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Why We Invested in Nexu

October 24, 2023

Valor Capital Group is thrilled to announce its investment in Nexu, a promising Mexican-based alternative credit lender, reshaping the automotive industry in the region.

Nexu offers credit and lease options to drivers directly at the point of sale through strategic partnerships with car dealerships. The Company’s differential lies in a powerful distribution channel strategy and an advanced credit model enabling rapid consumer credit analyses while delivering solid non-performing loan (NPL) levels through collateralized products.

The Company’s unique approach offers compelling value propositions for all stakeholders in the value chain: increased sales for car dealerships; greater access to accessible credit options for car buyers; and a high-quality portfolio for debt investors, creating a win-win situation for everyone involved.

 

The Mexican automotive finance industry is a multi billion-dollar market, yet it meets less than half the demand, denying access to three out of five car loan applicants.

As a powerful driver of the local economy, the Mexican automotive industry contributes 3.5% to the country’s GDP, representing more than US$50B in annual sales. However, more than half of potential car acquirers are forced to either abandon their purchase or seek more expensive and less efficient alternative solutions.

This market reality reveals an untapped and neglected segment that encompasses both new and used cars, marked by even deeper-rooted inefficiencies.

  • New Cars: In Mexico, financing is the predominant method of acquiring a new vehicle. According to a recent report from the Asociación Mexicana de Distribuidores de Automotores (AMDA), 40% of new vehicle purchases were made entirely independent of bank financing or other conventional financial methods;
  • Used Cars: Only 2% of used car transactions are completed with financing solutions. Moreover, used cars represent a staggering 86% of Mexico’s annual total car sales, highlighting a significant market opportunity.

As a point of reference, the percentage of new and used vehicles purchased through credit in the United States stands at 84%, accentuating the substantial untapped potential in Mexico’s automotive financing industry.

 

In Mexico, several structural factors contribute to the underpenetrated credit industry.

  • Limited Diversity of Supply: Due to limited risk profiling capabilities, large financial institutions must often resort to a one-size-fits-all credit approach. Consequently, many car buyers receive standardized credit offers unsuited to their unique needs, limiting broader credit access and excluding potential trustworthy borrowers.
  • Sector Concentration: The above problem is further exacerbated by the fact that in Mexico, the seven major financial institutions jointly represent 80% of the total market share. Such an oligopolistic market structure tends to increase the financial burdens on consumers and discourage innovation advancements within the industry.
  • Distribution Channel Inefficiencies: The absence of suitable distribution channels and enhanced UX applications challenge the traditional financial institutions’ ability and willingness to expand their credit offerings. Indeed, traditional banks are not effectively integrated into car dealerships, nor do they have widespread coverage throughout the country, significantly limiting their reach.
  • Poor UX and High Pricing/Rates for the End User: In Mexico, the auto loan approval process predominantly operates offline, leading to inefficiencies that can stretch for days or weeks. This suboptimal user experience not only creates friction for customers’ purchasing journey but also drives up the CAC for banks, which in turn impacts pricing and approval rates.

As a result, incumbents find themselves reliant on the inertia of their established, unbounded core markets, creating opportunities for new-generation players to disrupt the blue ocean segments.

 

Nexu stands in a unique position to catalyze transformative and instrumental change within the automotive financing market in Mexico.

Nexu’s competitive advantage lies primarily in an efficient and low-CAC B2B2C model, ensuring high-quality product delivery to the end-user coupled with a reliable channel. Its initial focus is addressing potential clients who have been denied an auto loan, roughly 50% of the current market, but still have good intrinsic capacity to absorb loans.

 

Through a B2B2C model, Nexu establishes a strategic collaboration with car dealerships, resulting in a highly efficient distribution channel strategy.

With independent car dealerships as its primary distribution channel, Nexu can benefit from a widespread network of over 2,500+ points of sale across Mexico. Today, the Company has secured partnerships with many dealerships, yet there remains significant potential for expansion.

Nexu stands out as a game-changer for car dealerships. The Company empowers car sales representatives with real-time credit approval, albeit subsequent validations. Before Nexu, the standard approach was to use paper documentation. This process often resulted in customers leaving the dealership prematurely, potentially exploring other options, or simply losing their purchasing motivation. However, with Nexu’s instantaneous credit feedback, sales representatives are now equipped with a potent tool that can seal the deal in real time.

Also, technology lies at the core of Nexu’s business model. Equipped with advanced totems, car dealerships facilitate a seamless application process, delivering a fully integrated and 100% online experience for car buyers. This modern approach undoubtedly enhances customer satisfaction and retention.

By offering a compelling incentive, dealerships are enticed to establish long-term strategic partnerships with Nexu, which in turn significantly reduces the Company’s CAC to minimal levels.

 

Nexu’s personalized credit model suits a broader range of customer credit profiles and needs, ensuring a more inclusive lending approach, all while maintaining efficiency and lowering default rates.

Nexu’s credit models enable the Company to extend credit opportunities to a qualified public often overlooked by incumbents. This comprehensive approach empowers car buyers who were denied credit not due to high-risk profiles but rather because of inadequate risk evaluation from limited and outdated traditional credit models.

Indeed, Nexu presents clients with personalized credit products tailored to their unique credit risk profiles while considering both their credit scores and intended vehicle purchases. Moreover, unlike the process of traditional banks, which can often take weeks, Nexu’s system delivers results instantly.

Also, on an operational level, Nexu’s personalized product offerings and robust over-collateralization have allowed the Company to consistently maintain below-market average default rates.

Finally, Nexu has taken significant steps to improve the collections process and avoid collateral recollection. With an efficient collateral system that includes features such as vehicle tracking, Nexu successfully maintains a low single-digit rate of cases requiring collateral.

Nexu is creating a win-win-win flywheel where customers fulfill their dream of purchasing a vehicle, and car dealerships can increase their sales by up to 20%.

 

Founded by a perfectly matched and complementary duo, Nexu is poised for success.

We at Valor Capital believe that the team behind Nexu’s achievements plays a significant role in the Company’s potential to continue building a disruptive and very successful player in the Mexican automotive industry.

Before founding Nexu, both founders met during their MBA at Wharton and spent years in the automotive industry, each starting their journey as brokers. This firsthand experience allowed them to gain a deep understanding of the challenges faced by the local market.

Abdon, a software developer by background with prior experience at PwC, McKinsey, and Credera, oversees the executive part of the business as well as product development.

Fernando, an actuarial scientist with experience in product launching at Shopify and BCG, is responsible for credit and risk assessment at Nexu, working closely in product development.

Equipped with strong determination, strategic thinking, and a relentless focus on execution, Fernando and Abdon’s partnership is the driving force that will elevate Nexu to new heights, and Valor Capital is honored to partner with them on this journey!