Deep Dive: NU Holdings (NU US)
A Berkshire-backed compounder at an attractive valuation
Before we begin, we want to acknowledge Federico Sandler (@FedexSTi), ex-Investor Relations Officer of Nu Holdings who added some invaluable insights and helped us edit this report.
The Nu Holdings thesis has been written by many investment analysts but we believe that none of them have done justice to the opportunity. There is a younger cohort of analysts - likely ones that entered the industry in the last 10 years - who have never analyzed a bank. We don’t blame them as most portfolio managers swore off financials after the great financial crisis (GFC).
We are biased and believe that banks in emerging markets present a very unique opportunity. In January 2022, we wrote a detailed report on HDFC Bank, India’s largest private bank. We also used that report as a primer in analyzing a bank’s balance sheet and income statement. HDFC Bank remains on thesis and has produced alpha when compared to the market. It is down 10% YTD compared to -24% for S&P 500. Importantly, there were many opportunities to use HDFC Bank as a source of cash as it rallied to its previous high’s intra-year.
We now come back to another emerging market bank, this time, in Brazil called Nu Holdings. It helps that Berkshire Hathaway owns ~$1 bn in Nu Holdings at close to IPO price of $9 per share while the shares are now half off!
David Velez was born in Colombia, but his family moved to Costa Rica when he was 9 in order to escape the security situation in the country. After graduating as a valedictorian, David went to Stanford for his engineering degree. Thereafter, he worked with Morgan Stanley and then General Atlantic. During this time, David met Nigel Morris, a co-founder of Capital One and got an opportunity to learn about Capital One’s business model.
After General Atlantic, David then went back to Stanford to complete his MBA. After graduating he started working with Sequoia Capital. He moved to Brazil and was tasked with building Sequoia’s Latin American practice. Over time, David and Sequoia both realized that there was not enough talent or opportunity for a thriving tech ecosystem in Brazil and they abandoned their effort.
David describes his experience in opening a bank account in Brazil,
“When I moved to Sao Paulo for the first time, I had to go to a banking branch and it was the most painful experience I ever had in my entire life. I would describe it as almost going to jail because you have to go to these bulletproof doors, you have to leave your wallet and your cell phone and your bag in a locker outside the branch and go through the bulletproof door and wait 60 minutes and then talk to a branch manager that has a horrible attitude that is always thinking I’m doing you a favor, opening your bank account, and it’s not like, oh, let me really serve you. I had to go to the banking branch maybe 10 times in the course of four months to eventually open a bank account that charged me about $30 per month, an interest rate that was over 400% a year.”
-David Velez, founder Nu Bank
While this experience certainly played a part, I believe David’s conversations with Nigel Morris, the co-founder of Capital One, were more consequential. From Morris he likely learned about Capital One’s business model (which we will discuss). Morris would later sit on NU’s board of directors. He also probably saw Oleg Tinkoff adopting this business model to great success in Russia. He realized that this business model, when applied to the highly consolidated, inefficient and underbanked banking sector in Brazil, could pay significant dividends.
Here is David describing the big lessons studying other technology businesses which helped form Nu Bank’s strategy:
Building technology in-house
In 2013, after raising a $2M seed round from Sequoia, David was in business. David’s past experience was as an investor. While he could help set strategy and apply his learnings sitting on the other side of the table from entrepreneurs, he still needed co-founders who could help him execute his vision and complement skill sets that were needed to build a durable financial services business. Cristina Junqueira, a management engineer from Universidade de São Paulo with an MBA from Kellogg School of Management came on board as a co-founder. Cristina was Brazilian and was working in one of the biggest banks in Brazil, Itaú Unibanco, handling consumer’s loans and credit card business. To build the technology stack, Edward Wible, a Princeton Computer Science grad with an MBA from INSEAD joined as a co-founder.
In August, 2014, they raised a $15M series A round. They launched Nubank’s beta a month later, with the primary value product being a credit card with no annual fees.
Why? Why launch an unsecured product in a third world country? Don’t they know people will not pay their credit card bills leaving Nu Bank with large losses!
We believe there are a few reasons:
Success of similar business models in other countries offering an app only user experience and no fee credit card
The opportunity in LatAm with a large financial services TAM (50% of population unbanked/underbanked).
Increasing smartphone penetration with a population that has massive demographic tailwinds and increasing consumer technology adoption.
Case study #1 Capital One