Goldman Sachs Bets On Latin American Fintech Startups & Other Investing News

News highlights the growth of Latin American fintech startups, including a recent investment by Goldman Sachs into Mexican startup, Konfio. We also discuss factors fueling Latin America’s digital banking boom.

Goldman Sachs Invests In Latin American Fintech Startup Konfio

Goldman Sachs made another bet on Latin American fintech; financing a secured credit facility of up to $100 million to Mexican startup Konfio Ltd.

Created in 2014, Konfio- which has served roughly 1 million clients to date- provides unsecured working capital to small and midsize companies. The platform uses technology to analyze credit behavior and collects other types of data to provide an immediate credit response to companies.

While traditional loans to small and midsize companies can take months before they’re approved and require collateral or guarantees, Konfio’s platform has the ability to make disbursements in as little as 24 hours.

According to CEO and Founder David Arana, Konfio’s interest rates are half those charged by the traditional banking industry.

“Technology also helps Konfio keep non-performing loans under control. The delinquency rate on the firm’s loan book was 4.8% in 2018, compared with 5.4% for the banking industry,” Arana told Bloomberg.

Konfio received its first round of funding in April 2016 from Jaguar Ventures, Kaszek Ventures, QED Investors and Accion Frontier (a fund managed by Quona Capital). In October 2017, the startup raised a second round of funding from the International Finance Corp., the financial arm of the World Bank. In July 2018, the company took in both debt and equity investments from investors including Vostok Emerging Finance, Victory Park Capital Advisorsand the IFC.

Use of Goldman Sachs' Capital

Goldman Sachs’ capital contribution will help Konfio lend roughly $250 million in the next 12 months. Arana told Bloomberg that the plan is to expand using guarantees or collateral, making it possible to do bigger loans than Konfio’s current average of $20,000. In total, Konfio has raised $43 million in equity and $260 million in debt, and also has access to credit from Bank of Nova Scotia.

The Konfio transaction was the first time Goldman’s structured finance, investment and lending business has provided a credit facility to a Latin American fintech.

“Konfio brings a unique approach to credit underwriting for a segment of the market that’s poorly served in Mexico and more broadly across the region,” Ram Sundaram, head of Goldman’s structured-finance, investment and lending business globally, said in an email.

The bank has previously made investments through its special-situations group in credit card lender Nu Pagamentos SA, widely known as Nubank. In 2016, Goldman loaned Nubank 200 million reais- $49 million USD- and expanded the credit line in August 2017 to 455 million reais in a deal with Fortress Investment Group. The entire loan has already been repaid.

Earlier this year, the bank’s special-situations group provided Mexican fintech startup Credijusto Inc. with a $100 million facilityto support lending to small and midsize enterprises.

Real Estate Startup QuintoAndar Raises $250M Series D Led By SoftBank, Becoming Brazil’s Newest Unicorn

São Paulo-based real estate startup QuintoAndar has raised a $250 million Series D round. SoftBank Group International led the round, alongside existing backers General Atlantic and Kaszek Ventures. Dragoneer Investment Group also participated in the round as a new investor.

This recent round of funding brings the company’s total raised to over $335 million, and comes just nine months after its $70 million Series C round (Crunchbase).

CEO Gabriel Braga and CTO André Penha came up with the idea for their company after getting their MBAs at Stanford University. QuintoAndar (which is translated to “Fifth Floor” in Portuguese) was created in response to Braga’s “personal nightmare” of an experience with renting an apartment in São Paulo (CrunchbaseNews).

The company saw its revenue surge more than threefold last year, and has tripled its number of employees to an impressive team of 1,000. On average, Konfio closes over 4,500 new contracts per month.

Last year, the company began expanding its offerings to more regions in Brazil. Today, the platform is present in 25 cities and nine metro areas throughout the country. QuintoAndar recently began partnering with Brazil’s leading brick-and-mortar real estate agencies. Fifteen brokers are currently working with company “to provide landlords with personal face-to-face support.”

Growth Plans With New Investment

With this new capital infusion, the company plans to continue growth within Brazil and also start expanding beyond its home country.  

In a prepared statement, Marcelo Claure, CEO of SoftBank Group International, stated,

“QuintoAndar makes it easier for people to quickly find homes and for landlords to better manage their properties,” said“The company is at the center of a global transformation of the real estate industry.”

Earlier this week, Reuters reported that Softbank is “in talks” with various venture capital firms in Latin America to invest hundreds of millions of dollars in their funds, a move “likely to speed up spending of a $5 billion regional venture capital fund”.

Thus far, Softbank has only announced direct investments. Their Latin American-focused fund has injected capital into Colombian delivery app Rappi, Brazilian lender Creditas, gym membership app Gympass and Mexican payments startup Clip.

SoftBank executives told fund managers it intends to deploy roughly $500 million in five to 10 funds, one source told Reuters.

Mexican Government Injects $5 Billion into State Oil Company Pemex

This Wednesday, ratings agencies gave a cautiously positive assessment of Mexico’s $5 billion cash injection into state oil company Pemex.

This move was the latest of the President’s efforts of plotting a brighter future for the cash-strapped oil and gas producer. Reuters reported that the $5 billion aid package appeared to be in addition to a $4.4 billion contribution, including cash and tax relief, unveiled in the government’s 2020 budget plan last weekend. The company is the most indebted major oil producer.

S&P Global Ratings, one of the three major credit agencies, described the cash injection positively, saying it underscored the “overarching and unconditional federal support” for Pemex (Reuters).

Despite a positive initial reaction, these assessments do not eliminate the risk of another downgrade of its bonds to speculative grade in the upcoming few months. In June, Fitch became the first agency to downgrade Pemex debt to junk. Another downgrade by Moody’s forced some investors to sell billions of dollars of Pemex bonds.

Burdened with over $104 billion of financial debt and declining output, Pemex said it plans to use the capital for the prepayment of bonds that mature in 2020 and 2023. The company will  also issue new bonds in maturities of seven, 10 and 30 years to refinance short-term debt. A value was not given for the new bond placements.

According to Bloomberg, Pemex said that it would not increase net debt this year or next. However, the global drop in interest rates over the past few months has opened an attractive window for refinancing.

As demonstrated in the figure below, Pemex had $14.6 billion of debt coming due over the next 12 months, according to its second-quarter report. The company’s nearly $3 billion of bonds maturing in January 2021 fluctuated after Bloomberg’s report, climbing 0.05 cent to 101.78 cents on the dollar.

Mexican Oil Company Pemex Bonds

Some analysts have said that the Mexican government’s latest support for Pemex may only buying time until a more comprehensive reform of its tax obligations is established. Otherwise, additional government cash injections will ultimately harm the government’s own creditworthiness.

“Any recurring support (the government) can provide, absent a fiscal reform, will cost the sovereign a deterioration in the fiscal deficit, which causes a sovereign downgrade, which will eventually lead to a Pemex downgrade. There is no way around a Pemex downgrade except to do a fiscal reform and they still don’t seem to be in favor of doing that, ” said Shamaila Khan, head of emerging market debt at AllianceBernstein.

Fashion Giant H&M Suspends Leather Purchases From Brazil Over Amazon Fires

Last Friday, fashion retailer H&M said it will suspend leather purchases from Brazil to ensure it is not supporting cattle farming that may be contributing to the fires in the Amazon rainforest.

The Swedish clothing company said its temporary ban on leather from Brazil will remain in place “until there are credible assurances that the leather does not contribute to environmental harm in the Amazon” (U.S. News).

This move may be more about the fundamental message than the business impact, however. H&M reportedly sources the vast majority of its leather from Europe, and only a small fraction of its materials from Brazil. The group has been moving away from using materials derived from animals over the past few years. In 2017, less than 1% of the company’s clothes were made of leather; using synthetic leather products five times as much as real leather.

H&M’s announcement follows a similar decision by VF Corp., the maker of Vans and Timberland. Various international investors are also trying to put pressure on the Brazilian government, which has been viewed as “too lax” in its approach to protecting the rainforest.

VF Corp. stated it will not purchase leather and hide from Brazilian suppliers until it’s assured that the materials "do not contribute to environmental harm in the country.” Five percent of the company’s leather used for their products is purchased from Brazil.

Amore and Rosas: The Sustainable Clothing Startup that Employs Mexican Artisan Women

In 2016 when Debra Broberg and Laura Melendrez graduated from the Yale School of Management’s Master of Advanced Management program, their socially conscious clothing line, Amor and Rosas, was still in its early stage startup phase.

This April, their clothing line- which features traditional and non-traditional, hand-made artisan embroidery- made its debut at Fashion Week Mexico City in April. Amor and Rosas is gaining international attention, popping up in the likes of Vogue in France and Germany, and select boutiques around the world.

Amor and Rosas is an “ethical, slow-fashion brand. The key components of our business model are social impact and environmental sustainability,” Brogas said in an interview with Yale School of Management.

Indigenous Mexican artisans execute the designs. The company, headquartered in Mexico City, pays these artisans ethical wages, and proceeds from sales are invested in their villages and in growing their artisan networks.

“Right now, we’re working with 84 artisans in seven villages,” said Melendrez, the company’s CEO.

Amor and Rosas uses natural fibers, like hemp and bamboo, and recyclable materials whenever possible. Although some textiles are imported, all the embroidery is done in Mexico. The company adheres to strict sustainability practices, while employing women who are traditionally underrepresented in business in Mexico.

“It’s a tiny space, but it’s our first one. And it’s so incredibly rewarding to see the artisans so happy, and to know we’re making a difference in their lives,” Melendrez said.

The company recently opened its own boutique in San Miguel.

Key Factors Fueling the Latin American Fintech Startup Boom

Taking into account that approximately 70% of the Latin American population is unbanked or underbanked, the region’s fintech startups are introducing innovative solutions to bring this informal economy online.

According to Visual Capitalists, the business opportunity that the unbanked sector represents in Latin America is estimated at roughly $34 billion.

Nubank’s digital banking offerings found an innovative way to tap into Brazil’s large, young consumer base with mobile-first banking services. With over 8.5 million customers, Nubank is now the largest digital bank outside of Asia. The company recently raised a mega-round of funding ($400 million) from U.S. investment firm TCV, making it the highest-valued, private digital bank in the world.

In Brazil alone, there are approximately 224 fintech startups, although it is not the only Latin American country with emerging innovative banking solutions. This year’s funding in fintechs across the region has already surpassed the total funding raised in Latin America in all of 2018 (Crunchbase).

The key trends driving this digital banking boom include:

1.An Increased Focus on Small Business

In Latin America, mobile banking can help reach SMBs (small and midsize businesses)  in rural areas, or simply provide them with a better way to access financial services without the need to visit a brick and mortar bank.

Access to credit has been a long-standing issue for SMBs in the region. Digital banks are able to use technologies such as machine learning to evaluate a business’ creditworthiness faster and more efficiently (i.e. Konfio’s business model).

2.Regulatory Pushes In The Right Direction

Many countries throughout the region are introducing new regulations that aim to level out the playing field between traditional financial institutions and the new fintech companies.

For example, Mexico recently introduced a new fintech law that provides a detailed framework on how financial services served through digital platforms are regulated. Regulatory initiatives are also in the works in both Chile and Brazil.

3.More Bank-Fintech Collaborations

Despite the clear benefits for banks to partner with fintechs, there is not yet widespread collaboration between the two entities in Latin America. This may change, however, as open banking— or allowing bank customers to share their transaction data safely with third parties— is gaining traction.

In Chile, the fintech association FinteChile is working to educate lawmakers on the benefits of open banking. As more banks open their APIs to third-party developers, there’s no doubt it will advance digital banking innovation throughout Latin America.

4.China’s Growing Fintech Influence

China- arguably the world’s fintech leader, especially in mobile payments technology- is a leading example for what the future of banking will look like.

For more, read this Crunchbase News article on how Latin American fintechs are finding inspiration from China’s mobile-first successes.

5.Latin America’s Race To Lead Digital Banking

Latin America is well-positioned to become an international leader in the digital banking space. The opportunities to attract unbanked or underbanked customers and integrate them into the system using mobile-first services are limitless.

An increasingly friendly regulatory environment, growing investments, and mobile-first successes in other emerging markets (such as China) prove that financial inclusion is a feasible reality for Latin America.

Argentinian Traders’ Loophole Generates 7% Returns in Minutes

Argentinian traders have found a loophole around President Mauricio Macri’s capital controls by  profiting off the difference between the US-Argentine peso exchange rate and the government’s new peso value.

The term “MEP dollar” refers to the buying and selling of bonds in different currencies. The official exchange rate of about 56 pesos to the US dollar is stronger than the “MEP dollar,” which stood at about 62.35 per dollar last Friday.

These trades take place as follows:

  • An investor exchanges roughly 56,000 pesos for $1,000 at a bank, and asks their broker to buy Bonar 2024 government bonds with the $1,000. (As of 12:25 p.m. ET Monday, these bonds traded at $45.56).
  • Next, the investor sells the bonds and receives roughly 62,300 pesos: leveraging the weaker exchange rate. This trade nets a profit of around 4,300 pesos, or 7.4% return.
  • As commission charged by the trade’s broker accounts for about 0.26%, the trade still yields a 7% (or better) return.

The sole limit to the bond trade is a $10,000 monthly cap on dollar purchases. “Some traders blew through their limit in one week,” Guardati Torti trader Federico Grand told Bloomberg.

This trade structure is virtually guaranteed to turn a profit. With central banks taking the expense through cash loss, however, the government is unlikely to keep the conditions that allow the trade to flourish.

Businesswoman Rose Marie Saab’s Role as a Key Player in the Colombian Oil and Gas Sector

Rose Marie Saab, president of Independence Drilling, is one of the most recognized business women in Colombia.

Based in Bogotá, Independence Drilling  provides drilling, maintenance, and reconditioning of oil and gas wells. The company specializes in the extraction and maintenance of underground water wells, water treatments, consulting in the integral management of water resources, and the drilling of stratigraphic wells for mining and hydrocarbons (The 961).

As a woman leader in the male-dominated oil industry, Rose has quickly expanded the organization into one of the most renowned companies in the drilling sector in Colombia.

To ensure its commitment to the environment, Independence Drilling became the first carbon-neutral company in the Colombian oil and gas sector. The company, with annual revenues of more than $100 million, stands upon four core values: sustainability, innovation, excellence, and ethics (The 961).

On the topic of sustainability, Rose Marie Saab told Home Magazine,

“Our goal is to have our operations working in more efficient ways so that spills are minimized and emissions are better controlled during the drilling process. Environmental regulations for our sector are rigorous; we are required to be compliant. But being environmentally responsible is also a corporate goal that has always been present within Independence.“

Interview with NXTP Labs’ Co-Founder and Managing Partner, Ariel Arrieta

Nathan Lustig sits down with Ariel to talk about the evolution of the tech ecosystem in Latin America, advice for founders, and lessons learned from being both an entrepreneur and investor.

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