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U.S. Financial Firm Courts Start-Ups in Brazil

31 July 2013

(Deal Book) The SVB Financial Group in California has long been an important banker and investor in American venture capital firms and technology start-ups. Now, the company is testing the waters in South America, particularly Brazil.

In recent months, one of SVB’s subsidiaries, Silicon Valley Bank, has added venture capital firms and young companies in the region as clients. In May, it met with the mayor of the Brazilian city Porto Alegre at its Santa Clara, Calif., headquarters.

And SVB Capital, another subsidiary, expects to make new investments in South American venture capital firms from its latest fund of funds, the American-based $322.8 million Strategic Investors Fund VI, which closed last month.

SVB’s interest has been piqued by a still nascent but vibrant start-up ecosystem in Brazil. But it also comes as Brazil’s economy is lagging and social unrest abounds. This month, Nomura Securities lowered its estimates of the country’s economic output for both this year and 2014. The Brazilian Central Bank also raised its benchmark interest rate earlier this month for the third-consecutive time this year in response to concerns about rising inflation.

But the cooling economy does not seem to concern SVB Financial, which has more than $22 billion in assets. “I think it is good for everybody when things pull back a little bit,” said Aaron Gershenberg, managing partner for SVB Capital. Indeed, valuations have fallen and deal-making is less rushed.

Andy Tsao, the Silicon Valley Bank managing director in charge of the global gateway initiative, said he was not particularly worried about the large street demonstrations against corruption and inadequate public services. The protests, “while sometimes a bit chaotic, seem to be something generally positive for Brazil,” he said.

“We are still bullish for the long term,” he said.

Silicon Valley Bank is initially focusing on providing banking services to start-ups and venture capital firms in Brazil and South America that have offshore accounts denominated in United States dollars.

In just over a year since it started meeting people in Brazil, the bank has added as clients 80 companies and 10 venture capital firms from countries including Argentina, Uruguay and Chile, as well as Brazil. They include the online real estate listing company VivaReal, the Brazilian venture capital firm Monashees Capital and the Argentine venture capital firm Ax Ventures, and their portfolio companies.

Lisandro Bril, an Ax Ventures managing director, said he was pleased with SVB’s interest in his firm, “Nobody provides services to my companies that SVB does,” he said. “There is zero lending and zero access to financing in the region.” He said he first tried to get the firm’s attention in the 1990s but to no avail.

Monashees dropped JPMorgan Chase and Morgan Stanley for SVB in 2012, according to a person with direct knowledge who did not want to be named because the discussions were confidential.

Banking has resulted in additional business for SVB. Monashees and the Redpoint e.Ventures $130 million fund were the first two South American-based funds SVB Capital invested in, both last year.

With the new Strategic Investors Fund VI fund, SVB Capital expects that it will continue to to invest in both firms. Mr. Gershenberg said that if they executed their strategy, “we are going to stick with those guys for two or three funds. That is our expectation.”

And even while the fund of funds will be focused on investments in the United States he said that “we will add one maybe two names.” Kaszek Ventures, based in Buenos Aires, is one venture capital firm he identified as a top candidate.

SVB Financial is also keeping an eye on some accelerators and incubators in the region. It sponsored 21212’s Demo Day for technology start-ups in Rio de Janeiro last year, and Silicon Valley Bank has provided banking services to the portfolio companies of NXTP Labs, a seed fund accelerator in Buenos Aires.

This exposes SVB to the start-up market in Brazil at an early stage. That has also been their approach in the United States.

Today, it says it counts more than 50 percent of all venture capital-backed technology and life science companies as clients. Its stock, which closed Tuesday at $87.54, is up nearly 50 percent from a year ago.

Profits have risen. Last week, SVB Financial posted net income for the second quarter of $48.6 million, or earnings of $1.06 a share, beating analysts’ estimates. That compared with a net income of $47.6 million in the same quarter last year.

While most of its income comes from its business in the United States, the company is expanding globally. Over the last decade, it has set up offices in Britain, China, India and Israel. It has also invested in venture capital funds in those countries.

And now, SVB Financial is spending time in Australia, Russia and Turkey, places it considers important to new business.

How aggressively the firm expands in Brazil is uncertain. Setting up a full commercial bank is a possibility, although that does not appear to be its current focus. Brazil has a robust and competitive banking industry.

But some in the industry say that SVB Financial will soon need to start providing local financing to attract larger companies. In the United States, a question mark for SVB has been its ability to retain clients as they grow, although that has improved in recent years.

Still, many in the industry said that SVB Financial could fill an important void in Brazil and would like to see it expand more aggressively.

“Their potential in the Brazilian market is huge,” said Everson Lopes, portfolio director with the Rio de Janeiro venture capital firm Ideiasnet. He said that was probably because “the major commercial Brazilian banks are not able to provide good services to start-ups and young companies, especially in technology.” They demand assets most of these companies lack.

Francisco Alvarez-Demalde, a founder and partner at Riverwood Capital Partners, a private equity firm with investments in South America, also said the lack of debt financing options in the region for early stage companies beckons a larger role for SVB. “They could really push the region and make a real difference,” he said.