Widely used in the Brazilian market for more than 20 years, the so-called FIDCs, or Fundos de Investimento em Direitos Creditórios, a type of fixed-income investment backed by receivables, have been gaining ground among startups in the financial area (fintechs). Entrepreneurs in the country have realized that it would be possible to convert the expected payment receivables into credit rights, raising funds that could leverage the growth and development of new products and projects. The advantages are especially interesting for startups looking to gain some traction, and the strategy seems to have intensified in the last 12 months, with millions and even billions of reais being raised.
One of the most recent operations was that of iugu, a fintech that raised BRL 100 million in FIDC with Bradesco BBI to anticipate receivables from the payment platform’s customers. Before that, CloudWalk, owner of the fintech InfinitePay, had already announced that it had raised BRL 2.1 billion in a FIDC structured by Itaú BBA, the same financial institution involved in the BRL 180 million FIDC formed to support MovilePay and iFood, the leading delivery app in Brazil, in expanding their lending offer to partner restaurants. A similar move was also adopted by Provu, an online personal loan fintech, which raised BRL 1.4 billion in FIDC led by Goldman Sachs.
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But what exactly are FIDCs?
Investment funds that acquire receivables of several types and securities representing credit rights generally originate from car loans, credit card purchases, and trade assets and can be carried out by financial and non-financial companies.
The example of receivables originating from credit card purchases in Brazil is perhaps what best explains the financial engineering behind FIDCs.
Brazilians are used to paying for goods and services through monthly installments on their credit cards; they usually don’t pay for something all at once.
All the future installments to be paid by consumers are receivables that can be sold to a FIDC as credit rights. Merchants wanting to receive all these payments sooner end up selling the remaining receivables at a discount (that is, taking a lower amount than they are owed). This difference between what is anticipated and what is actually owned remunerates FIDCs’ investors.
In the case of startups, receivables can be transformed into assets of a FIDC, leaving investors who acquire their shares indirectly exposed to both the returns and risks of these receivables. At the same time, the startup manages to raise financial resources by securitizing these receivables, which can be either performed receivables (commercial operations already completed) or still to be performed (still to be completed).
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Essential for the economy and rapidly growing
Allowing businesses to be able to raise funds now based on promises of future revenue is important for keeping any economy moving because it allows those on the “front line” to have more capacity to allow financed sales, explains professor Liliam Carrete, who teaches finance for startups at the Faculty of Economics and Administration (FEA) of the University of Sao Paulo (USP). “It is beneficial for the economy as a whole, as long as the potential and risks of this product are understood,” she stresses.
To ensure that this vital instrument is not misused, operations with FIDCs in Brazil happen under specific regulations established by the country’s Civil Code (Law No. 356) and the Central Bank (CMN Resolution No. 2907).
The rules apply equally to traditional companies that want to raise funds to finance their value chain and for startups that want to negotiate their receivables, transforming them into credits for fundraising via FIDCs.
Since 2018, the number of FIDCs and the equity represented by these investment instruments has grown substantially in Brazil. According to experts consulted by LABS, this has to do both with the boost brought by the digitization of the securitization sector, which makes it easier to identify debtors and formalize transactions, and by the incentive of the Brazilian financial market regulators, especially after the start the introduction of open banking and open finance guidelines.
“There has been an effort to give greater granularity to the credit card market since 2013, as well as regulatory and infra-regulatory changes that the Central Bank and the country’s Securities and Exchange Commission (CVM) sought to make for stimulating the growth of securitization and the competitiveness of the lending market. That generates a great expectation of participation in this market, making it more fluid, which is very welcome,” points out Marcelo Ferraz, coordinator of the thematic commission on credit rights at the Brazilian Financial and Capital Markets Association (Anbima).
In the view of Ricardo Binelli, managing partner of Solis Investimentos, which specializes in the management of FIDCs, this type of fund works as a disintermediation instrument, allowing companies and people to be financed without the need for a bank.
FIDC-like products have been around for some time in the U.S. and Europe, where the securitization market is already quite developed. The difference, in general, lies in the legal characteristics of international products, which tend to be somewhat different. “What we have seen is that the Brazilian market seeks to synthesize here the legal basis present in the international market,” analyzes Ferraz.
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New dynamics allow fundraising via FIDCs even at the early stages
The amounts raised by recent FIDCs show that this is a strategy more aligned with late-stage startups. Companies that create their own FIDCs need to have a relevant credit origination volume for this type of operation to be financially attractive. “FIDCs have a slightly higher cost structure than a typical fixed-income fund. Therefore, they need equity and be backed by a credit portfolio with enough volume to dilute costs and deliver a better return for investors,” explains Binelli.
However, there is a strategy being worked on by some capital managers that bet on a “warehouse” format, bringing together credit quotas from different early-stage startups in the same FIDC. Thus, instead of setting up their own FIDC and bearing all its costs, early-stage startups start to originate credit for a “collective” FIDC of a manager. “This warehouse strategy allows fintechs to put their energy into credit origination, but at the same time maintains an alignment of interests because the startups need to own at least a part of the subordinated quotas of that fund,” he details. Binelli cited some of the FIDCs in his portfolio that went through this warehouse strategy, such as TradePay’s FIDC (the first dedicated fintech FIDC to go to market), and the FIDC from ASAAS, a fintech that offers microloans for micro entrepreneurs.
(Translated by Fabiane Ziolla Menezes)