Developments to keep an eye on: UBS and Banco do Brasil’s new partnership, Santander InnoVentures’ investment in Mexican fintechs and the coronavirus threat to economic growth in Latin America
Editor’s note: We set out to cover green finance and COVID-19 caused an upheaval. The digital edition reflects what went to printing press just prior to the extraordinary measures western governments have put in place to fight this pathogen. While green finance remains a relevant topic, we ask that you keep in mind the comments given by experts in preparation for this edition were given as a reasonable reflection of the world prior to the novel coronavirus derailing, temporarily, the flow of everyday life.
Santander InnoVentures, the Spanish bank’s venture capital fund, is eyeing more investment opportunities in Mexico.
Late last year the fund invested in Mexican financial startup Klar. It marked Santander InnoVentures’ latest investment in the country’s growing fintech sector. Klar, which offers digital alternatives to traditional credit and debit cards, announced at the time it had raised nearly $58 million, drawing a range of investors.
In an interview, Manuel Silva, a partner at Santander InnoVentures, says the investment reflected the continued growth of fintechs in Mexico. “Brazil has dominated the last two or three years, but Mexico is a rising star,” he says. “We’re looking at more companies there.”
“One of the things that surprised me from that deal is the amount of international entrepreneurs and start-up people that have moved to Mexico,” he says. “Something is brewing and I think it’s really positive.”
The London-based group is Santander’s $200 million corporate venture fund. It first launched in 2014 and has invested in some 25 companies, many of them fintechs.
But Silva says the fund is beginning to look beyond the financial services business. “Customer habits are changing and that is impacting the customer journey,” he says. “We are looking at the way people are buying online, accessing real estate and how people are moving around in terms of mobility with the idea that there is a bridge between that and financial services.”
Silva says the next step in Latin America’s fintech growth is the emergence of a regional company. “Historically the region has had a hard time creating regional fintech companies that are successful.”
Brazil’s Nubank has opened offices in Mexico and Argentina as part of a regional expansion. MercadoPago, the payments platform of e-commerce retailer MercadoLibre, is also operating in other countries. “Is the region ready for regional companies? This will be the first acid test.”
Silva says he’s watching for the emergence of other regional fintech firms. “I can see Colombia and Peru producing some of those companies,” he says. “Firms operating in smaller markets need to think more regionally because their local markets are so small. So I think the appetite for a company to launch regionally is higher than it used to be.”
TEAMING UP IN BRAZIL
UBS and Banco do Brasil are teaming up in an investment banking joint venture in Brazil.
The partnership, which is still pending approval from Brazil’s Central Bank, will also operate in Argentina, Chile, Paraguay, Peru and Uruguay.
Image: Manuel Silva, Santander InnoVentures
But UBS Brazil CEO Sylvia Coutinho says Latin America’s biggest economy will clearly be the focus for the new venture.
“We’re at an inflection point in the capital markets in Brazil,” she says. “There is a combination of reforms and interest rate levels that will bring a large amount of corporates to the capital markets who have never tapped the markets before.”
She says she expects the new venture to seize on the “the big opportunities” in both the debt and equity markets.
Brazil market watchers also expect cheaper financing in Brazil to spur an increase in M&A activity.
Under the arrangement, UBS holds a controlling stake of 50.01%, with state-owned Banco do Brasil, the country’s largest bank by assets, holding the rest. Coutinho points to Banco do Brasil’s deep corporate relationships as a big advantage in the tie-up.
“We are complementary,” she says. “We are combining a strong global bank with a large local bank with incredible reach. It’s the best of both worlds.”
LATAM’S CORONAVIRUS EXPOSURE
Latin America was already poised for a slower economic growth this year, but the spread of the coronavirus has left economists, investors and policymakers girding for broader potential economic consequences of the outbreak.
With China ranking as Latin America’s largest overall trading partner, risks were beginning to grow, possibly threatening global commodity prices, which in turn could hamper growth in the region.
Alberto Ramos, chief Latin America economist for Goldman Sachs, said in February he was maintaining his growth forecasts for the region’s biggest economists — for now.
“We are not, at this juncture, changing the real GDP growth forecasts for the main Latin American economies but acknowledge that the recent developments add downside risk to some of the regional economies, mostly Brazil, Chile and Peru,” he said.
Ramos noted that in many of the biggest exporting countries to China, exports were a modest share of GDP in absolute terms.
China is the largest trading partner for Brazil, Chile and Peru. Exports to China account for 3.4% of GDP in Brazil, 5.3% in Peru and 7.8% in Chile.
Primary sector goods and agricultural and mining commodities make up the bulk of Latin America’s exports to China.
“Latin America is more exposed to a broad decline in commodity prices than to China as an export market,” he said. “Most Latin American economies are significantly exposed to a loss of income if China’s headwinds to activity end up having a visible and lasting impact on commodity prices,” Ramos said.
Chile sends 50% of its exports to China, and since the outbreak started in December, global commodity prices have fallen. “We know that it is going to hit economic growth in China,” Chilean Finance Minister Ignacio Briones said. “But if it is controlled, then there will be a rebound that will make up for it.”
The International Monetary Fund (IMF) forecasts growth in Latin America of 1.6% in 2020. Overall growth in Latin America has hovered below 2% since 2013. This year, the IMF sees Colombia registering the fastest pace of growth at 3.5% among the region’s big economies.
However, London-based consultancy Capital Economics says fears about the coronavirus, which have weighed on global oil prices, has “clouded” the country’s near-term outlook.
“Even if – as we expect – the virus is brought under control soon and oil prices recover, growth probably will be a lot weaker than most predict in 2020-21,” it says. The group forecasts GDP growth of 2.8%.
SOFTBANK’S NEXT MOVES
SoftBank is planning to make $1 billion in investments in Latin America this year, focusing on health care, fintech and e-commerce companies.
The Tokyo-headquartered company launched its $5 billion Latin America Fund in 2019 targeting Latin American technology companies.
SoftBank Managing Partner Andres Freire, in comments to reporters in February, said the fund has so far invested in 17 companies and two venture capital firms totaling $1.6 billion.
The investments include Brazilian online lenders Banco inter and Creditas, Colombian delivery app Rappi, Argentine fintech Uala, Brazilian logistics company Loggi, among others.
Now, Softbank is paying “special attention” to several companies in Peru, Chile and Brazil, Freire said, without naming them.
The company has so far made more than half of its investments in Brazil.
Freire said SoftBank was continuing to also scope out start-ups in Colombia Mexico and Chile.
Freire added that SoftBank was also looking at the foodtech sector and companies using artificial intelligence.