From Credit Lines to Capital Markets
A multi-faceted approach to scaling a FinTech loan portfolio in emerging markets
This post is taken from Sturgeon Capital’s Q1 2025 manager update to LPs. FinTech is one of the key investment verticals for Sturgeon in Emerging Asia, representing the largest TAM in almost every market. Scaling a FinTech lending business in these markets requires a multi-faceted approach to unlocking debt capital from local and international financial institutions. This letter digs into the challenges and opportunities in Emerging Asia, as well as what we can learn from comparable emerging markets that are more developed. If you would like to learn more, please get in touch on LinkedIn.
As you know, FinTech lending is one of the core investment verticals across Sturgeon’s funds. The rationale behind this is simple: established financial institutions in emerging markets do not have the data or distribution to meet the needs of individual and SME borrowers. Solving the challenges of data and distribution can unlock the largest addressable market in any country, and technology companies are best placed to do this, and at scale. There are broadly two ways for startups to tackle this opportunity:
As another business initially that embeds financial services on top of its existing products, such as Trukkr or Billz.
The area where established financial institutions have an advantage over startup competitors is their depth of balance sheet. Most deposits they hold on behalf of corporations and individuals are invested in government or corporate bonds. This is a good trade, especially when you pay low to no interest on deposits and can take sovereign risk, then head out for an early lunch. Solving the balance sheet problem is the key challenge for FinTech lending startups as they scale and is something we have been spending a lot of time thinking about recently as we support the portfolio. This letter digs into that challenge and the opportunities for solving it, based on our own experience as well as lessons from other markets.
Thank you to Rati Morchiladze at Foresight Group, Mariam Rostomashvili at TBC Capital, Karen Srapionov at Avesta Partners, Dana Kurmanbayeva at Tansar Capital, and Ali Farid Khwaja at kTrade for their insights and help in writing this piece.
Typically, a FinTech lending startup will build its initial portfolio using equity. With no prior track record, they cannot go to a third-party debt provider. However, once they have built that initial portfolio and demonstrated the ability to score, distribute and collect loans, then they must source external funding to scale. There is no way that a startup can scale without third-party financing in emerging markets for three reasons:
There is not enough equity available;
If there were, it would dilute the founders and investors out of existence; and,
The return on equity for an unlevered portfolio would be pitifully low and long-term valuations constrained as a result.
In developed markets, the next step would be to raise venture debt funding. While the cost is higher than a credit line from a bank, this funding would allow a startup to scale to a point where it could tap into more commercial debt facilities. However, this is usually not an option for startups in Emerging Asia. While there are emerging market-focused venture debt providers, such as Lendable, Almavest and Partners for Growth, Emerging Asia is not explicitly part of their mandate and so they are unlikely to work there. When they do, the typical cost of funds for a startup will be 18-20% in USD, to which one must add 5-10% in hedging costs. Such funding can be a short-term stopgap for a company; however, at an all-in cost of 23-30%, the net interest margin is not viable at scale.
The real opportunity lies in unlocking local currency funding. While central bank rates are typically higher in emerging markets, taking away the foreign exchange risk and hedging costs makes such funding more profitable. It is also more scalable if one can persuade traditional institutions to unlock their balance sheets. Doing that is easier said than done; most banks in emerging markets are slow to work with startups, especially at an early stage, because neither they nor their customers can provide collateral. We are starting to see this change in our markets, with Pakistan ahead of the rest. Bank Alfalah, Bank of Punjab and Meezan Bank have set a precedent for working with early-stage startups, notably including the $47m debt facility provided by Meezan Bank to Haball. However, many banks will still ask for any credit line to be fully collateralised by dollar deposits before they will start working with a startup.
An alternative to working with banks directly is to tap into local capital markets. While they might not be comparable to developed markets, even in a small country like Georgia, the outstanding value of local corporate bonds at the end of 2024 was more than GEL 2.51bn ($920m). This is large enough for an early-stage company looking to raise the first $3-5m on top of its existing equity, and the rates are attractive; average coupon rates in Georgia in 2024 were 8.36% and 12.94% for USD- and GEL-denominated bonds, respectively.
The challenge, much like with bank credit lines, is that local capital markets are not set up for early-stage companies to issue bonds. Arcane processes, collateral requirements, and a lack of understanding about startups on the demand side mean that corporate bond markets are dominated by established businesses and financial institutions.
Applying our usual principle of learning from comparable emerging markets, the most advanced region for FinTech capital market issuance is Latin America. Some examples:
Regional giant Mercado Libre has successfully tapped both local and international capital markets. As of Q4 2024, the company had $1.8bn in collateralised debt under securitisation transactions in Brazil, Argentina, Mexico and Chile. It also has third-party funding arrangements with global banks, including $250m from JP Morgan and $233m from Goldman Sachs. The company issued its inaugural bond offering in 2021, raising $1.1bn, made up of a $400 million sustainability bond with a 2.375% coupon and $700 million in senior notes due 2031 with a 3.125% coupon. The bonds were registered with the SEC and listed on the Nasdaq Bond Exchange.
In Brazil, Nubank has successfully raised BRL 500m ($87m) through the issuance of an FIDC (credit receivables-backed fund) backed by credit card vouchers, and BRL 1bn ($175m) through a public offering of financial bills.
Brazilian FinTech Creditas has historically issued multiple FIDC-backed securitisations totalling up to BRL 900m ($158m), backed by auto loans, personal loans, and mortgage loans. The company has issued two tranches of unsecured corporate bonds under a framework allowing for up to $150m in aggregate nominal amount, including $40m in 2023 at a 13% fixed interest rate in USD, and $60m in 2024 with a 10.5% coupon.
Mexican FinTech Konfio has issued asset-backed securities tied to SME loan portfolios for $160m, via a Goldman Sachs loan facility.
Proximity to the US means that it is easier to work with large institutions such as Goldman and JP Morgan, and it will be some time before we see these kind of brand names active in Emerging Asia. However, access to capital markets has enabled these FinTech’s to diversify their source of funding and scale their loan book. If we can unlock domestic capital markets in our region, this will enable our portfolio companies to scale profitably and drive higher returns for us as equity investors.
Things are already starting to happen in Emerging Asia. In Uzbekistan, TBC issued bonds for UZS 128 billion ($10m), with a yield of 24%. This was the largest corporate bond issuance by a digital bank in Uzbekistan and one of the largest by any company on the local market. Jointly managed by TBC Capital and Avesta Investment Group, 70% of the issuance was acquired by the Abu Dhabi Uzbek Investment fund, while the remaining 30% was purchased by the Azerbaijan Uzbek Investment Company. Across the border in Kazakhstan, FinTech super app Kaspi recently issued its debut $650 million Eurobond offering of 6.250% senior unsecured notes. While Kaspi and TBC are established financial institutions, Kazakh startup Solva successfully issued bonds worth KZT 7 billion ($13m) on the Kazakhstan Stock Exchange (KASE) with a yield to maturity of 21.5%.
Sturgeon’s portfolio companies are at the forefront of efforts to tap into local markets. Abhi issued the first ever Sukuk bond for a FinTech firm in the MENAP region, raising PKR 2bn ($7.1m) in 2023 at KIBOR +2.5-3%. Fellow Pakistani startup Trukkr is working on issuing a bond in the second half of 2025, utilising the precedent set by Abhi’s issuance, which was 2x oversubscribed. This builds on the existing bank credit lines that Trukkr established in 2024. In Central Asia, Cargon is working with a bank in Kazakhstan to structure a domestic bond issuance that will help meet working capital requirements for its carriers.
Emerging Asian FinTechs do not have it easy. VC capital is limited, established institutions are slow to work with them, and local capital markets are nascent. However, the precedent set by startups in Latin America shows what is possible for startups that can weather these challenges. We are already seeing progress, both within and outside of our portfolio, enabled by support including credit guarantee enhancements by DFIs in Pakistan and Uzbekistan. Ultimately, our advice to portfolio companies is always to diversify their sources of funding as much as possible. Ideally, a combination of equity, international venture debt, local currency bank credit lines and capital market issuance should be used to provide a scalable balance sheet and optimise profitability.