This week, it was announced that Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) has agreed to invest $500 million in Brazilian digital bank operator Nu Pagamentos SA, aka Nubank. This investment, coupled with an additional $250 million from various domestic and foreign investors, put the company's value at $30 billion.
Berkshire's Brazilian investment
The Brazilian digital bank operates via its Nubank brand, and it is the largest fintech in Latin America. It has 40 million users in Brazil, Mexico and Colombia. According to the company, the investment from Berkshire is the most significant single investment it has ever received.
This deal is interesting for a couple of reasons. First of all, it's the second substantial fintech investment the conglomerate has made in South America in recent years.
When StoneCo (STNE, Financial) went public in October 2018, Berkshire snapped up 14 million shares in the Brazilian payment processor. Berkshire owned around 5% of the business at the time.
StoneCo started as a payments company, but it has grown by providing a suite of products for customers. The number of customers using the platform has expanded rapidly, and its expansion into software, credit and banking means its market is substantial.
Due to the size of this position (it was initially smaller than $1 billion), I think it's most likely one of Buffett's portfolio managers, Todd Combs or Ted Weschler, who initiated the position. I have previously speculated that Combs may have been behind the deal. He has also been associated with the firm's substantial investment in India's Paytm, the largest mobile payment service in the country.
I don't think it's unreasonable to assume that the same manager is behind this trade. After all, all three of these companies are active in the same sector: digital payments. So if Combs knows more about this sector than any of the other investment managers at Berkshire, he would likely be behind the trade.
Growing market
Even though Combs and Weschler and have some level of autonomy in Berkshire, their investing style is not too dissimilar to that of the Oracle of Omaha. Buffett has, in the past, stated that he would be open to investing in Brazil at the right price. For example, he said at Berkshire's 2006 annual meeting of shareholders:
"Brazil would not be off-limits at all, but we'd have to be able to get a lot of money into a business we understood at an attractive price. We would want it to be cheaper than if it were in the United States. We wouldn't understand the tax laws as well, the nuances of governance, a whole bunch of things. But after allowing for that, at a price, we would do it."
Based on these comments and Berkshire's investment in StoneCo, I believe the conglomerate's investment managers think they have found two market darlings with StoneCo and Nubank. These companies may be cheaper than their peers in the United States, and they may offer the potential for even faster growth as they operate in developing markets.
According to Nubank's CEO, there are 60 million people in Brazil and 250 million in Latin America without access to financial services. That's excluding the millions of consumers already inside the banking system, which is undergoing a significant transition. Nubank offers life insurance, personal loans, investing products, mobile payments and products for small businesses and entrepreneurs.
Over the past few decades, Berkshire's exposure to financial services companies has multiplied. As the value of U.S. equities has risen to record levels, it would appear that the investment managers at the group are now looking outside the country for value.
They seem to have found it in the fast-growing, digitally developing Brazilian economy. It would appear the managers believe the region's economic growth will make these investments worthwhile in the long run.
