Softbank’s Investment into Latin America

Softbank is a Japanese based company that invests in a variety of different sectors including energy, financial services, and technology. Recently, they have been investing in and acquiring many different companies around the world, many of which are developing new technologies, having invested a total of around US$84 billion into start-ups throughout the past four years. Examples of acquisitions include Boston Dynamics, which was acquired for an undisclosed amount and later sold to Hyundai as well as the UK-based chip manufacturer ARM in a deal worth £24 billion. The companies that Softbank have backed are, according to PitchBook, worth a combined US$1.1 trillion. However, the company has experienced some substantial setbacks in the past couple of years, particularly following the collapse of WeWork in 2019.

In September 2021, Softbank announced that they were increasing the size of their Latin America tech fund to US$8 billion, an increase of US$3 billion from the initial allocation of US$5 billion in 2019. This increase in investment was advocated for by the chief operating officer (COO) of Softbank, Marcelo Claure, who leads the Latin American fund which has already backed over 48 different companies throughout the region, generating a net internal rate of return of 85% in USD, according to the bank. Claure stated that he believes 2022 will be the “biggest IPO year” in the history of Latin America and it seems that Softbank would like to be even more involved, with the fund having “far exceeded” the firms’ expectations.

One of the key sectors experiencing such high returns has been in the financial services industry which, according to Claure, was full of banks that were “highly inefficient” with “lots of branches and long queues”. He saw a solution in fintech and many of these fintech start-ups have experienced a lot of success, with companies such as Nubank and Ualá leading the way. In addition to this, there are many missing markets for digital products and technology in Latin America, providing a lot of space for new start-ups to grow into, with the founder of Ualá suggesting this is due to regional underinvestment into technology.

Outside of banking, the Mexican firm Kavak, which received investment from Softbank in their latest funding round, became the country’s first unicorn start-up in October of 2020, having been founded just four years ago in 2016 and, as of September 2021, having a valuation of around US$8.7 billion. The company provides an online marketplace for used cars to bring access, security, and transparency to a market full of asymmetric information. It goes about this by acting as an intermediary for car transactions, carrying out inspections for vehicles as well as offering financing to buyers if they cannot afford to buy the car outright. According to García, the company’s CEO, 90% of car transactions in Latin America are done informally with a fraud rate of 40%, so Kavak aims to try and reduce this failure within the market. After having commenced operations in Argentina and Brazil, the firm now operate in three of the five most populous countries in the Americas, and with relatively few competitors, Kavak will likely continue its growth.

However, the fast growth of start-ups in South America is perhaps best exemplified by Ualá, a fintech bank, which has also received investment from Softbank, which offers online financial services to customers and was valued at US$2.5 billion in its latest funding round. Throughout 2020, the company experienced a quintupling of bill payment volumes and, by 2022, they are hoping to break even operationally in Argentina. The company has now started providing services in Mexico with plans to operate in more Latin American countries in the future, acquiring the Mexican bank ABC Capital SA in early November to further expand within the country, where they have already issued over 200,000 debit cards.

With Softbank experiencing so much success in this region and given that more and more investment is entering Latin America, there will likely be many more start-ups in the position of the aforementioned ones in the future. Additionally, Julio Vasconcellos, the co-founder of a Latin American venture capital fund stated that the technology market capitalization is considerably lower in Latin America at 3.4% of GDP as opposed to 14% in India and 30% in China, so there is certainly room for more progress.

In addition to the benefits for Softbank and other investment companies, the investment into technology will likely lead to a positive change in the emerging economies throughout the region, with start-ups growing to a level where they will be able to compete with the larger and more established companies. Furthermore, it will hopefully bring greater stability to a region that is prone to economic and political instability, attracting further investment from some who may be wary of the volatile climate.

By Kristian Eklund

Sector Head: Gregor MacDonald

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