Latin American Investment Horizon: Trends and Insights

Latin American Investment Horizon: Trends and Insights

By Andrew Seiz, SVP of Finance at Kueski, the leading buy now, pay later (BNPL) and online consumer credit platform in Latin America, known for its innovative financial services.

During the first half of 2023, we saw a significant pickup in activity when the market reopened for IPOs in September. Latin American (LatAm) companies were able to tap almost $2 billion in equity funding in the five months leading up to November – nearly twice as much as the first half of 2023.

The late-in-the-year market activity of 2023 should bode well for 2024. The Fed funds rate has most likely peaked and it is really a question of what magnitude it should decline this year. Below is what could transpire in the LatAm investment space during 2024:

Boost in Latin American Venture Capital Funding

With the Fed funds rate peaking at 5.25 percent to 5.5 percent and rate cuts anticipated by July of this year, inflation in the U.S. and other key markets is likely to continue to subside.

This should be good news for venture capital funding in LatAm, given the broad correlation with the U.S. rate cycle and risk appetite for emerging markets. Within Latin America, Mexico and Brazil will likely be at the forefront of this focus given their market sizes, underbanked populations, urbanization, and demographics driving growth.

Investments in Consumer Credit Fintechs

There was an expectation that rising interest rates would increase delinquencies in consumer and corporate credit. As such, fintechs operating within this space were considered vulnerable – especially those which had longer duration assets and/or a reliance on market sensitive funding. Largely consumer and corporate credit remained relatively resilient (at least so far) given that the economic slowdown induced by high rates has been relatively shallow. Although there are exceptions, fintech business models and underwriting practices demonstrated resilience and an ability to adapt to changing business cycles. A resilient private credit market has enabled borrowing costs for venture stage companies to remain, for the most part, competitive.

Assuming we’ve avoided a recession, borrowing costs will become more accessible, which should encourage increased consumer interest. And because data showed that these portfolios did not weaken as anticipated, investors will have more confidence in the sector. This shift is likely to attract more attention to companies in a position to secure funding more easily, especially in cases where the decline in valuations has been excessive relative to the risk profile.

Increased Interest in Closer-to-Home Markets And Nearshoring

Venture capital volumes in Latin America declined by 65 percent in the second quarter of 2023 compared to a year earlier as investors became more discriminating. As conditions stabilize, U.S. investor attention will naturally shift back to closer-to-home markets, with a gradual expansion to more distant opportunities in search of yields and riskier asset classes.

With geopolitical risks in Eastern Europe and the Middle East and ongoing concerns over growth in China, LatAm continues to stand out as a relatively safe haven. Moreover, the secular trend toward nearshoring and bancarization, which favors a wide range of sectors in LatAm including infrastructure, logistics, and consumer credit should be in place for the next five to 10 years.

Beyond geographic proximity, Mexico in particular offers a large, low-cost labor force and free-trade agreements with the U.S. and Europe – all of which should facilitate high levels of FDI and a closer trade partnership with the US.

Generative AI – Multiple Applications within the LatAm fintech space:

Generative AI (GenAI) can play a crucial role in fraud detection and prevention within the financial sector, providing crucial support to financial institutions in mitigating potential harm. It also supports comprehensive risk evaluation and therefore makes better use of existing large data sets – to help inform better credit and pricing decisions. At the same time, GenAI should help facilitate better investment decisions. Expedited research endeavors should allow investors to conduct better company, industry and macro analyses.

The strong performance of asset markets so far in 2024 should bode well for Latin American venture capital funding this year. The backdrop should be healthier and more sustainable compared to the 2020/2021 period with investors being more selective and looking for business models with proven resiliency in jurisdictions benefiting from favorable secular trends.