Integra Five LATAM Dispatch

June 3, 2022

At Integra we view the drawdown in fintech valuations as a reset and not a "wipe out." High quality and resilient companies are prepared for volatility by driving operational efficiencies simultaneously investing to thrive on the day after. There is a huge opportunity to scale to multiproduct offerings through M&A at these levels. Recent a16z research shows public fintech companies’ valuations peaked at around a 25x forward revenue multiple in October 2021. Since then, the same fintech cohort of stocks has fallen to around 4x their forward revenue. Attractive entry points into value-add businesses can help good fintechs become great.

35% of companies in Latin America plan to invest in IoT projects in the next 18 months

The adoption of the Internet of Things (IoT) is growing annually in Latin America. Internet of things is defined as physical objects or groups of such objects that have sensors, processing ability, software and other technologies which connect and exchange data with other devices and systems over the Internet or other communications networks. For example, a smart TV which allows a consumer to watch Netflix or YouTube is an internet of things. 

Within Latin America, Brazil is the country with the highest use of technology at an advanced level (36% of companies) whilst Argentina is the furthest behind with only 26% of companies at the production level. The solutions commonly used by these organizations are video analytics for monitoring people and environments 49%, inventory management and internal logistics (27%) and geolocation (26%). The overall perception of the importance of IoT solutions is very high, as a result 25% of companies in Latin America are planning to invest in IoT projects in the next 18 months. 

Source: IoT Snapshot 2022 study, Logicalis

Latin American startups are facing a wipeout, says Clip CEO

What Integra views as a healthy reset some CEOs view as a wipe out. Clip is the leading digital payments and commerce enablement platform in Mexico. Its CEO Adolfo Babatz believes that a crash in venture capital funding is set to wipe out startups across Latin America, delaying potential initial public offerings for years, whilst also placing Clip on more than optimal footing. Latin America was the world’s fastest growing region for venture funding last year but is now “facing a hangover” as investors recoil from risky bets resulting in the death of many companies. 

Babatz predicts that when Clip IPOs, it will be in the US. Clip is not alone with these thoughts, Kavak and Bitso, other Mexican unicorns expect to choose US markets for their IPO which would be a blow for the local stock market which has not had a major IPO since 2017. 

Clip helps manage inventory through its devices which are becoming common across Mexico in corner shops and restaurants. There is a huge market still as approximately 900,000 merchants are served by traditional bank terminals, out of 11 formal and informal businesses throughout the country. 

Why rampant capitalism is taking hold in Venezuela

Venezuela is moving from the unsuccessful application of the Socialist Bolivarian revolution to the process of opening liberalism, causing a mirage of economic recovery to appear. Up until recently, Venezuelans would hide their US dollars as it was up until recently a crime to possess such things. Not only this, citizens would previously have to queue for hours to buy rationed food at regulated prices and bolîvars the local currency, but it is now few and far between. 

The dollar is now used in almost 70% of commercial transactions but due to the distortion of the economy, it is infected by inflation. In Venezuela the smallest transactions require mental calculations to work out if the exchange rate applied by the shop is beneficial, which varies depending on the currency being used and convenience. For example, an extra tax for when a buyer only has dollars and their use has spiraled the last few months and unfortunately as the economy is very convoluted, everything ends up being more expensive. 

Source: Luigi Pisella, president of Conindustria

A sui generis capitalism is being practiced in Venezuela which has created a bubble of expenditure and redistribution for 4 million people, mainly in Caracas. Traffic levels are as high as any other bustling major Latin American city, whereas before the streets were practically empty. This is not felt equally however, as a large part of the economy has had their income stagnate or fall.  

Poverty and inequality drive change in Latin America

During the FT’s Rachman Review edition this week, the chief foreign affairs commentator discusses the politics in Latin America which are currently pointing towards a turn to the left and collapse of the political centre. This is occurring on the backdrop of a global revival of authoritarian and populist politics around the world.   

The Colombian presidential election this week found the radical leftwing Gustavo Petro (a former guerrilla fighter) lead with just over 40% of the vote. He goes into the second round against the rightwing candidate Rodolfo Hernandez later this month. 

The left currently holds power in five of the seven most populous South American countries: Venezuela, Chile, Peru, Argentina and Mexico. Chile and Peru have suffered much social turmoil as of late with protests in the street and further beyond as the economic recovery post Covid-19 is weak. Moises Naim, Venezuelan economist and journalist, and Gideon Rachman fear that authoritarian governments come to power, often through democratic means. How this will pan out, Moises suggests that Brazil is most at risk, as Jair Bolsanero has said he will leave “only when God tells him too.”  

Fintechs fail to make a dent in Mexico as cash remains king

Fintech startups are trying to ‘bank the unbanked’. The National Inclusion Report found that cash still drives 90% of transactions under 500 Mexican pesos ($25) and 78.7% of payments or bills over 500 pesos. As a result, this puts Mexico, Latin America’s second most populous country far behind similar economies like India, Kenya and Brazil in terms of inclusion and its reliance on cash. 

Maelis Carraro, the managing director at consulting firm BFA Global, said that “Fintech innovators have not yet delivered on their potential to build solutions that are centered on underserved communities.” Fintechs tend to mainly target LATAM’s metropolitan elite, rather than poorer rural communities where banking infrastructure is most needed.  

However, Fintech users still need to link their digital accounts to licensed banks, which leads the user to require a trip to the traditional brick and mortar branches, which will limit inclusion and disrupt ease.  

Source: Americas Market Intelligence. Data is for 2021
Reference

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