Blockchain to drive deals in Mexico in 2018

Put your thinking caps on in 2018 if you haven't already, because those starting earliest on the blockchain technology learning curve and fintech boom will stand on the right side of the disruptive process breaking out across the globe.

That disruption looks to sweep across every commercial sector, as the technology is used to close what blockchain guru Richie Etwaru calls "the trust gap" – particularly with financial intermediation.

Regulatory impacts are also set to play a role, such as Mexico's proposed fintech legislation, which after nearly clearing congress in 2H17 is almost certain to become law in 2018. This comes amid cautioning edicts emerging from central bankers across Latin America, all set against titillating but feverish jumps in the trading of Bitcoin and other cryptocurrencies.

ALSO READ: Spotlight: Fintech Business Verticals in the LAC.

A studied hand at the wheel should also help players navigate what looks potentially to be a very interesting, if challenging, year for M&A activity and VC deals in 2018, with investors looking to get in on the ground floor of game changing innovations.

Mexico's VC silver lining

The investor watchword for Mexico in 2017 was 'uncertainty,' which looks to hold sway in 2018 given the recent faltering of the Nafta renegotiation and what looks to be a wild and wooly lead-up to the July 1 presidential election.

Overall, deal-making in Mexico in 2017 underwhelmed with the country seeing fewer deals and more than a 40% drop in capital moving with M&A activity through November.

Venture capital stands out as one of the country's only bright spots, outshining average regional performance this year.

M&A research firm Transactional Track Record reported 45 of the 261 VC deals taking place in Latin America in the first 11 months of the year happened in Mexico, raising a disclosed total of US$367mn.

The figures represent a 25% year-on-year increase in the number of VC transactions and a 103% increase in disclosed capital, compared to the 20% increase in deals across the region and 61% rise in total disclosed capital raised.

Of the 45 deals through November, 18 were in the internet sector and 10 were in technology, representing 29% and 11% more transactions for each subsector compared to the same period of 2016.

Fintechs to foster deals region-wide

In comments to BNamericas, Marcela Chacón, TTR research and businesses intelligence analyst for Latin America, sees innovative firms driving investment in 2018.

"The awakening of new platforms in the fintech sector, especially in Mexico, Brazil and Argentina – countries that have shown important investment flows in this sector in 2017 – has promoted the increase of new financial products, the consumer confidence with online payments and the increase of ventures that stimulate investor confidence in the region," said Chacón.

"In that sense, because many of these ventures are in their initial phase of business life, some will require capital increases, either to survive or to start their expansion phase in other countries," she added. "This behavior will lead to a trend in the increase of mergers, acquisitions, venture capital investments, among other reconfigurations of the sector throughout 2018."

Big players on the horizon

David Schwartz, head of the Florida International Bankers Association (FIBA), who spoke with BNamericas in November, said that, beyond fintechs, the banking industry needs to keep an eye on global retailers entering the market.

"We're seeing a lot of people concerned now about the entry of the fintechs and their involvement in the payment areas and lending," said Schwartz. "But we're seeing more threats mainly coming from Amazon, Apple, Facebook, Alibaba, all of these types of players that are looking to expand into financial services."

The entry of such powerhouses could well spawn larger M&A activity as well as equity deals throughout the region in 2018, such as the much-ballyhooed potential merger between Alibaba and MercadoLibre.

In addition, TTR reported 10 inbound acquisitions of Mexican Internet or technology firms through November, up from nine in the same period a year before.

Mexico building ties beyond US

Markets are bracing for a potential US exit from Nafta, but such an action would only hamper trade between the neighboring countries. While a cut in the sovereign ratings could come for Mexico in that event, it would hardly be a doomsday scenario, as reaffirmed by ratings agencies recently.

Mexico wrapped up the sixth round of talks with the European Union for a free trade agreement in December, an initiative now 18 months formally in the works. It has also made significant efforts to strengthen the Pacific Alliance in 2017, which itself is looking to keep alive hopes of some form of trans-Pacific FTA, with or without the US' initial support.

"Mexico will maintain its privileged position in 2018 as the second most active country in the mergers and acquisitions market in Latin America," said Chacón to BNamericas.

"In particular, the country will not only stand out as attractive to investors, but also its strategy of diversifying markets in strategic areas such as Europe and Asia, its focus on the renegotiations of Nafta, as well as its positive GDP outlook, all augur for natural growth in the number of cross-border operations in the Mexican M&A market."