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KPMG Report: $111 billion awaits capital calls from global management companies, recovery likely postponed to 2025

01/16/2024


Daniel Malandrin — Foto: Rogerio Vieira/Valor

Daniel Malandrin — Foto: Rogerio Vieira/Valor

In 2023, high-interest rates and macroeconomic uncertainties severely affected the venture capital sector, leading to a consecutive annual decline in Brazil’s startup investments. A survey commissioned by Valor and conducted by Sling Hub, a data intelligence platform for the sector, revealed a 39% decrease in investments last year, a decline slightly less than the 41% experienced across Latin America.

A KPMG report reveals that investors have committed $111 billion globally to management companies, pending allocation to startups. Daniel Malandrin, KPMG’s lead venture capital and innovation partner, attributes the move to increased risk aversion, leading to greater selectivity among asset managers and investors who now favor larger, profit-generating companies. He forecasts a challenging 2024, with many startups struggling and investors remaining cautious.

Mr. Malandrin predicts a continued rise in startup failures due to funding challenges in 2024. The start of monetary easing in the United States, a key driver for the market, remains uncertain.

In December, Distrito, an innovation platform, reported that 60% of venture capital fund managers do not anticipate a return to pre-crisis activity levels in the sector for over 18 months.

Oscar Decotelli, CEO of DXA Invest, which manages R$1 billion in “growth equity” funds—a blend of venture capital and private equity—noted that companies that weathered 2023 have emerged stronger into 2024, having slashed costs and enhanced efficiency. He also noted a significant reduction in financial needs, with companies now requiring only R$0.30 for every real they needed at the beginning of last year. However, Mr. Decotelli anticipates that investor interest in both startups and established companies will only pick up in the latter half of the year.

Mr. Decotelli points to uncertainties in both international and domestic markets as major influences on investment decisions. In the United States, the anticipated decline in inflation due to rising interest rates has been offset by signs of a resilient economy, delaying expectations of rate cuts. In Brazil, initial concerns over fiscal policy have eased following government measures. Despite high-interest rates in 2022, which saw a robust influx of startups, Mr. Decotelli describes 2023 as a “double negative” year, where companies struggled to sell products or raise capital for operations, marking it the most challenging year in the past decade.

Additionally, the early 2023 credit crisis, influenced by Americanas and Light, led to costlier financing and significant declines in funding through capital markets and bank lending. Mr. Decotelli highlights the plight of small companies with innovative products, which started the year hopeful for capital to grow or maintain operations but failed to secure funding.

The Distrito survey reveals that 35.7% of asset managers experienced negative impacts on their operations during the crisis. In comparison, 11.1% seized opportunities, such as purchasing assets at reduced prices. Mr. Malandrin from KPMG remarks, “Managers who have successfully raised funds in the past two years are now ideally positioned for negotiating with promising startups in need of growth capital.” He emphasized the need for investors to recognize the adequacy of the risk premium in venture capital for the sector’s recovery.

The KPMG executive highlights that the recent widespread increase in interest rates marks a major macroeconomic shift unprecedented in a decade of venture capital. “Until 2022, the remarkable productivity gains of startups didn’t impede investments due to the surplus of capital. The focus was on growth at any cost, followed by profitability.” However, he notes, there is a heightened demand for results due to competition with U.S. interest rates. Previously, venture capital investments were estimated to yield a 12% annual return in dollars; that has now decreased to a 7% differential with the U.S. prime rate at 5%.

Data from the Brazilian Private Equity and Venture Capital Association (ABVCAP) indicates a partial recovery in the third quarter of 2023. Venture capital funds invested R$1.9 billion across 62 rounds, a 19% increase from the R$1.6 billion invested between April and June of the same year. However, the number of deals decreased by 16%. Compared to the third quarter of 2022, there was a 29.6% reduction in the invested amount and a 66% decrease in the total number of transactions.

Mr. Malandrin from KPMG explains that the current trend of investing more money in fewer startups, particularly larger ones on the path to profitability, is due to increased selectivity. He emphasizes that this trend is not a structural but a cyclical change, likening it to a temporary memory that might fade with new technologies and managerial approaches. “Nevertheless, it represents a significant learning opportunity for the entire industry,” he added.

Globally, KPMG data indicates that the volume of transactions fell to its lowest since the fourth quarter of 2018. In the second quarter of 2023, the volume was $81.4 billion across 9,563 transactions, which decreased to $77.05 billion in 7,434 transactions in the third quarter. That represents a 5.35% drop in value and a 23% decrease in the number of deals.

In Brazil, fintechs garnered the most investment in 2023. The Sling Hub survey reports that 54% of the country’s transactions involved fintech companies, up from 43% in 2021 and 45% in 2022. João Ventura, founder and CEO of Sling Hub, attributes the increase to large funding rounds during the year.

Mr. Ventura highlights significant transactions such as fintech Meutudo’s announcement of a new R$2 billion FIDC—a fixed-income investment backed by receivables such as trade assets, checks, and car loans—managed and administered by BTG Pactual Asset, focusing on social security (INSS) payroll loans. Another notable investment was Citi’s $466 million infusion into Mercado Pago, which was aimed at expanding its credit operations in Brazil and Mexico. “We haven’t seen operations of this magnitude for quite some time,” Mr. Ventura remarked. According to KPMG, Brazil currently boasts 13,300 active startups, with fintechs constituting 11% of these enterprises.

*Por Liane Thedim — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
Telefônica Vivo vende 1.909 torres por R$ 641 milhões

Telecom Vivo announced on Monday the creation of its first corporate venture capital (CVC) fund to invest R$320 million in startups over the next five years. The amount makes Vivo Ventures one of the largest CVCs in Brazil.

The company plans to invest in 12 to 20 startups, with stakes in the range of R$15 million to R$20 million, in an average allocation of R$60 to R$80 million per year.

“We want to have stakes close to 20%. Therefore, the startup has to be big enough in the pre-money for our check to represent that percentage,” Christian Gebara, Vivo’s CEO, told Pipeline, Valor’s business website. In the average the company projects, the startup should have a price valuation around R$100 million before the investment.

Vivo has begun discussing internally and formatting the fund over the past six months, part of the company’s strategy to “Digitize to Bring Closer”, as its institutional motto states. “This means not only being the connection structure, but also being a digital ecosystem,” says the CEO.

Until now, Vivo’s investments in startups were made through Wayra, the Telefonica group’s innovation hub. Globally, Wayra has already invested the equivalent of R$300 million and, in Brazil, there were about R$25 million in a decade, with 30 startups in the local portfolio.

“Unlike Vivo Ventures, these were pre-seed and seed funding, with an average ticket of R$1.5 million. Now we can enter series A or B rounds of companies that have gone through this seed,” says Mr. Gebara.

One of the attractions for the startups, besides the capital, is the access to Vivo’s ecosystem, emphasizes the CEO — the telecom giant has more than 100 million pageviews in its base, 1,700 stores and 20 million unique users in the app, with an average of 80 million monthly interactions.

This connection has given Wayra’s startups revenues of R$70 million in 2021 with Vivo alone — Gupy, for example, is a recruiting company that was hired by the investor. “Companies can raise money with other funds, but few have this customer base, the volume of channels and the big data that we have,” says Mr. Gebara.

Wayra invests in Gabriel, a security and camera monitoring startup that currently operates indoors — if it begins to operate indoors, it may enter the smart home connection, for example, an issue in which Vivo has been engaged.

Wayra’s team will be responsible for the technical part of CVC and the business flow for the fund, which is interested in solutions in finance, health, education, entertainment, whether B2C or B2B. The company already has initiatives in these areas, such as Vivo Money, a personal credit service, and Vivo V, a health and wellness marketplace.

In Brazil, corporate venture capital funds have already made more than 200 deals in the last 20 years, amounting to $1.3 billion, according to a survey by fintech Distrito — most of this capital has been invested in the last two years. Here in Brazil, almost 70% of the CVCs are focused on the initial phase of startups, and therefore generally have lower volumes.

Sinqia’s CVC, for example, is R$50 million, and CSN’s is R$30 million. Companies that invest in more mature phases also have larger vehicles — BV Bank made R$300 million available to this type of investment in 2018, Via allocated R$200 million last year and Banco do Brasil divided this same amount in two vehicles earlier this year.

In the world, $80 billion were invested by CVCs only in 2021, according to CB Insights.

According to Mr. Gebara, Vivo will continue simultaneously with other strategies, such as partnerships in the model of the joint venture with Ânima Educação and maybe acquisitions. “The investment in startups complements our digital positioning,” he adds.

Source: Valor International

https://valorinternational.globo.com