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SPAC phenomenon set to seep into LatAm's fintech space


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SPAC phenomenon set to seep into LatAm's fintech space

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A view of Nasdaq in Times Square in New York City during the coronavirus pandemic in May 2020.

Source: Noam Galai/Getty Images Entertainment via Getty Images

Following their massive comeback in 2020, special purpose acquisition companies have continued to boom this year, with several now looking to deploy raised capital in the Latin American fintech space.

The influx of liquidity into the region's fintechs should boost their ability to expand their credit offering and to launch other products including investment and insurance services, putting them in a more solid position to chip away at legacy banks' market share, analysts said.

Within the first quarter of 2021 alone, at least six Latin America-focused venture capital firms, asset managers and bank founders have raised or announced SPAC IPOs worth more than $1.46 billion.

Carlos Rodriguez-Pastor, founder of Peruvian major Intercorp Perú Ltd., filed a $250 million IPO for Excelsa Acquisition Corp. in March to target "Latin America Growth Industries." SoftBank Corp., Alpha Capital Sponsor LLC, DILA Capital, Valor Capital Group and Itiquira Partners I have also launched SPAC IPOs to target the region's growth sectors, including both financial services and technology companies.

"Yes, the SPAC could invest in fintech ... in the Spanish-speaking [countries of] Latin America," DILA Capital confirmed to S&P Global Market Intelligence via email. DILA Capital Acquisition Corp., the Mexican venture capital fund's SPAC, filed for a $50 million IPO in March.

On a similar note, a spokesperson at Alpha Capital, whose Argentine founders are based in Brazil, said they were "exploring potential targets in a broad range of LatAm technology sectors, including fintech, a fast-growing and deeply transformative sector in Latin America." Alpha Capital Acquisition Co. closed its $230 million IPO in February.

Digital banks, fintechs in the crosshairs

While most SPACs are still holding back on their specific special purpose, both early-stage and more mature digital banks could be in their crosshairs, Edwin Zácipa, founder of LatAm Fintech Hub, a Colombia-based think tank, said.

"Fintechs experienced great traction during the pandemic, allowing them to reach major milestones — such as reaching their first million clients — as people were driven into using digital financial services, while governments used them to distribute emergency aid both to companies and individuals," Zácipa said, noting that VCs look closely at such feats to make investment decisions.

As many banks across the region closed the tap on lending, several fintechs were also able to partially fill that gap, meaning that their loan portfolios have also grown, Zácipa added, also noting that several digital banks have edged closer to profitability.

Zácipa expects a record $4 billion will be invested in the region's fintechs this year, up from $3 billion last year, with the majority of M&A activity occurring in the Brazilian market.

"I would certainly expect these companies to be the target of SPACs, and in the case of larger neobanks like Nubank, I would not be surprised if they launched their own SPAC to acquire other fintechs to continue making their product offering more robust," the think tank director said, pointing to Nubank's recent acquisition of e-brokerage Easynvest as an example.

Fintechs tend to diversify their funding strategies, and SPACs could be an alternative for digital banks to speed up the process of becoming multi-product, in order to truly compete with traditional lenders.

For Carlos Ramos de la Vega, Manager of Venture Capital at the Latin American Venture Capital Association, or LAVCA, "it makes a lot of sense that they would look at fintechs, given the maturity of the ecosystem across the region, which has been driven by the pandemic," but they "will probably be targeting the most mature and established ones that are ready to go public, because that is the ultimate objective for investors."

In 2020, fintechs absorbed 40% of all private capital invested in Latin America, the largest percentage out of any sector, and investment rounds are expected to continue ticking up this year, according to LAVCA.

"We're seeing very experienced operators and fund managers, with deep knowledge of the region, leading SPACs," Ramos de la Vega continued, adding that "it's a matter of time before due diligence processes come to fruition" and deals are announced. SPACs have a 24-month time limit to select a company and complete its acquisition.

For the expert, incumbent banks also take to SPACs to acquire strategic tech-enabled companies, following in the footsteps of Intercorp's Rodríguez Pastor.

Brazil's digital bank, Neon, and payments platform, PicPay, each with several million clients, would "definitely be cases of interest for SPACs," Bruno Diniz, co-founder of fintech consultancy Spiralem, commented.

Argentine digital bank Ualá's recent deal to acquire competitor Wilobank is a sign of M&A activity beginning to pick up, with SPACs as an additional vehicle in that trend, Diniz added.

Legacy banks remain vigilant

Funding from SPACs could invigorate Latin American fintechs and neobanks, which could mean more serious competition for legacy banks.

"Competition of the fintechs is clearly an issue for the large banks" in Latin America, UBS bank analyst Thiago Batista commented.

With open banking regulation looming in several Latin American countries, including Brazil, digital banks' ability to grow their loan portfolios will be facilitated, as incumbent's competitive advantage wanes, Batista added.

While neobanks' net promotor scores tend to be significantly higher than legacy lenders', most of the former still face the challenge of monetizing their vast client bases, with their total loans still representing a "negligible" amount of the total credit market.

S&P Global Ratings bank analyst Cynthia Cohen Freue sees "a limited threat of disruption among major LatAm banks in the short term" but also notes that "some digital disruptors have begun to take market share from the incumbent universal banks, particularly in payment services and consumer finance."

"In the short to medium term, large banks can compete by replicating the product offerings and services that e-banks offer, while collaborating or partnering with fintech firms," Freue added.