A Quick Look at Fintech Investment & Valuations in Brazil and the Americas

Over the last few years, Fintech has been the “it” sector in global startup ecoystems and venture capital. The investing play is based on the promise of future disruption, momentum and the potential of continued valuation exit highs. Globally, last year there were approximately 836 investments worth $12.7B in financing to venture-backed fintech startups. This was slightly behind the so far record of 2015 with 848 investments worth approximately $14.6B (CB Insights). So where are we so far in 2017 and where is the market going? Moreover what´s the outlook in Brazil and the broader Americas region?   

Global Snapshot – Onwards and upwards

After three relatively stagnant quarters, the global fintech market rebounded strongly in the second quarter of this year, with investment more than doubling quarter over quarter to $8.4 billion. While the number of fintech deals were below the 2015 peak, volumes remained robust. M&A activity is the main driver of sector liquidity. 

However, looking at VC-backed deals, total deal volume was actually over the peak of the third quarter and 2017 is therefore on pace to hit a new investment high. 

VC deal volume at the end of Q217 was also on track to approach last years total of over 1,000 deals, despite an ongoing slide in angel and seed-stage deal volume, which stretched to a fifth-straight quarter. According to KPMG, “the relative stability across other investment stages suggests that while there may be some caution in the VC market globally, investors remain interested in tangible fintech opportunities”.

Looking at the public fintech equity markets, stocks have seen strong performance. 

Furthermore, key financial metrics also continue to see upside pressure. Over the last 10 months, trailing firm and equity valuation multiples (EV/EBITDA +6% and P/E +27%) continue to move upwards as do top line growth projections, profitability and scaled growth-value indicators (for example PEG).  

Valuations continue to decline at the late-stage . Once again, the global median late-stage, post-money valuation fell during Q2’17, likely as a result of the scarcity of such late-stage deals in the fintech market globally, in addition to a normalizing of investor sentiment with respect to VC investment. Meanwhile, fintech exits increased during Q2’17, with the number of exits matching the second-best quarter experienced to date. While the total exit value remained relatively weak, the increase in activity may be a positive sign leading into the remainder of the year.

Americas – Positive outlook for regional fintech despite 2016’s funding contraction

According to KPMG, “after a very active 2015, total number of deals dropped significantly 2016, from 685 to 555. Meanwhile, value region fell more than 50% year-over-year, although 2016’s $13.5 billion investment remains the decade’s second highest volume. While venture capital and private equity funding to fintech companies both dropped in 2016, the real differentiator was the decrease in M&A activity, with just $8.5 billion in M&A deal value compared to $21.3 billion the previous year. 

Especially if the M&A cycle continues to wind down and the IPO market remains frigid, venture firms’ ability to achieve liquidity may come under even greater scrutiny. Accordingly, the fact that fintech exits remained steady — albeit for lesser total value — even as the broader exit market slowed, is promising.

In Q217, fintech investment in the Americas hit USD 5.7B over 147 deals

The second quarter of 2017 saw an acute uptick in the Americas region, driven in part by strong US based VC activity and the multi-billion acquisition of Toronto-based lending and payments software company, DH Corp. VC investment in the region remained relatively stable quarter over quarter, with over $1.6 billion invested (source: KPMG).  Despite the US being the largest investment market, other countries across the region are also seeing growing traction, especially in Canada and Brazil. 

Fintech in Brazil

Brazil is the largest Fintech market in Latin America, with over 200 startups divided into 16 key segments, compared to Mexico (158 startups), Colombia (77 startups), Argentina (60 startups) and Chile (56 startups), according to 2016 data from Finnovation. The largest sectors are Payments (31%) and Credit (12%). Leading fintechs including Nubank, Creditas, Banco Original and EBANX are driving innovation in the financial sector. 

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In Latin America and Brazil, a lack of banking services, high demand for credit and historically high interest rates has created a boom for entrepreneurs and investors seeking to develop fintech market leaders. Thus, the impact from fintech disruption is expected to be greater in Brazil than in many other countries because of its highly concentrated banking sector. According to Techcrunch, “while 85 percent of Brazilians now live in cities, 40 percent remain excluded from traditional banking systems. Brazilian consumers are seeking better alternatives to credit card rates in Brazil that are in the triple digits. The industry is one of the world`s most lucrative, with return on equity still at nearly 19 per cent for Itaú and 15 per cent for Bradesco in the first quarter of this year (the largest private banks in South America) even after almost three years of recession, according to data company Economatica, higher than US and European averages. Consumers in Brazil, Latin America’s biggest country, pay an average of 190 percent a year for unsecured overdraft, credit card and consumer loans with banks”. Even the reduction in central bank rates from 14.25% to 8.25% by September 2017, will impact spreads for banks and enhance opportunities for more efficiency. Smartphones are also broadly used in Brazil, with more than 60% of the population using the mobile devices, which in turn helps drive the spread  and delivery of fintech products and services in the country, as does growing internet access. There is also a lot of legacy infrastructure in the banking/financial sector, including many services that still run on COBOL, a computer programming language that has run on mainframes since 1959. COBOL is primarily used in finance and administration systems for financial services companies and governments.

In Latin America and Brazil, a lack of banking services, high demand for credit and historically high interest rates has created a boom for entrepreneurs and investors seeking to develop fintech market leaders. Thus, the impact from fintech disruption is expected to be greater in Brazil than in many other countries because of its highly concentrated banking sector. According to Techcrunch, “while 85 percent of Brazilians now live in cities, 40 percent remain excluded from traditional banking systems. Brazilian consumers are seeking better alternatives to credit card rates in Brazil that are in the triple digits. The industry is one of the world`s most lucrative, with return on equity still at nearly 19 per cent for Itaú and 15 per cent for Bradesco in the first quarter of this year (the largest private banks in South America) even after almost three years of recession, according to data company Economatica, higher than US and European averages. Consumers in Brazil, Latin America’s biggest country, pay an average of 190 percent a year for unsecured overdraft, credit card and consumer loans with banks”. Even the reduction in central bank rates from 14.25% to 8.25% by September 2017, will impact spreads for banks and enhance opportunities for more efficiency. Smartphones are also broadly used in Brazil, with more than 60% of the population using the mobile devices, which in turn helps drive the spread  and delivery of fintech products and services in the country, as does growing internet access. There is also a lot of legacy infrastructure in the banking/financial sector, including many services that still run on COBOL, a computer programming language that has run on mainframes since 1959. COBOL is primarily used in finance and administration systems for financial services companies and governments.

Moreover a recent report by Goldman Sachs (“Fintech Brazil’s Moment”) projects that Brazils fintech universe should generate a potential revenue pool of about $24 billion over the next 10 years. Payments, lending and personal finance are three promising segments, as is insurance, the report highlighted (source: NY Times). The Goldman Sachs economists cited what they called “an oligopolistic market structure” in Brazil where the top five banks, excluding development banks, hold 84 percent of total loans. In retail branch banking, the top five banks have 90 percent of branches. The Central Bank is playing a role to enhance competition in the sector and changing its regulations to simplify the license-approval process for foreign banks wishing to operate in Brazil. Indeed, according to the International Banker magazine, “it is also looking to implement new regulations to formalise the rapid expansion of fintechs; in particular, the new rules would cover their partnerships with banks to offer loans—those providing securitised credit from institutional investors, and “peer-to-peer” lenders connecting borrowers directly with individual investors”. However, the Goldman Sachs conluded its report by adding that although, “Fintech companies in Brazil are driving the innovation in the nation’s digital banking landscape, ultimately it will be the sector’s established leaders that will dictate the scope of changes in the industry. While in 10 years we expect incumbent banks to lose market share, the effect should not be perilous. We do not expect significant pressure on growth or profitability for large retail banks, despite market share loss and price pressure.”

Fintech Investment

Venture capital investment in the space has been on an upward trend over the last few years. In 2016 fintech investment hit over 150M USD in 2016, more than tripling year-over-year. Vertical focus areas are also increasing, such as in Insurtech and Regtech. 

Brazil was the destination for 63% of Latin America’s total investment (source: Marsdd). According to Isaias Sznifer, managing director at the boutique advisory firm Greenhill & Company in Brazil, “we expect a lot more in the space to happen in the near future”.