➤ SoftBank plans to invest $3 billion in Latin America after having secured "low-hanging fruit" during its initial stage of capital deployment.

➤ The fund sees opportunities in e-commerce, fintech, and insurtech stemming from the pandemic in the region, which has one of the lowest levels of growth equity capital in the world.

➤ Firm says WeWork proved that giving entrepreneurs the "key to the kingdom" is not beneficial for either companies or investors.

Japanese conglomerate SoftBank Corp. is set to accelerate its play in Latin America after having invested almost $2 billion in tech startups during 2019 and 2020. The SoftBank Innovation Fund recently got clearance from Tokyo to begin to use its remaining $3 billion to take advantage of post-pandemic deal opportunities.

Paulo Passoni is managing partner at SoftBank Group International and heads an investment team that has already bought into more than 30 companies in Latin America, including a $1 billion deal for logistics company Rappi and stakes in Brazilian digital lenders such as Creditas Soluções Financeiras Ltda. and Banco Inter SA. For its second phase, SoftBank has a pipeline of 800 startups under review.

Given the explosive growth in tech usage across industries, the executive is confident that COVID-19 has positively impacted the portfolio. However, hard currency returns in Latin America have been affected by widespread macroeconomic deterioration, a trend which could take time to revert. Passoni also discussed some of the lessons learned from SoftBank's investment experience with WeWork, the struggling U.S. coworking company.

The following conversation has been edited for length and clarity.

S&P Global Market Intelligence: What is the rationale behind the $5 billion bet in Latin America?

Paulo Passoni: Strong empirical evidence. Latin America has the combination of great entrepreneurs with a very significant lack of capital. The only region in the world that has as little growth capital is Africa. Whereas growth equity usually averages from 0.20% to 1.00% of GDP every year, in Latin America it accounts for roughly 0.04% or 0.05%. Growth equity investors were already making a lot of money. They were generating 20% to 25% dollar returns. It was a very strong signal that there was something going on.

How has the pandemic impacted companies in the portfolio?
It is funny to say this because many people are suffering, but we definitely benefited from the pandemic in the sense that everything digital got a boost. Penetration rates that were supposed to occur over three to four years took place in just one. Adoption and change of people behavior has gone through the roof. We invested just before that, so we were definitely very, very lucky.

How would you describe second-phase strategy and which sectors look most appealing?
The number of opportunities that fit our desire is now lower because we already went for the low-hanging fruit. The strategy is to back existing companies more, and we are doing that. COVID-19 has had an impact across the board, but where it is most clear is in e-commerce. We can see this big-time growth across our portfolio. E-commerce is a very strong theme for the next ten years in Latin America as it catches up with the rest of the world. We also love the insurtech sector. We think it is big, and the strongest of those segments is healthcare insurance. The other obvious sector is fintech.

There's been a lot of development in Latin America's fintech space in recent years. Where do you still see opportunities?
There is an old saying from Amazon's Jeff Bezos. "Your margin is my opportunity." I think it is the same thing with the economic profit of Latin American banks. Return on equity against the risk free rate in each country is still higher in Latin America than almost anywhere across the globe. That is the opportunity of the fintech sector. Banks have made a lot of money, and became owners of every single vertical of finance from insurance to acquiring business to wealth management. They own it all: that has created a very fat system. Entrepreneurs love fat, because it means that there is money to be made.

Where do you think fintech is having the greatest impact today?
Biggest market share losses [for banks] are already happening in wealth management, with the rise of XP Inc. and other tech brokers. That will continue. Then, lending, especially secured, is changing fast with Creditas, Inter and other fintechs providing much more competitive access to those products. I have the conviction that the industry is going to grow around home equity lines, mortgage, car financing, payroll lending. All things that have lower risk.

Despite tech adoption, LatAm has been severely impacted by the pandemic. How does macro instability factor into your investment risk?
Outcome in growth capital is very idiosyncratic and not so much dependent on the macro. At the end of the day, it depends on the company and how it can execute and grab market share. There are minuscule companies with 1% of the market, and all that matters is to grow that to 20% in five years. Of course, you would rather have GDP growing. It makes things easier. But macro affects more by way of the exchange rate, which keeps devaluing. Most countries went to a fiscal expansion phase, from which they need to get out somehow, and there are political implications to that.

How do tech startups make use of fresh funding?
The biggest transformation we see after we invest is a massive upgrade of their talent pool. Every single company has gone through a C-level upgrade, which is essential for survival and success. They are ruthless about that. We don't even ask. Joining a very-early-stage startup is not for everyone. It is very risky, but as you de-risk, talent starts to come. And if you are attracting the right talent, you obviously have a greater chance of success.

The WeWork case has raised concerns internationally on the mistakes entrepreneurs might make if provided with massive amounts of funding. What is your view on that?
It is not a great thing to just throw money at companies, as simple as that. It is obvious anywhere on the globe that that kind of approach is not good. Because it kills the discipline, like if everything could be solved with money as opposed to ingenuity, innovation and building tech to solve problems. If you just throw money at problems, you do not necessarily build tech. And you need tech to win.

Have you set up any kind of new controls in that regard?
We have not had that problem here. As growth investors, we exist to serve the entrepreneurs. It does not mean that we give them the key to the kingdom. Because it is not good for them. Let us have a reasonable relationship and let me help you avoid basic mistakes. Entrepreneurs are our core assets, not capital. If we serve them well, guess what? We make tons of money.