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Endeavor Catalyst has invested in more than 10 different companies in Brazil, Argentina and Mexico. Here an Endeavor event in Santiago, Chile in June. (Photo: Endeavor)
Wednesday, October 1, 2014

Latin America Venture Capital: Mixed Outlook

The outlook for private venture capital varies from country to country and sector to sector.


Inter-American Dialogue


Private equity investments as well as deployments of venture capital in Latin America declined by 10 percent in the first half of this year, as compared to the same period last year, to $2.6 billion, the Latin American Private Equity and Venture Capital Association said recently. Fundraising in the period totaled $3.5 billion, a figure the organization estimates could reach $8 billion by year's end. What are the trends in venture capital and private equity in the region? Who is investing money and in what sectors? Which countries have attracted the most and least investment this year, and why? 

Alejandro D. Fiuza, partner and chair of the Latin America Practice Group at Brown Rudnick LLP: 
We have seen a significant increase in venture capital and private equity investments (many of them high-end and mid-market) in Latin America over the last few years, both from international as well as local investors, along with the more prominent role played by some sovereigns and government-owned funds and the growing role of the so-called 'Multilatinas' in the region and outside the region. While the key drivers of M&A activity continue to be opportunistic, economic and political volatility as well as the growth of middle class, our clients see Latin America as a region ripe with opportunities and with innovative entrepreneurs. In the last 12 months, we have assisted our clients in closing numerous series investments in various Latin American companies. As an illustrative example, one of our clients, Endeavor Catalyst, alone has invested in more than 10 different companies in Brazil, Argentina and Mexico, mostly in the emerging tech and consumer products space. The same client was also involved in two exits, the last one in connection with Globant S.A.'s recent IPO. There has been significant appetite in other segments (for instance, oil and gas, energy, infrastructure, agribusiness, IT and telecommunications). While a significant percentage of the exits in 2013 involved Brazilian companies, there were also exits in other areas in the region (Mexico, Chile, Andean region and Argentina). When it comes to Latin America, there is no such a thing as a one-size-fits all investment approach. There is not a single recipe for success. For instance, sudden and unpredictable regulatory changes often dissuade some investors (the most risk-averse funds) from investing in some countries or industries, but others see those very same changes as challenges and opportunities for arbitrage. Last but not least, Latin American firms are taking a more active role north of the border--this is growing, and it is not just Brazilian and Mexican companies that see opportunity in the North American market. This is a very interesting development..

Bret Rosen, managing director at Jamestown Latin America: This year's decline in private equity investments in Latin America should be viewed as cyclical in nature, rather than representative of a longer-term trend. Local and foreign pension funds, endowments and sovereign wealth funds are all allocating funds to the region, and once economic growth returns to trend level, they will likely be investing more aggressively. Domestic pension funds have seen substantial increases in assets under management, and given the lack of liquidity in many domestic stock markets, are increasingly more interested in private equity. Private equity investors continue to search for opportunities linked to the rise of the middle class in Latin America. In particular, businesses connected to the rising consumption of the middle class are gaining marked interest. The real estate and retail sectors benefit from interest rates that are low from a historical perspective and higher levels of disposable income. Latin America has a substantial housing deficit (Brazil's is estimated to be over 6 million), and mortgages are now within reach of larger percentages of the population. Due to better access to consumer credit and healthy jobs markets, retailers and shopping malls have delivered good financial performance. Meanwhile, the average Latin American consumer is demanding the same products middle-class citizens in the United States and Europe have been accustomed to. Private equity investors are deploying capital with these trends in mind. The Andean countries have seen growing interest due to strong economic fundamentals and rising consumer confidence. Returns in the Colombian and Peruvian markets should be attractive, especially as the landscape there is less competitive than in the region's largest markets. Colombia and Peru only recently have entered the radar of large institutional investors. Brazil remains a major focus; despite its subpar macro numbers, Brazil represents a huge domestic market, with more than 200 million people, more than 50 percent of whom are considered to be middle class, a GDP of more than $2 trillion and a strong consumer culture. 

Francisco Alvarez-Demalde, founder and partner of Riverwood Capital Partners in New York: 2014 has continued to be a strong year for private equity and venture capital for Latin America, and deal activity might end up close to record levels, despite the decrease in the first half of 2014 versus 2013. However, we see that the trends are different by country, sector and investment type. For example, technology, which is the sector in which we focus, continues to be a strong destination for investment driven by the secular growth in the sector. We continue to be cautiously optimistic about the growth in several technology verticals, despite the macroeconomic headwinds. At the same time, other sectors are getting less attention as macroeconomic conditions change and growth decreases. In terms of countries, we see a more balanced and conservative market in Brazil in comparison to 2012 and 2013, with significant concerns due to lack of growth and continued devaluation of the currency, as well as the elections. At the same time, Mexico has caught a lot of new attention by private equity firms, driven by the recovery in the United States and the energy and telecommunication reforms. The Andean region also presents a mixed picture.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor



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