Fintech firms in Latin America are having a moment with the equity investing titans of the world, and debt investors are taking note.
Venture capital heavyweights including Softbank, Andreessen Horowitz and Sequoia Capital have boosted their equity investments in the region over the past six to 12 months, according to multiple industry sources. Strong equity backing, in turn, is attracting debt capital.
“We can’t really scale a debt investment unless the startups are well-funded” to protect investors from first-dollar loss, said Gordon Watson, a partner at Victory Park Capital, a fintech investor. “They need to be able to raise large equity lines in order to get large debt.”
In the past year and a half fintech startups in the region have attracted increasing volumes of global venture capital dollars. Venture capital investments in LatAm startups quadrupled to a record $2 billion in 2018 from $500 million in 2016, according to an annual review by the Association for Private Capital Investment in Latin America (LAVCA). Fintech firms captured nearly 25% of those investments.
“What we are seeing in, say, Mexico … is very different from a few years ago,” said James Sagan, managing partner at fintech investor Arc Labs. “So much has changed so quickly.”
While 2018 was a record investment year, the trend has accelerated this year. In March, SoftBank, the Japanese conglomerate, launched a $5 billion fund devoted solely to tech investments in LatAm companies, including fintechs.
“Something like that is really a game changer for companies, because they are going to have access to $500 million checks,” Watson said. “That wasn’t really something that existed a couple of years ago, most of the venture capital [rounds] were smaller.”
Victory Park, which has been an active debt investor in the online lending sector in the US, entered the LatAm market a few years ago, according to Watson. The firm is primarily investing in Mexican companies, but has plans to expand to Brazil and Colombia.
Because there is less investing competition in Latin America than in the US, debt providers are still able to snag double digit returns investing in online consumer and SME (small-to-medium enterprise) lenders, according to both Watson and Sagan. That’s compared to 6%-7% returns from similar investments in US lenders. Sagan’s Arc Labs — which recently pivoted to primarily investing in LatAm fintechs — is close to closing on three or four debt deals in Mexico, and one more in Brazil.
With a fresh supply of capital, LatAm startups, in turn, are rushing to launch new products, expand their geographic reach and raise additional debt and equity rounds. Brazil’s online lender Creditas, for instance, plans to expand into Mexico by year-end, according to CEO Miguel Rodrigues. Creditas, like many other fintechs in the region, targets the underbanked population that has limited or no access to credit.
“In Mexico … 80% don’t have a credit card and 60% of people don’t have a bank account,” said Adalberto Flores, CEO of online consumer lender Kueski. “Credit access in Mexico is very difficult and we are trying to build a digital financial ecosystem around the Mexican consumer for easier availability of credit.”
The lender is on the lookout for a Series B equity funding round to expand its platform to other LatAm countries, Flores said.
Another fintech lender, Mexico’s Prestadero, plans to raise $5 million in equity and “some debt capital” by early next year to offer additional products, according to CEO Gerardo Obregón.
All three CEOs report increased interest from US-based debt investors, including large US investment banks, in recent months.
“US investment banks are spending a lot of time in the region … and seem more interested in LatAm deals today than in US deals,” Watson said.
Goldman Sachs, for instance, has reportedly directed its special situations group to keep a close eye on the region after its successful debt investment in Brazil’s digital bank Nubank, Watson said. “Other investment banks are following Goldman’s suit,” Watson said.
A Goldman Sachs spokesperson confirmed that the firm is actively investing in and seeking investments in fintechs in Latin America.