Investment and entrepreneurship in Latin America
Is this the next market to watch?
As the global economy begins to snap back after a disastrous 2020, many investors are looking to the usual places: North America, the Eurozone, and Asia. As terrible as last year was, there are great opportunities for smart investors in these markets. Credit Suisse predicts global growth of 5.9% for 2021, with Asia ex-Japan predicted to grow 7.5%.
Yet with trillions of dollars of pent up cash flooding the markets, it’s increasingly difficult to find a good deal. Consider this: The valuations of tech companies in the US have increased to $30 trillion — more than the entire GDP of the US in 2020.
To find value and hidden opportunities, some private investors are looking to Latin America. One study by the international accounting firm Auxadi found 70 percent of private equity firms are planning to invest in Latin America over the next five years, “fueled by attractive valuations and a growing appetite for cross-border deal flow as the global economy recovers from the Covid-19 pandemic.”
The notion of investing in Latin American startups isn’t new by any means, but several signs indicate that this may be a particularly good time. One often cited example is the growing interest SoftBank, the Japanese conglomerate, has had in the region. Softbank created a Latin America Ventures fund in 2000 to invest in startups, among other things. In 2019, it created the $5 billion Latin America fund, which produced a 62% net equity internal rate of return as of the end of March. It is now planning to launch a second $5 billion fund.
SoftBank is a good indicator of the interest and opportunities in the region, but it isn’t the only one. In June, JP Morgan agreed to pay a reported $2.3 billion for a 40 percent stake in the Brazilian digital bank, C6 Bank. That company is 2-years old and has 7 million customers.
So why Latin America, a region that with few exceptions is known for historically sluggish (and sometimes corrupt) economies?
First, consider demographics. The median age of people living in Latin America is 31 years. In many countries, more than half of the population is younger than 30. While education across the region generally remains a challenge, many areas are making good progress and a large, educated generation of entrepreneurs and consumers with disposable income is emerging.
Second, Latin America is a unicorn factory. At least 23 private Latin American companies are valued at least $1 billion and have raised over $15 billion in sectors ranging from fintech to food. LAVCA, the Latin America private equity association, maintains a Unicorn Scoreboard that’s worth keeping an eye on.
Some noteworthy fast growing Latin American companies include Kavak, an online platform to buy and sell used cars, Brazilian financial services company Nubank, and logistics company Rappi. These companies are widely considered well run, financed, and hungry for growth.
A few hopeful signs of government, pension and economic reforms are beginning to sprout. Make no mistake, many of the governments are still developing and need to be stabilized. But pension reform in Brazil, the region’s largest economy, is one meaningful first step.
Additionally, China’s increasingly aggressive posture and willingness to flout many western norms could lead companies to find alternative places for lower cost manufacturing and services. Latin American countries could fill that role, and some already are. However, China is working and investing aggressively to gain influence there.
Make no mistake, for investors, Latin America has risks. But for the patient and smart investor, it’s a part of the world with pockets of great potential and signs of growth and opportunity.
Danilo Diazgranados is an investor, collector, and lover of fine wines and a member of the prestigious Confrérie des Chevaliers du Tastevin, a fraternity of Burgundy wine enthusiasts.