Q&A interview
One of Brazil’s largest brokerage firms, XP Investimentos has set off on an aggressive acquisition spree while landing some high-profile executives to join its team in a bid to take on the nation’s largest banks
BY JOE ROWLEY
Brazilian investment management company XP Investimentos kicked off an expansion drive to add breadth and depth to its platform in 2020.
Since the start of the year XP acquired several financial technology firms, including online insurance brokerage DM10, banking app Fliper and digital platform Antecipa. It also launched financial services platform DuAgro with VERT Securitizadora to provide credit lines for rural producers.
Strategic partnerships with France’s AXA Investment Managers in May plus Chile's Moneda Asset Management and US investment management firm Neuberger Berman in August provide clients of the brokerage access to feeder funds for US-based, Multi-Cap and Latin American equity funds.
In June, XP hired José Berenguer, the chief executive officer of JP Morgan in Brazil, to head up its nascent wholesale banking arm and develop new products. The brokerage also announced the launch of an international credit card in partnership with Visa scheduled for 2021.
Another high profile hire saw the addition of Paulo Leme, the former CEO of Goldman Sachs in Brazil, who was brought on board to head up the investment committee of its private banking arm.
XP is backing its growth play with a war chest that includes $1.96 billion raised from its initial public offering on the Nasdaq Stock Market in December. At the time, the firm pledged to use the proceeds to launch new products and services, such as digital payment accounts, and grow its platform through acquisitions.
CFO Bruno Constantino spoke to LatinFinance about XP’s efforts to take on Brazil’s large commercial banks and the brokerage’s early efforts to respond to increasing demand for ESG (environmental, social, and governance) investments.
The interview was edited for clarity and length.
LatinFinance: XP has made several acquisitions since the start of the year and has launched several new partnerships and products. How does the level of activity that we're seeing compare to previous years?
Bruno Constantino: We've been a lot more active in 2020. In the previous years, we focused on the consolidation of the broker dealer space in Brazil and we've done more acquisitions in the broker dealer space in the past. But since the IPO, and because of the growth of our ecosystem, we decided to move forward with other acquisitions that complement our ecosystem. We did five acquisitions announced to the market. One of these acquisitions regards our fund platform. We also had Fliper, which is a fintech related to the open banking strategy that consolidates all your investments and bank accounts, and Antecipa for the credit and securitization business, which is something that will also help to develop the Brazilian capital markets. Then we had DM10 in the insurance business, another fintech in the life insurance business. It’s like a broker, so we are not taking the risk in the insurance business, but as a broker and with our ecosystem, it is something that can leverage our insurance business internally. Finally, we have this joint venture with VERT, which is the number one securitization company in Brazil.
LF: What led you to make the acquisitions and launch the of joint venture, and how do they fit into XP’s broader strategy?
BC: We want to push Brazilians to compare their investments and Fliper is like a GPS for your investments. Basically, you tell it where you want to go and this app is supposed to tell you the best way of getting where you want to go by providing you with a broader view of your bank accounts and expenses and so forth. Brazil still has a lot of inefficient investments. We still have fixed income funds in big asset managers, asset managements that charge, for example, 1.75% in management fees only to buy government bonds that in the short term pays 2% per year, which doesn’t make sense. Antecipa is up and running. We recently hired José Berenguer, the former CEO of JP Morgan in Brazil, to consolidate our institutional and wholesale activity and we believe that Antecipa will be part of the securitization business that will put us as a leader. For the joint venture with VERT, we already do a lot of business with them in our investment banking activity and we decided to get together to create a platform for small and medium agribusinesses. We are going to fund that through the capital markets so, again, it talks to our ecosystem.
LF: You mentioned XP’s efforts to develop its wholesale banking activities and the hire of José Berenguer, who will head Banco XP. What is behind XP’s decision to expand in this direction?
BC: XP, throughout its history, has fought against the high concentration in the financial industry in Brazil. We had to develop a unique ecosystem because the financial system in Brazil has never been about developing the Brazilian capital markets. At the end of the day, the banks were focused on credibility and being solvent. XP didn’t have the balance sheet, so for us to survive and disrupt these highly concentrated markets, we had to develop the Brazilian capital markets. We have always focused on the liquidity of the secondary market and how we can improve financial knowledge in Brazil. We created an ecosystem that brings together the retail investor, independent asset managers and corporate clients all together, and now have such a high market share compared to any other competitor, because no competitor has focused on developing the secondary trading business in Brazil. But what is big picture here? The big picture is the size of the opportunity ahead of us. Brazil has highly concentrated financial industry. Despite our recent growth, 90% of investments come from inside the banks. The banks combined have more than 50 million clients. We have 2.5 million clients. We are just at the beginning and we think it is going to take a long, long time to disrupt the whole financial industry.
LF: Are you currently negotiating any other acquisitions or partnerships?
BC: We are always talking to several fintechs and we expect more [M&As] to close before the end of this year. We have a very active proprietary M&A area in our company, and we are always looking for opportunities. XP has been in the spotlight since the IPO, so we get a lot of inflow in terms of M&A opportunities. We analyze most of them and we decide based on which ones can complement our ecosystem, speed up our growth and has a cultural fit with our purpose.
LF: What impact has the low interest rate environment in Brazil had on demand from clients?
BC: The low interest rate does play a role because it accelerates the shift from bad investments, fixed-income, to other products and that accelerates the growth of our platform. The pandemic also accelerated that because of the [shift to] digitalization and because of the recession, which caused the interest rates to fall. The Central Bank also has an agenda about competition. So, all together, we're seeing competition accelerating, more clients coming, and the need to diversify our international product platform, such as through the AXA partnership. Now, our international product platform is going skyward because in the past, Brazilians would buy government bonds whenever there was a crisis and wouldn’t mind paying a high management fee because they would get more than 10 percent per year. Now, it's different.
LF: Are there any longer-term trends that you see developing in the market?
BC: We have a few different initiatives in the company concerning ESG investing. For example, we hired Marina Cançado [as Head of Sustainable Wealth] to help private clients invest according to ESG principles and we have in our asset management business an initiative about creating a fund to invest focused on ESG. Although the Brazilian capital markets still have too few opportunities for investments, it’s something you've got to think about. In our open fund platform, we had an initiative of a kind of a fund that mimics an ETF that can buy in the United States ESG funds or ETF. We decided it was time to organize all those initiatives under a new area and [ESG & Business Development Director] Marta Pinheiro is coordinating all those efforts. We have a seed fund for BRL100 million for independent asset managers in Brazil to create ESG funds, so we are some initiatives, but a lot more is to come.