Lower valuations at LatAm fintechs expected to entice investors, M&A

M&A dealmakers in Latin America are beginning to shake off the initial shock of the COVID-19 crisis to go on the hunt for improved valuations at homegrown fintechs.

Deal data gathered by M&A research firm Transactional Track Record (TTR) identified fintechs as “one of the four most attractive sectors in the short and medium term,” said Marcela Chacón, TTR research and business intelligence analyst for Latin America.

Chacón told BNamercas that dealmakers TTR spoke with for its upcoming transactional impact monitor “revealed an optimistic outlook in the fintech sector.”

“The latest data for July shows this segment is not stagnant,” she said. “In Argentina, the growth of transactions of fintech companies has increased by 33%. In Mexico, 18%, for example, and in Brazil 1%,” in comparison to July 2019 levels.

Some analysts, however, still see investors “on pause” – at least for now.

Jan Smith, co-founder KoreFusion, a global M&A strategy consultancy specializing in fintechs and global payments, sees investors eager to get out until the market settles. 

“We have already seen evidence of bankruptcy and desperation happening in every country of the fintech community, and we’re seeing [venture capital], as well as the 'finlabs' of the banks, make a hard pause on their investments,” said Smith, responding to a question from BNamericas during a presentation of KoreFusion’s new LatAm fintech study (available here).

“This means that the following financing rounds are at risk,” he said Smith, adding, “We have also seen the aggressive desire to get out of their investments, even having to pay fines.”

Looking for excuses

Other investors, said Smith, are looking to lower investments or pull out entirely, citing benchmarks that have yet to be reached or finding justification in companies not reaching desired performance thresholds.

But he sees these arguments as excuses. “What these funding groups are really seeking to preserve, both with the banks and on the venture capital side, is their liquidity, to hold on to their liquidity to take advantage of valuations much more advantageous for them six months from now.”

At that point, they know there will be “companies more desperate” to receive capital.

“As such, we see the brake now on investments and curiosity, but also the tremendous appetite to explore the market once it gets a little weaker,” he said.

Did COVID-19 burst the bubble?

Smith said that some funds seem to be taking advantage of the crisis to poke a hole in the high valuations of some of the largest fintechs in the market.

“There’s an overvaluation for the larger fintechs in the market. And this is not just for Latin America, it’s globally,” he said.

The stance investors are taking makes even more sense with this in mind, he added, given that they may be looking at “more level playing fields” once these valuations correct a bit.

A matter of time

Chacón said this means the pickup in activity is just a matter of time. “Although the trend will be moderate in the short and medium term, foreign investment funds are going to see low valuations at companies as an opportunity,” she said.

This sets up a situation to trigger deals that involve debt restructuring, as well as injection of liquidity for the right companies, all of which looks to keep stagnation from setting in the region, she added.

Chacón said the ability to reach “the millions of consumers currently outside of the formal banking system in countries like Brazil, Mexico, Chile, Colombia and Argentina … will be essential for private equity funds to expand new ventures.” 

“As for the growth of fintech,” Chacón said, “this trend will be evident through the course of 2020 due to the digital transformation that is occurring with companies,” citing the wide swath of the private sector now being forced to confront new financial and technological challenges in an unprecedented environment.

For now, it appears activity did pause in March. The following tables, provided by KoreFusion, show the top recent transactions at the largest fintechs in Mexico, Brazil, Argentina, Chile and Colombia.

Source: KoreFusion

Source: KoreFusion