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July 12, 2019

Goldman Sachs looks to capitalize on new opportunities in Latin American fintech, Finance Chief’s Resignation Deepens Doubts in Mexico, and more from Latin America

Goldman Sachs looks to capitalize on new opportunities in Latin American fintech

Goldman Sachs Group Inc.’s special situations group is looking to invest in fintechs across Latin America, among a few other industries in the region.

The interest in Latin American startups is driven in part by Goldman’s successful investments with Nu Pagamentos SA, widely known as Nubank. The firm reached a $3.6 billion valuation in a fundraising round last year.

Founded in 2013, Nubank is already the fifth-largest credit-card issuer in the nation, with 10 million clients. Back in 2016, Goldman loaned Nubank 200 million reais ($53 million USD), and later expanded the credit line to 455 million reais in a deal with Fortress Investment Group in August 2017.

Earlier this year, Goldman’s situations group agreed to provide Mexico’s Credijusto Inc. with a $100 million facility to support lending to small and midsize enterprises.

Goldman Sachs isn’t alone in spotting Latin American opportunity, however. According to a study by the Inter-American Development Bank and Finnovista,  the number of fintech startups in Latin America jumped from 703 in 2017 to 1,166 in 2018. Furthermore, LAVCA reports that the industry attracted about $695 million in venture capital through 161 deals from 2017 through 2018.

The group has already completed over 15 deals in the region including investments in equity, debt and hybrid securities. In 2016, Morgan Stanley’s former co-head of Latin America investment banking, Marcelo Naigeborin, was hired by Goldman to manage the business in Brazil.

According to Gaurav Seth, a partner who heads the business in the Americas, the group provides capital to companies from startups, or “early-stage clients,” to firms that are “facing stress and need help”. (Bloomberg).

“What we can do is basically help companies that fall out of the traditional banking sector, don’t have enough of a track record, don’t have enough of a history, or may not be large enough. Latin America is a significant focus for us and a significant area of future growth,” Seth said.

FOMO’s underlying role in last week’s EU-Mercosur Agreement

Last week on June 28th, two trading partners captured access to each other’s markets as Mercosur- a customs union comprising Argentina, Brazil, Paraguay and Uruguay- agreed to a new trade deal with the European Union.

European companies will now be eligible to compete for government contracts within Mercosur. Customs procedures will also be increasingly simplified. Based on current trade patterns, the annual bill for tariffs on Mercosur’s imports from the EU should fall by over €4bn ($4.5bn), more than four times the equivalent sum for the deal the EU recently signed with Japan (The Economist).

While 9% of Mercosur’s tariff lines and 5% of the EU’s will remain above zero, a “standstill” clause commits the members not to raise any of the tariffs above an agreed rate; therefore allowing the EU to insure itself against South American countries’ protectionist tendencies. The Brazilian government called the deal a “bridging agreement”, intended to facilitate additional agreements with other nations.

“FOMO”, a motivating force behind trade deals, encompasses the idea of fear of missing out. If negotiators fail to grab new markets for their exporters, rivals may capture those markets first. In the past twenty years that the European Union and Mercosur have been in talks, the geopolitical and economic landscape have experienced substantial changes.

On July 1st, the U.S. threatened the imposition of new tariffs on $4 billion worth of imports from the EU as part of a continuing dispute over aircraft subsidies.But even if the U.S. does not feel fear falling further behind the EU- which leads the world as signatory to the largest number of trade deals (see chart below)- maybe other international governments will get the message.

Photo Courtesy of the Economist

On June 30th (two days after the EU-Mercosur Treaty announcement), the EU signed a trade deal with Vietnam; just days after President Trump threatened to impose nation with tariffs.

Finance Chief’s Resignation Deepens Doubts in Mexico

This Tuesday, Mexico’s finance minister, Carlos Urzúa, resignedin a shocking move seen as a blow to President Andres Manuel Lopez Obrador’s government (El Universal).

Urzúa’s surprise departure has “deepened doubts among investors over economic policy under President Andrés Manuel López Obrador, including fears he may eventually undermine Mexico’s financial stability” (The Wall Street Journal).

Urzúa accused the seven-month-old AMLO administration of enacting policies without sufficient evidence as well as conflicts of interest in appointing ministry officials.

Urzúa was seen as an economically prudent figure in the AMLO administration that has made promises of a dramatic departure from how the previous Mexico government was managed.

He disagreed with several of President Lopez Obrador’s decisions, including funding a new refinery at the state-owned energy firm Pemex and canceling construction of a partially built airport. The resignation came as Mexico has struggled to revive a sluggish economy (WaPo).

Lopez Obrador appointed Urzua’s deputy, Arturo Herrera, as his replacement (Council on Foreign Relations).

Brazilian Startups’ Preference for New York over São Paolo for IPOs

Last year, two of Brazil’s most promising fintechs, PagSeguro and Stone, chose the Nasdaq—the tech-specialized stock exchange based in New York—to list their shares. Meanwhile, Banco Interremains an outlier, however, as the only fintech that chose to hold its initial public offering (IPO) at B3, São Paulo’s stock exchange.

Contemplating overall technology or software companies, B3’s options remain limited. Consequently, B3 offers sparse coverage from specialized analysts or tech investors.  

While Brazil is working to combat the nation’s fiscal chaos, the precedent set by the first trailblazers in New York demonstrated to other businesses that it is possible to follow an alternative path.

Paulino Rodrigues, Brazilian startup Agibank’s CFO and Investors Relations Director, noted that going public abroad offers the advantage of having “access to a broader base of investors that do not trade on the B3,” which are also specialized in the technology business. Rodrigues also mentioned that due to the larger number of investors, the U.S. market liquidity is much higher than in Brazil, therefore helping shares reach higher prices (Brazilian Report).

An EY advisory firm report confirmed that last year, the three IPOs that took place at B3 amassed USD $2 billion in proceeds, with a median deal size of USD 801 million. On the other hand, NASDAQ and NYSE hosted 205 IPOs, with USD $52.8 billion in proceeds, and a median deal size of USD $111 million.

However, the process of going public in New York versus São Paulo tends to be much more extensive, as a result of more stringent legislation in the states.

A PwC report comparing IPOs in Brazil and the U.S. show that almost 73% of companies listed in Brazil needed less than six months to go public. In the United States, the same process takes about six to nine months, plus a preparation period of 12 to 18 months.

The report also shows that costs are higher in the U.S., ranging from 11.7% to 4% of the amount raised in the IPO, dependent upon the size of the offer. The bigger it is, the cheaper it gets. In Brazil, fees range between 5.6% to 2.5%.

Photo Courtesy of The Brazil Report

There are other costs to consider, including as stock exchange fees, legal advisors and even travel costs for executives. B3 charges about USD $17,300 only for the initial listing tax. On NYSE, this same fee ranges from USD $150,000 to USD $295,000, while NASDAQ charges between USD $50,000 to USD $295,000, depending on the company’s industry.

Brazilian health-tech Feegow Clinic raises R$20 million

Brazilian software company Feegow Clinic recently landed an R$20 million (approximately US$5.2 million) deal with DNA Capital, a Latin American healthcare venture fund.

Born in 2009, Feegow Clinic provides a SaaS to hospitals, healthcare institutions, and doctors to better manage day-to-day operations.

The company is working to revolutionize the entire industry, with a streamlined interface, that provides a holistic platform to store data and information, as well as interact with patients.

According to Contxto, “there are also databases for prescriptions, diagnostics, report templates, in addition to around 200 distinct features.” Additional capabilities include split payments, telemedicine, appointment scheduling, patient facial recognition, and direct authorization for agreements.. Clinics also have the ability to track transactions and monitor financials without having to switch back and forth between multiple platforms.

Mexican government questions fashion giant Louis Vuitton over possible culture appropriation

This Wednesday, French fashion brand Louis Vuitton said that the multinational corporation is in contact with Mexican artisans after the Mexican government criticized a new chair line over possible cultural appropriation: the second dispute of its kind between the country and the world of fashion.

In a brief statement emailed to The Associated Press, Louis Vuitton said,

“We are currently in a relationship with artisans of Tenango de Doria in the state of Hidalgo, Mexico, with the perspective of collaborating together to produce this collection”

The response came after Mexican Culture Secretary Alejandra Frausto sent Louis Vuitton a letter last week expressing “surprise” that a chair in the Dolls by Raw Edges line featured colorful embroidery motifs, with apparent similarities to the traditional Tenango de Doria.

Frausto expressed that the government felt obligated to “respectfully” ask whether the community and its artisans had been part of the project, and proposed “a work group where we dialogue as equals, business, government and communities” (The Seattle Times).

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