➤ Fintech companies will continue to be among the biggest targets for funds.

➤ After a record year for venture capital investments in Latin America, flows could slow down in 2022.

➤ A new wave of B2B and banking as service startups is likely to dominate the attention of investors.

Founded in 2011, Kaszek Ventures has become one of the largest Latin American early-stage funds. In a decade, it has raised more than $2 billion in capital and holds some 60 active companies in its portfolio, including Nu Pagamentos SA or Nubank, Creditas Soluções Financeiras Ltda., Credijusto Ltd., MadeiraMadeira Comércio Eletrônico S/A and QuintoAndar Serviços Imobiliários Ltda.

Hernán Kazah, co-founder of and managing partner at Kaszek and also co-founder of e-commerce giant MercadoLibre Inc., argues that financial technology will continue to draw interest as the industry expands into segments that are still highly underserved in the region. The entrance of global players in recent years, such as Japanese giant SoftBank Group Corp., reflects the potential of the Latin American tech sector. However, competition for assets is heating up and low-hanging fruit investments are much harder to find.

Latin America saw record venture capital flows of $15.7 billion in 2021, according to data by the Latin American Private Capital Association, leading to 16 newly formed unicorns — startups that reach a $1 billion valuation. The sum was greater than that of the previous seven years combined, with fintech the top recipients.

S&P Global Market Intelligence had an online conversation with Kazah about trends in the Latin American venture capital market and expectations for the post-pandemic scenario.

The following is an edited transcript of the conversation.

S&P Global Market Intelligence: How do you see the competition and how has it changed the landscape?

Hernán Kazah: We have been in the Latin American venture capital business for 22 years. We saw it grow basically from scratch. Without a doubt, the acceleration that we have seen over the past five years was incredible. There is more competition with foreign funds which were not in the region before and are now coming. The market has grown by users and smartphones, making successful opportunities much greater. Before, you might have had an entrepreneur that did reasonably well and made good progress, but capital was scarce and companies that could have been great suffered from that. Today, there is much more capital available and it has turned into a seller's market. Good entrepreneurs have several alternatives to choose from. That is music to their ears.

With record flows in venture capital investments last year, how much space is there for more banner years?

It is difficult to predict about this year in particular. 2019, 2020 and 2021 were record years. This year is not going to be a record, and there might be some regression to the mean at some point. But that does not mean that when we look back we are going to not see growth during the decade. I believe there is still room to grow. Even at $15 billion, the weight of [venture capital] investments in GDP is still below that of the United States and China.

[Editor's note: As of 2020, venture capital investments amounted to 0.08% of GDP in Latin America, compared to 0.71% in the U.S.]

Do you expect the fintech sector to continue to be a leading recipient of flows?

The fintech case has quite a long way to go, where penetration of financial services in Latin America is still very low. Financial services are a very important part of the GDP in most economies, whereas in Latin America it is much smaller than it could be. There is a great opportunity to increase the number of people and companies connected to the system, from the most basic products such as credit cards, insurance and payments. The penetration of lending in Latin America is absurd, minimal. Technology allows us to distribute credits more easily and make a better risk assessment. There is a giant opportunity.

What comes next in fintech?

Nowadays, almost every company is becoming a fintech. MercadoLibre was a marketplace in the beginning and now its fintech unit, Mercado Pago, is even bigger. And the same is going on with [Mexican used cars broker dealer] Kavak, which is accelerating the growth of its financial unit and offering car loans and insurance at the moment of the sale.

Where do you expect fintech investments to go from here?

The first round of innovation was business to consumer. That will continue to exist given that traditional players are expensive and have done little innovation. They have been trying to change with the rise of fintech but the truth is they have done too little for the consumer while focusing on being profitable. The second fintech wave is business to business, trying to replicate that but aimed at [small and medium-sized enterprises] that are underserved today. We are going to see a lot of growth there. And finally, there is a third wave that is slowly unraveling which is infrastructure among financial institutions. We have seen just too little of that so far, of which banking as a service is a core example.

How are rising rates and political uncertainty in Brazil likely to deter investments?

Those things will be on the table. An increase in interest rates together with Latin American instability will generate some noise over the short term. It might grow a bit slower, especially considering how much growth was accelerated by the pandemic. But the long-term factors are much stronger than anything else, there is going to be growth. The pandemic demonstrated two things. First, the demand for digital services was accelerated. Secondly, the technology sector proved that it can work at scale. Can they absorb 20 times more users? Yes, they did. And pretty well. That validates the long-term growth case for the industry.

Kaszek and MercadoLibre recently went public with a special purpose acquisition company that raised $287 million in funding in U.S. markets. How convenient do you consider that investment vehicle to be for Latin American companies to scale?

It is a very good option for companies to access funds faster than through a regular IPO procedure, and still become a publicly traded company. As a private company, it's easier to raise another round as opposed to a SPAC or an IPO. But staying private makes every round hard. You have to make effort to attract capital and processes take longer. Once you go public, it is easier to raise extra capital, issue shares and keep the ball rolling.