Why Itaú is buying Avenue

Itaú is buying control of Avenue in a transaction that positions the largest private bank in Latin America in a market that is still in its infancy, but which, according to the bank, can “easily” multiply by 10x in the coming years.

The transaction – the second for CEO Milton Maluhy, after the purchase of brokerage Ideal in January – is being divided into three stages.

In the first, Itaú is buying 35% of Avenue for R$ 493 million, valuing the platform for investments abroad at R$ 1.25 billion (pre-money).

Most of this amount will be in a secondary transaction that will give partial exit to all investors, but Itaú is also injecting R$160 million into Avenue’s cash.

In the second stage, Itaú will buy another 15.1% of Avenue at the end of two years, taking control of the company. O valuation will be a multiple of Avenue’s adjusted revenue.

The transaction also includes an option to purchase 100% of Avenue’s capital, which may be exercised in five years at a valuation of discounted cash flow. If Itaú did not want to exercise this callAvenue has the option to launch an IPO if executives meet predetermined financial volume and operating metrics.

The acquisition comes after five months of negotiations between the two companies – and at a time when banks and brokerages have started to enter the investment market abroad.

Inter launched its international brokerage last August. XP announced its international platform three months ago and is gradually rollout to your base.

“That deal creates a new chapter in the competition and offering of financial products abroad,” said Roberto Lee, the founder of Avenue. “It forces the entire industry to connect to this market. All operations will have access to robust products abroad.”

Founded five years ago by Lee – who also founded and sold Clear and WinTrade, sold to XP and Brasil Plural – Avenue is today the largest player of this market in Brazil.

Fintech has 493,000 open accounts, of which 229,000 are active, and around R$6.4 billion in custody. According to Lee, the company is still burning cash, but it is very close to breakeven.

“We hope to have a unit economics very robust in the short term, but [a Avenue] is a growing company that will require a lot of investment, not only in customer acquisition but in the entire infrastructure part,” said the founder.

For Itaú, the transaction is a way of positioning itself in a market that the bank believes will become increasingly relevant for Brazilian customers.

Carlos Constantini, the head of wealth management of the bank and the person responsible for arranging the transaction, said that it is difficult to predict the penetration of international investments in Itaú’s retail customer base, but that the experience with Private can be a proxy.

“In Private [onde o Itaú já tem uma plataforma de investimentos internacionais com US$ 31 bi em ativos], we have seen a gradual and gradual increase in clients’ exposure to international assets, which today reached 25% of the portfolio, on average,” he said. “I don’t think that in retail the level of diversification will be that big, but the potential is huge.”

According to him, the foreign investment market can “easily” multiply by 10 in the coming years.

While the transaction approvals are still pending, the integration of the Avenue platform with the Itaú app and ion will be basically through a referral – with the bank referring customers to the Avenue app.

“After this period, we expect that the offers will be integrated, that the investments in Avenue will appear in the ion, that we will have the Avenue logo inside our app – a much more complete integration.”

Source: Brazil Journal