Viewpoint: What to watch
December 9, 2019
Recent developments to keep an eye on: Goldman Sachs to expand in Latin America, Colombia’s economic outlook, Mubadala to increase Brazil investments and venture capital dollars flowing into the region
Goldman's LatAm push
Goldman Sachs is continuing its expansion in Latin America.
The bank is finalizing plans to open an office in Lima, Peru. Fernando Bravo, who leads the investment bank’s coverage in the Andes, will head the office, which will also cover Colombia.
Once opened, it will add to Goldman’s offices in Argentina, Brazil, Chile and Mexico. The bank opened its Buenos Aires office in 2018, a year when it saw an overall significant increase in its investment bank revenue in Latin America.
A Goldman Sachs source says the Lima office will include a “handful” of bankers. “We’re trying to be more active in the Andean region,” the source says. “We believe there are going to be opportunities.”
The move comes after Peru struggled with bouts of political volatility earlier this year. Peru President Martin Vizcarra has also tried to jumpstart investment in the infrastructure sector which slowed in the aftermath of the Odebrecht corruption scandal.
“Despite the volatility and corruption scandals, we still have seen activity,” the source says. “There are two underlining [infrastructure] trends: the big infrastructure gap that needs to be closed and the significant amount of institutional capital that has been raised to invest in the asset class.”
In August, Goldman Sachs was one of the bookrunners on a $563 million bond deal for Line 2 of the Lima Metro.
Among the focuses for Goldman will be natural resources and financial institutions, the source says.
When the International Monetary Fund (IMF) cut its 2019 growth forecasts for Latin America’s biggest economies in October, it kept a bullish outlook for one country: Colombia.
The IMF expects Colombia to outgrow Argentina, Brazil, Chile, Mexico and Peru this year, predicting the economy to expand 3.4%. In 2020, the IMF sees the Colombian economy growing 3.6%, the fastest growth among the big six economies.
In the third quarter, Colombia’s economy grew at its strongest pace in four years, with economists crediting healthy consumer demand, spurred in part by migration from Venezuela, which is in the throes of a deep economic crisis. Though the migrant population is poor, many of the immigrant arrivals are finding jobs in the informal economy and are helping to fuel household consumption.
Most economists think the economy will continue to show strength next year. London-based Capital Economics, however, thinks growth will slow. “We expect that private consumption will fall,” it says. The group forecasts 2020 GDP growth of 2.3%.
Still, Colombia’s outlook stands out among major Latin America economies, which have been hurt in some cases in recent months by street demonstrations and political upheaval. Ripple effects of the US-China trade war have also impacted growth.
Venture capital trends
New venture capital funding in Latin America is on pace for another record-breaking year.
In the first half of 2019, venture capital investment in Latin American startups hit $2.6 billion, according to the Association for Private Capital Investment in Latin America (LAVCA). That amount eclipses the record $2 billion that flowed into the region last year.
Overall, investment has more than quadrupled since 2016.
Julie Ruvolo, director of venture capital at LAVCA, says 2019 is shaping up to be a year where significant investments continue to grow. “In 2018, records were broken across all stages of investment — seed incubator, early stage and growth stage,” she says.
Companies looking to raise funds got a big boost in March when SoftBank launched its $5 billion Latin America fund, the Innovation Fund. SoftBank quickly made its mark with the largest technology financing to date in a Latin America-based company when it invested $1 billion in Colombian delivery app Rappi. SoftBank’s Innovation Fund invested $500 million and its Vision Fund, which has holdings in Uber and WeWork, put in the other half.
Since its launch, SoftBank’s Latin America Fund has poured more than $1 billion into startups in the region, with investments in Brazilian online lenders Banco Inter and Creditas, Brazilian e-commerce company MadeiraMadeira, Brazilian logistics company Loggi, Brazilian online housing broker QuintoAndar, Mexican fintech Clip and Brazilian online used car marketplace Volanty.
SoftBank has also said it plans to invest $500 million in venture capital funds in the region. The challenges it faces with WeWork are unlikely to change those plans.
Last year, according to LAVCA data, slightly more than half of the deals involving venture capital investment took place in Brazil. Mexico saw just over 20% of the deals, followed by Chile with over 10% and Argentina and Colombia with 4%.
Nearly half of the investment in 2018 went to logistics and distribution companies, 25% to fintechs, 7% to transportation companies with the rest split between agtech, security, e-commerce, edtech, proptech and other firms.
Ruvolo says Latin America’s rapidly growing consumer tech adoption will likely continue to drive venture capital investment in tech companies.
Ruvolo points to a few key data points: São Paulo, Mexico City and Rio de Janeiro are among Uber’s top three cities by volume globally. Mexico City has grown into one of Spotify’s largest listener bases, ahead of New York and London and Mexico and Brazil are among the top global markets on Facebook’s messaging platforms.
Mubadala & Brazil
Abu Dhabi sovereign wealth fund, Mubadala, plans to ramp up its investments in Brazil.
Waleed Al Muhairi, Mubadala’s deputy chief executive, said in October the fund wants to add to the more than $2 billion it has already invested in the energy, infrastructure and telecommunications sectors in Latin America’s biggest economy.
Brazil “will be one of the important destinations for Mubadala in the next five to 10 years,” he said.
During a United Arab Emirates-Brazil business forum in October, Brazil President Jair Bolsonaro said Mubalada was eyeing investments in real estate, mining, highways, ports and other areas.
While investor optimism about Brazil has risen since Bolsonaro took office in January, investment has largely remained anemic.
Economists worry the lack of investment from both companies and the government has left the country stuck in a cycle of weak growth and susceptible to external shocks. Brazil’s government forecasts the economy will grow 0.90% this year and 2.32% in 2020.
Al Muhairi is bullish on Brazil’s long-term growth prospects.
He said Mubadala’s approach in Brazil has come into sharper focus after it “lost larger deals because of hesitancy or lack of speed or sometimes lack of understanding on the Brazilian side.”