Latin America Equity Issue: XP’s US$2.25bn IPO

IFR Awards 2020
3 min read
Stephen Lacey

Equity for all

Online brokerage XP’s US$2.3bn IPO in December 2019 typified the dramatic transformation of Brazilian capital markets away from traditional bank savings and into equities fueled by low interest rates and higher disposable incomes.

The offering, the third largest ever by a Brazilian company at the time, saw global coordinators Goldman Sachs, JP Morgan, Morgan Stanley, XP Investments and Itau place 83.4m shares at US$27 apiece, well above the US$22–$25 range and valuing XP at US$14.9bn, about 32-times projected 2020 earnings.

Of the 83.4m shares sold, pre-IPO backers Actis, General Atlantic and XP insiders sold a combined 40.8m shares, inclusive of a 10% all-secondary greenshoe option.

XP closed first-day trading on Nasdaq at US$34.46 and ended 2020 at US$39.67, expanding its valuation to 57-times 2020 earnings since going public.

“Not only is XP disrupting large incumbent commercial banks, but they are democratising access to capital across all products, from equities to mutual funds and insurance,” said Marcello Lo Re, head of Brazilian ECM at Morgan Stanley, stabilisation agent on the IPO. “They are helping educate consumers about investing.”

By September 30, XP had seen the value of retail assets under management swell to R$563bn (over US$100bn), up from R$350bn at the time of its IPO on a 72% year-over-year growth in the number of active retail clients to 2.65m.

These are early days in Brazil’s equitisation. By management’s own estimates, Brazil’s incumbent banks still have a roughly 90% share of assets under management, a block XP is chipping away at through a growing array of financial services supported by more than 7,000 independent financial advisers and recent entry into commercial banking.

XP’s IPO highlighted the disparity between incumbent and successor in several ways.

The decision to list in the US, while controversial in Brazil, served to highlight XP as an asset-light, tech-enabled financial services company.

Before launching public marketing, the company drove home that point through extensive pre-marketing to 25 institutions that netted an anchor order to purchase 5.5m shares on the IPO from Durable Capital Partners, the US investment firm founded in 2019 by former T Rowe Price star fund manager Henry Ellenbogen.

The public phase expanded the marketing effort to more than 200 institutions over just seven days, resulting in a nearly 90% hit rate that included participation from blue-chip funds such as Dragoneer, Fidelity, Norges Bank, Third Point Capital and T Rowe Price.

The biggest validation of value created was evident in a secondary sell-down by Itau Unibanco in December 2020 (that followed a sale by General Atlantic in June) that netted the Brazilian bank US$925m from pricing at US$39 per share, tripling the returns from its purchase of a 49.9% stake back in 2017. Itau, which purchased the initial stake just days before XP was scheduled to launch a B3-listed IPO, plans to spin off its remaining 41% XP stake to shareholders.

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