For Brazilian shareholders, Nubank’s IPO has a bitter aftertaste

Welcome to The TechCrunch Exchange, a weekly startups-and-markets newsletter. It’s inspired by the daily TechCrunch+ column where it gets its name. Want it in your inbox every Saturday? Sign up here.

In 2021, we wondered whether Brazil could be in for an IPO bonanza. It hasn’t happened: Not only is Latin America’s largest economy going through the same IPO drought as the rest of the world, but also one of its highest-profile public listings, Nubank, is coming to a sudden end. Let’s explore. — Anna

What does it mean?

Nubank is one of Latin America’s preeminent neobanks, so when its parent company, Nu Holdings, decided to go public with a dual listing in New York and São Paulo, the operation was one of the most anticipated exits of 2021 among observers of Brazil and fintech.

There have been some bumps on Nubank’s road to IPO — for instance, when it repriced its shares from $11 to $9 ahead of its exit. But the fact that its debut on December 9 went okay and that its market cap, while down, hasn’t plummeted either, could be considered a relative success.

Fast-forward to last week, when surprising news emerged: “Nubank to Delist from Brazil’s B3 Stock Exchange,” a Bloomberg Línea headline read. There’s more nuance to it: As the article detailed, the fintech company will actually “restructure its Brazilian Depositary Receipts (BDRs) program with the conversion from Level III to I.” Confused? You are not alone.

Nubank’s decision is bad news for B3, and also unexpected. A post on B3’s financial education site, Bora Investir, doesn’t try to hide that “Nubank caught everyone by surprise.” The announcement left the stock exchange scrambling to explain what it means for retail investors, many of whom started trading recently.

As the Exchange previously reported, domestic retail investment rose significantly in Brazil, from fewer than 2 million accounts in February 2020 to close to 4 million in June 2021. Since then, Nubank gave this number another bump: A big part of its IPO marketing centered on turning its customers into shareholders, or NuSócios.

These customers/shareholders — more than 7.5 million people, according to Nubank — are now left wondering what will happen to their pedacinho (little piece) of the company.

What happens next will partly be up to shareholders themselves, Nubank explained. “Overall, current BDR investors will have three options: (i) exchange their BDR III for BDR I, (ii) sell their BDRs, or (iii) exchange their BDRs for the equivalent number of class A shares on the NYSE, if they are investors with trading accounts in the U.S.”

If you are still confused, let’s note that BDRs aren’t exactly stocks — they are certificates representing shares of foreign companies traded in Brazil. That’s true of all BDRs, but BDRs Level III correspond to a foreign issuer that is also registered as a publicly held company in Brazil. In contrast, Nubank noted, “top global technology companies — Google, Tesla, Facebook, among others — are registered with the SEC and trade in Brazil via BDRs Level I.”

In other words, Brazilian shareholders can still own shares of Nubank, but these will no longer be held by an entity that is publicly listed in their country. More importantly, the company wants to make it clear that they aren’t getting defrauded and that they have choices. Still, it wouldn’t be surprising if it turned newbies off from retail investment for quite a while. And this isn’t good news for tech companies that were hoping to go public in a country where only a very small fraction of the population of 216.6 million would ever consider such an investment in the first place.

Why is Nubank doing this?

Nubank’s justification is that restructuring its Brazilian Depositary Receipts will “increase efficiency and scalability.” Although it isn’t delisting just yet, it is set to request the cancellation of its foreign issuer registration with Brazil’s Securities and Exchange Commission (CVM).

According to Cristina Junqueira, co-founder and CEO of its Brazilian division, NuBrazil, Nu hopes to “[reduce] unnecessary duplicate workloads in regulatory requirements, which consume considerable resources.”

Improving governance has been a focus of Nubank for quite some time. Since going public, Nu Holdings made a number of changes in that direction, including to its management team. This August, it announced that former Amazon executive Alex Ceballos would take on the newly established role of chief corporate development officer, while its COO, Youssef Lahrech, also became the company’s president.

This management structure reshuffle was made necessary by Nubank’s scale, the company suggested.

“Since our founding in 2013, we have gone from being a credit card mono-liner in Brazil to being a multi-product, multi-geo financial services platform. This growth creates significant organizational challenges, and the time is ripe for us to shift gears internally and organize ourselves for the next decade of growth,” founder and CEO David Vélez commented at the time.

Nubank won’t report its Q3 2022 earnings until November, but the previous quarter saw the company pass some milestones. “Our largest operation — Brazil — is now profitable, having registered a net profit of $13 million in the first half of 2022,” Vélez wrote. As for Nu Holdings overall, it reportedly registered “a record US$1.2 billion in revenues” in the second quarter of 2022.

With the markets increasingly favoring profitability over growth, it is understandable that Nu would want to cut unnecessary costs. But its decision still represents an abrupt end to what we once thought of as a very clever marketing campaign — and that the company still frames as “one of the largest financial inclusion initiatives in the history of Brazil” (Junqueira’s words).

It is also worth keeping in mind that Nubank isn’t just a company: It is also a canary for still-private fintechs around the world, particularly in Latin America. Public exits in the region were already on pause for many reasons — some global, others local, such as 2022 being an election year in several countries, including Brazil, which goes to the polls on October 2.

Nubank’s decision is now another data point that leaves us wondering how long it will be before another Latin American fintech dares to IPO. And when that happens, we won’t be surprised if it’s solely through a U.S. listing.