NuBank IPO Fees: A Sign of Changing Times?

Nubank IPO Underwriter Fees Significantly Lower

Recent reports from Bloomberg indicate that the fees associated with Nubank’s Initial Public Offering (IPO) were remarkably low compared to other offerings this year.

The parent company of the Brazilian fintech, Nu Holdings, secured $2.6 billion through the IPO. Notably, only 1.6% of this amount will be allocated to the underwriters involved.

Fee Comparison to Other IPOs

This underwriting group included prominent financial institutions such as Goldman Sachs, Morgan Stanley, and Citigroup.

Bloomberg’s analysis reveals that, out of 490 IPOs in the U.S. to date, only three have incurred a smaller percentage in underwriting fees.

Nubank's Deal Compared to Brazilian Fintech Peers

Brazilian news outlets have characterized Nubank’s fee structure as securing “a bargain” in the IPO process.

This assessment is supported by a comparison to other Brazilian fintech companies that previously went public.

• PagSeguro, which launched its IPO on the New York Stock Exchange in 2018, paid 2.4% in fees.
• StoneCo, since its 2018 IPO, has experienced significant value fluctuations and paid 3.6%.
• Broker XP, which went public in 2019, incurred fees of 4.3%.

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Absolute Fee Differences

The disparity in fees is also evident when considering the absolute amounts paid.

Nubank is projected to pay $41.6 million in commissions and discounts, a substantial reduction from the $83.2 million paid by XP.

Implications for 2022

This favorable outcome for Nu Holdings may reflect its strong negotiating position and the high demand surrounding its exit.

However, it also prompts consideration of potential shifts in the IPO landscape that will be monitored throughout 2022.

The lower fees could signal evolving dynamics within the market.

IPO Fee Structures and Market Signals

Initial Public Offering (IPO) fees are influenced by prevailing market conditions. However, the overall percentage charged isn't the sole indicator of a company's standing; the level of competition among banks vying to manage the IPO also reveals crucial insights.

Underwriting Share Allocations as a Metric

Consider DoorDash’s public debut over a year ago. As reported by The Exchange, the company chose not to allocate shares to its underwriting banks at the IPO price. Typically, these banks are granted the opportunity to purchase a specific number of shares at the final IPO price.

This allocation provides banks with a potential profit margin should the company’s stock perform favorably after going public. For instance, if banks secure 5 million shares in an IPO priced at $20, and the stock subsequently opens at $30, they could realize a $50 million gain. While the actual process is more nuanced, this illustrates the principle.

DoorDash and Nubank: Signals of Demand

DoorDash’s decision to forgo share reservations for its underwriting banks signaled strong market demand and favorable IPO terms. A similar dynamic is observed with Nubank, whose reduced fee structure suggests intense competition for its IPO business. This is logical, given the backing of prominent investor Warren Buffett.

The Impact of SPACs on IPO Fees

Beyond individual deal “heat,” broader market trends impact IPO fees. The surge in Special Purpose Acquisition Companies (SPACs) has created alternative routes to public listing for private companies. The abundance of SPACs actively seeking merger partners has increased competition, leading to a decline in traditional IPO fee rates.

Global Implications

This trend of decreasing fees isn't limited to U.S. stock exchanges. The increased competition and alternative listing options are influencing IPO fee structures globally.

• Key Takeaway: Lower IPO fees often indicate strong investor interest and a competitive market.
• Underwriting Bank Allocations: The absence of reserved shares for underwriting banks can signal a highly sought-after IPO.
• SPAC Influence: The proliferation of SPACs has introduced more options and downward pressure on traditional IPO fees.

Competition Among Global Stock Exchanges

Several months ago, we observed that stock markets in the United Kingdom and across Europe are engaged in a competitive landscape. This rivalry extends to attracting Special Purpose Acquisition Companies (SPACs).

As continental exchanges strive to enhance their positions following the U.K.’s departure from the European Union, it’s reasonable to anticipate that this competition will also impact Initial Public Offering (IPO) costs.

The Rise of Alternative Listing Venues

Another factor contributing to potential fee adjustments is the growing number of alternative and regional markets available for technology companies to consider for listing – or even dual-listing.

The example of Nubank illustrates this trend; the company pursued a dual-listing strategy, including Brazil’s B3 stock exchange, which has recently become a viable destination for tech IPOs.

According to Rafaela Vesterman Araujo, a representative from B3, the technology sector was historically underrepresented on the exchange prior to 2020, as she explained to TechCrunch last August.

Implications for IPO Fees

• Increased competition among exchanges is likely to put downward pressure on IPO fees.
• The emergence of alternative markets provides companies with more options, strengthening their negotiating position.
• Post-Brexit dynamics are influencing the strategies of European exchanges.

The evolving landscape of stock exchanges presents both challenges and opportunities for companies considering going public. A wider range of listing venues can lead to more favorable terms.

Ultimately, the increased competition benefits companies seeking to raise capital through IPOs and SPACs.

Attracting Individual Investors

It is understood that prominent technology Initial Public Offerings (IPOs) hold particular appeal for stock exchanges, primarily due to their capacity to attract a greater number of individual investors to the market.

In the instance of Nubank, 7.5 million individuals registered with a Brazilian taxpayer identification number ("CPF") transitioned into Nu shareholders through the company’s NuSócios program. This initiative involved the distribution of Brazilian Depositary Receipts (BDRs) to its customer base, as detailed by O Globo’s Capital blog.

Brazilian CPFs serve as individual taxpayer registrations, functioning as a metric for quantifying the number of retail investors.

The precise number of these investors who are newly introduced to stock ownership remains unknown, however, a substantial portion is probable.

This consideration is particularly relevant given the significantly lower proportion of retail investors outside of the United States compared to within it.

Growth of Retail Investment in Brazil

As previously reported in August, the number of Brazilian retail investors experienced a considerable surge, increasing from under 2 million in February 2020 to approximately 4 million by June of the same year.

This represents a noteworthy expansion, yet still constitutes a relatively small percentage of Brazil’s total population of 216.6 million.

While socioeconomic disparities contribute to this, similar patterns are observed in less-unequal European nations, where direct retail investment remains uncommon.

Implications of Increasing Retail Participation

The increasing involvement of individual investors is a significant trend warranting observation.

It presents the potential for a broader segment of the population to benefit from the financial gains generated by the technology sector.

Conversely, it also exposes them to potential risks that they may not fully comprehend.

Consequently, the development of regulations concerning Special Purpose Acquisition Companies (SPACs) by European stock exchanges and regulatory bodies will be of considerable interest.

Navigating this landscape will require a delicate balance to be struck.

• Retail Investor Attraction: Tech IPOs are key to drawing in more individual investors.
• Nubank Example: 7.5 million CPF holders became Nu stockholders.
• Brazilian Market: Retail investor numbers grew significantly but remain a small fraction of the population.
• European Context: Direct retail investing is less common in Europe.
• Regulatory Considerations: SPAC regulations will be crucial for balancing opportunity and risk.