US-listed SPACs have a new target: Latin American tech companies

There has been an unprecedented IPO boom of tech companies in the Brazilian stock exchange, which is transformative for a market that was traditionally dominated by utilities, mining, oil and financial companies.

The trend continues to be strong; in February alone, growth companies like Bemobi, Westwing, Mobly and Mosaico went public. Mosaico, for example, was 20x oversubscribed and went up 70% on its first trading day. The same is true for other companies like Meliuz, Enjoei and Neogrid, up 173%, 53% and 74%, respectively, since their listing just a few months ago.

But what is even more surprising is that now, new special purpose acquisition companies (SPACs) are raising money in Nasdaq with a mandate to buy Latin American private growth companies, which would be completely unthinkable just a year ago.

The opportunity for SPAC mergers in the U.S. has become quite competitive, as almost 300 SPACs, which raised over $90 billion, are now competing to find deals before the deadline. As a result, it has become more common to see SPACs with global mandates seeking to acquire foreign growth companies and list them in the U.S. to benefit from better multiples.

Just in 2021, eight Asian-sponsored SPACs raised over $2.3 billion in the Nasdaq/New York Stock Exchange, already surpassing the entire volume of 2020. More recently, it looks like the activity level may pick up in Brazil, and, potentially, in other Latin American countries, with $1.1 billion of Brazil-focused SPACs coming into fruition.

Like in many Asian countries, ”blank check” companies are not allowed in Brazil because businesses are required to present at least three years of audited financial statements to be eligible for an IPO. As a result, Brazilian sponsors have also joined the trend and began to raise capital through SPACs listed in Nasdaq with a mandate to take Brazilian growth companies public — which means they would end up trading in the U.S.

So far, there have been only three IPOs of Brazilian-sponsored SPACs. The first one was HPX back in June 2020, and the last two took place in February, but there are still a few more in the pipeline. Alpha Capital was the last one to debut on Nasdaq, raising $230 million on February 23. Before them, Itiquira Acquisition Corp raised another $200 million early in February, which was 10x oversubscribed. All three SPACs have a mandate to invest in growth companies in Brazil and have collectively raised $650 million.

On top of that, there are more SPACs in the pipeline, including Softbank, which announced the LDH Growth Corp I (SPAC) that seeks to raise $200 million to acquire a Latin American growth company, as well as Dynamo, which announced plans to raise up to $400 million through Waldencast Acquisition Corp (SPAC).

In total, these SPACs would raise at least $1.1 billion, aiming to take Latin American growth companies public in the U.S. market. It is also worth mentioning that the average SPAC usually merges with a company at least three times its size, and, as a result, it is fair to estimate that this $1.1 billion raise implies at least $3 billion worth of market cap of Brazilian/Latin American growth companies coming into the U.S.

The effect that this can have on the American and the Latin American stock market is even more fascinating. Historically, public companies listed in emerging countries were composed of traditional-value companies from sectors like utilities, heavy industries, financials and energy.

However, the environment changed as the IPO of growth companies in places like Brazil boomed and the local stock market went through transformational changes. But now, local sponsors are raising “blank check” companies straight in the U.S. and listing businesses directly to a market that assigns higher multiples for growth — instead of listing locally and developing the domestic stock market.

This scenario can have a two-fold effect. First, the U.S. market can become even more diverse and global as leading sponsors throughout emerging markets resort to SPACs in the U.S. to list leading domestic companies.

Second, if this trend proves successful, then stock markets in emerging-market countries can become structurally stagnant and lacking innovation. In other words, the U.S. will become the go-to place for the listing of tech companies throughout the world and increase overall stock market concentration and inequality as successful growth companies in emerging markets see a U.S. listing as the logical next step.

That being said, there have been only a few SPACs so far with a mandate to buy Latin American companies, and none of them have found an acquisition target yet. The process is still in its early stages, and it is hard to forecast how much the SPACs boom in the U.S. can affect emerging markets and what the net impact would be.

Furthermore, there are still some threats to this trend, such as mergers of existing SPACs being less successful than anticipated, decreased demand in private investment in public equity, increase in interest rates, as well as a potential disruption in the U.S. equity capital markets. Nonetheless, these recent events are remarkable, and watching how they unfold will be intellectually stimulating.

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