Fintech leaders in Latin America expect investment capital to be more abundant next year, as interest rates worldwide reach a tipping point in early 2024 and the region benefits from secular trends such as nearshoring and relatively lower geopolitical risk.

“2024 should be a better year for companies in Latin America,” said Andrew Seiz, Head of Finance at Mexican unicorn fintech company Kueski. The BNPL firm argues there has been “renewed investor attention” on emerging markets in recent months, following improvements on the inflation front and the expectation that central banks such as the Federal Reserve might start easing soon.

“As investors consider geopolitical risks in Eastern Europe and the Middle East and concerns over growth in China, Latin America stands out as a relative safe heaven,” he said. The region, with Mexico in particular, is also standing to benefit from longer-term trends as U.S. firms rewire supply chains following the pandemic. This is expected to reinvigorate Mexico’s role as a U.S. trading and manufacturing partner. Some economists point out that it will drive significant investments on the horizon.

Optimism building for LatAm fintech investments

Latin American fintech leaders cautiously look ahead after a relatively subdued 2023 in terms of sizable investments. The regional landscape witnessed a prevalence of smaller-scale equity transactions, while seeing only a handful of major deals by select venture capital firms.

The industry faced a significant setback since 2022, witnessing a substantial drop in VC investment from the record levels seen in 2021. Although there has been a stabilization this year, the funding levels remain significantly higher than those in the late 2010s when there was limited capital available for regional tech firms. Notably, financial technology firms account for most of this funding.

Recent data for 2023 shows some encouraging signs of life. According to data from Itau BBA and Sling Hub, Latin American companies received nearly $2 billion in equity funding in the five months leading up to November, more than the $1.3 billion received in the year’s first half.

“Things have picked up since September,” said Seiz. “So much of Latin America investment is driven by the U.S. rate cycle, and the U.S. economy has been favorable in that respect.”

For Bruno Diniz, a fintech consultant in Brazil, investment for next year seems “on an upward trajectory”. However, he was cautious in that they should be well below the sector peak in 2021, a record.

Curbed enthusiasm

2021 was a breakthrough year for Latin American startups, reaching nearly $16 billion in venture capital investments, the capital needed for large fintechs to accelerate their growth throughout Latin America. Most of the big-sized fintechs could get through the last two years of capital scarcity by cutting costs aggressively, stepping up cross-selling and moderating expansions.

While there’s a glimmer of hope, the fintech industry isn’t out of the woods yet. Due to valuation concerns, late-stage financing has taken a hit, with global investors pumping the brakes. Though there’s a hint of improved sentiment recently, the prevailing mood is cautious optimism. Some companies have had to close amid intensified competition, grappling with a scarcity of capital that hampers prolonged product testing.

Large deals near the end of the year included Mexico’s Kapital securing $40 million in a series-B round, or neobank Albo’s $40 million series-C round in October. Also that month, a Brazilian QI tech firm tapped $200 million in a series-B deal that was one of the largest rounds in the entire year for Latin American fintechs.

Diniz, also a fintech professor at the University of Sao Paulo, sees investment rounds limited to Series B rounds next year. “Larger rounds will tend to be scarcer,” he said. He argues that Latin American startups will think twice before tapping markets. “Fintechs that have already received more advanced investment rounds spent the last two years adjusting their operations for efficiency and aiming for profitability.”

Debt financing takes the lead

In recent quarters, debt financing has become a common avenue for fintechs, with many neobanks securing credit lines from major lenders like U.S. banks to fuel their expansion. Examples include Klar in Mexico, which secured a $100 million credit facility from Victory Park Capital, and Konfio’s $100 million debt line with J.P. Morgan.

For Sandro Reiss, president of the Brazilian Association of Digital Credit, securing the necessary capital to lend will be critical next year. As saturation concerns are on the rise, those fintechs in a better position to grant credit will boast a differentiated product.

“There is a  limit to how much better the user experience can get when offering the same product,” he told Fintech Nexus. “The ability to provide higher credit limits to your clients probably drives engagement the most. That will drive whether clients will keep their bank accounts open and active, or ultimately discontinue their usage”.

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• Source: https://www.fintechnexus.com/latam-fintechs-expect-vc-investments-2024-rate-cuts/