of it.
As we reported last August, the number of Brazilian retail investors grew from fewer than 2 million in February 2020 to close to 4 million as of last June. Quite a significant increase, but still a very small fraction of the country’s 216.6 million population. And while this is partly due to glaring inequalities, the situation in less-unequal Europe isn’t that different, with direct retail investing more the exception than the norm.
With that in mind, the rise of individual investors is an important trend to watch. On one hand, it could give a chance to a wider range of the population to partake in tech’s financial upside. On the other hand, it could get them exposed to risks they might not understand. Which is another reason why it will be interesting to see the kind of SPAC regulations that European stock exchanges and their regulators come up with – it will be a balancing act for sure.