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Goldman's Longshot Pick to Challenge Brazil's Banks Takes Off

Goldman's Longshot Pick to Challenge Brazil's Banks Takes Off

(Bloomberg) -- Brazil’s president was facing impeachment, corruption scandals and protests were spreading and the economy was sliding into one of its biggest slumps ever. For banks, it meant writing off loans. International lenders were retreating.

It was 2016 and Goldman Sachs Group Inc. decided the time was right to pump money into a Sao Paulo startup looking to reinvent the country’s financial industry, starting with zero-fee credit cards.

The unlikely alliance is paying off, even as the country’s growth remains anemic. The venture, now widely known in Brazil as Nubank, for Nu Pagamentos SA, has reached 8.5 million consumers and sold private shares in itself with a $3.6 billion valuation. If it keeps expanding at its current rate, it will soon become the fourth-biggest card issuer in Latin America’s largest economy, and it’s starting to expand abroad. Goldman got in early by agreeing to finance customers’ credit lines. Its executives say they’re eager to help Nubank grow further.

“We have the flexibility of investing up and down the capital structure -- whether it is lending, equity or a combination of things,” said Jason Nassof, an executive in Goldman’s special situations group.

The pairing of a South American startup with one of Wall Street’s premier investment banks began with a group of entrepreneurs who saw an opportunity in Brazil but weren’t likely to get much support from the country’s financial sector. In Goldman Sachs’s special situations group they found a business that’s long prided itself on taking risks, for the right price. The New York-based firm happened to be embarking on its own push into online consumer banking under the brand name Marcus.

Goldman Sachs got not only a chance to profit on financing for Nubank, but also an early relationship with a company that may someday need an underwriter for an initial public offering -- though Nubank’s main partners say that won’t happen soon. It also got an inside look at the prospects of financial technology firms in Latin America, a frontier where it’s now hunting more opportunities.

And by helping Nubank, it indirectly helped the startup’s equity investors led by Sequoia Capital Ltd. The powerful venture capital firm holds stakes in a long list of unicorns that will someday need to pick an investment bank.

Bulletproof Doors

Before co-founding Nubank, Chief Executive Officer David Velez spent two years at Sequoia, trying to find an investment in Latin America. Instead he found a problem.

“To open a bank account in Brazil is a surreal and painful experience,” said Velez, who is Colombian. “You need to go through bulletproof doors, take your keys, wallet and cellphone out of pocket, and the alarm will sound many times.” It can take 30 minutes to talk to an employee, he said, and then there’s the paperwork.

Goldman's Longshot Pick to Challenge Brazil's Banks Takes Off

Velez, 37, sees Brazilian banks as an oligopoly, charging high margins with poor customer service. He wanted to challenge them with an online system that would let people open accounts or credit cards in a fraction of the time. Yet he kept meeting skepticism: “People told me that banks would crush us, regulators would crush us.”

He enlisted Cristina Junqueira, a Brazilian credit-card veteran who worked at a joint venture of Itau Unibanco Holding SA and retailing giant Magazine Luiza SA. “I knew the industry, and saw the perfect opportunity to prove them wrong, to build something people actually wanted," said Junqueira, 36.

They and Edward Wible, a 36-year-old who began his career at Boston Consulting Group, created Nubank in 2013. Sequoia ended up being an early backer in 2014, making the fintech the fund’s first and only equity investment in Brazil. While Nubank went on to amass $420 million in equity fundraisings, Sequoia remains the largest shareholder after the three founding partners. 

‘Expensive’ Support

It was Goldman Sachs, though, that provided the first loan, 200 million reais ($50 million) in May 2016, using a receivables securitization structure. The credit was expanded to 455 million reais in August 2017, with Fortress Investment Group also participating. The companies don’t comment on the size of the loan now.

Nubank’s Velez said Goldman’s initial rates were “expensive,” but he credited it for taking a chance when others wouldn’t. “We started with no history, tried talking to every single investor in Brazil and couldn’t find anyone to take the risk,” he said. “As we’ve grown into a cash-flow positive company, we’ve been able to negotiate better terms.”

Goldman’s special situations group was born more than a decade ago from a collection of overseas trading desks and lending units. It’s since evolved to engage in a wide variety of deals with companies, often providing bespoke financing, but sometimes taking stakes. The bank eventually moved the business’s earnings from the trading division into its investing and lending segment. Earlier this year, the group agreed to provide Mexico’s Credijusto with a $100 million facility to support its lending to small- and medium-sized enterprises.

Nubank is based in a multi-colored office building, near a bohemian neighborhood away from Sao Paulo's financial district. With high ceilings and exposed concrete, the vibe is more tech startup than staid financial institution.

Finding Inspiration

The company has found inspiration from far-flung quarters. Velez is a fan of Capital One Financial Corp., which for years achieved explosive growth with a mix of marketing and data analytics that helped it set terms for credit cards. It eventually expanded into other banking services. Nubank recruited one of Capital One’s founders, Nigel Morris, to its board, and much of the startup’s credit team is from there, too.

Velez also flew to Russia repeatedly to study Tinkoff Bank JSC, an online bank. Then, a couple of years ago, he started going to China.

“To me it was like traveling to the future, considering the amount of technology and data they are able to use in lending,” he said. Tencent Holdings Ltd., the operator of WeChat, the messaging app that handles payments, ended up investing $180 million and acquiring 5% of Nubank, according to an October report from Moody’s Investors Service.

“We didn’t need capital for that round, but we decided Tencent could be a really strategic investor,” Velez said. “And we’re learning a lot from what they are doing.”

Read more: Why China’s payment apps give U.S. bankers nightmares

Now Nubank is inspiring a fleet of other online ventures, such as Brubank SAU in Argentina.

Last February Nubank started offering loans and, after getting a central bank license, it can raise cheaper local retail funding. It expanded into Mexico this month.

“We would love to help them grow in that part of the world," said Gaurav Seth, a partner in Goldman’s special situations group. “We look forward to doing more business with Nubank both in Brazil and outside.”

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net, Dan ReichlMichael J Moore

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