Five reasons Latin American TMT companies are seeing increased investor interest
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Latin American technology, media, and telecom (TMT) companies are increasingly popular M&A targets for external investors. Growing markets, talent availability and springboard opportunities are among the trends spurring interest.
“When it comes to opportunities for growth and global expansion, recent and upcoming developments in Brazil’s technology landscape speak to the region’s significant potential.”
The quote from the latest edition of BDO’s International Tech Hubs publication encapsulates some of the growing interest in Latin American TMT companies.
Several core trends are spurring investor activity, including from overseas companies and investors.
“There is huge growth potential in the region, for example, for Latin America’s mid-market TMT companies. Moreover, their current attractive valuations further increase interest among the likes of private equity firms,” Luz Vasquez, Americas Regional Coordinator and Leader of the LATAM Marketing Committee at BDO, says.
Making investments in Latin America successful does, however, require a firm understanding of the regulatory, financial, and business dynamics across a diverse region.
Investment figures point to growth
LAVCA (The Association for Private Capital Investment in Latin America ) investment data highlights venture capital (VC) and private equity (PE) firms’ increased interest in Latin American companies:
- VCs invested US$6.4 billion in 1H 2021, a half-year record
- PEs committed US$1.6 billion through 1H 2021, an 82% increase over 1H 2020
- A record 323 VC deals in 1H 2021 had a median and average of US$1.8 million and US$22.5 million, respectively, compared to US$1.1 million and US$9 million for 1H 2020
“We have experienced a marked uptick in demand for M&A-related services through the last couple of years. It is an indication of the growing interest in Latin American TMT companies,” Dario Vieira de Lima, Partner, Capital Markets, Audit and Accounting Advisory Services at BDO Brazil, says, adding:
“COVID-19 has led to an increase in high-quality distressed targets. As the region recovers, they look set for a resurgence and market growth. That proposition is part of what is attracting investors.”
Market intelligence company CB Insights calculates deal totals and values slightly differently from LAVCA but its data, as can be seen in the graph below, points to similar trends:
Data: CB Insights, Graph: BDO Global. Funding figures exclude buyouts, consolidations and or recapitalisations.
VC figures show how investors see a huge potential in the region’s start-ups and scaleups. Furthermore, PE numbers showcase the potential of the region’s mid-market companies.
Accelerating digitalisation industries like education, financial services, healthcare, real estate, and retail contributes to the investment numbers.
Simultaneously, technology unicorns keep appearing, and the success of companies like Mercado Libre (Argentina), Rappi (Colombia), Nubank (Brazil), Cornershop (Chile), Gympass (Brazil), Globant (Argentina), Uala (Argentina), Loggi (Brazil), and Mercado Bitcoin (Brazil) increases interest in the region. Finally, exits are on the rise, generating a record US$11 billion in 2020.
Investors include Tiger Global Management, Tencent, Accel, H.I.G Capital, Ribbit Capital, QED Investors, and SoftBank. In 2019 the latter committed to a US$5 billion fund for investments in Latin America.
“Latin America is on the cusp of becoming one of the most important economic regions in the world, and we anticipate significant growth in the decades ahead,” Masayoshi Son, chairman and CEO of SoftBank, said at the time.
1: Home market potential
The home market growth potential across Latin America is enormous. Colombia is on the cusp of becoming a high-income country, with other countries on a similar growth trajectory. This adds to the attractiveness of a region with 600 million people and a combined GDP of around US$5 trillion.
As growing purchasing power and internet connectivity continue to drive developments, Latin Americans are increasingly open to spending in the digital realm.
The dynamic is clearly visible in fintech. Companies like Nubank and other fintech leaders are busy replacing traditional banking services. Simultaneously, they are reaching parts of the population underserved by conventional banks and financial institutions. Many other fintech start-ups and scaleups are making similar moves.
“Fintech has huge potential throughout Latin America. It is gaining momentum where parts of the region’s population are seeing earnings rise but remain underserved by traditional financial services solutions,” Luis M. Romero, Governance, Risk & Compliance Partner at BDO Argentina, says.
Similar trends and companies are changing commerce (Mercado Libre), education (Coderhouse and Crehana), and healthcare (Epic and Teladoc). Incidentally, almost all companies mentioned here have received overseas investment.
The TMT companies are in a prime position for further growth in rapidly expanding markets with growing middle classes and percentages of the population in their prime earning years.
As a result, TMT companies can expect to see continued growth in their home markets.
2: Maturing companies
The increased funding rounds, number of unicorns and investment figures mirror the region’s maturing TMT ecosystem. Over the years, entrepreneurs have gained valuable experience and are taking new endeavours to unscaled heights. Moreover, they can look to experienced entrepreneurs and successful exits for inspiration.
Within TMT ecosystems, exits tend to grow over time. First, a region sees company acquisitions in the double-digit millions of dollars, then triple-digit and on to billions. Simultaneously, the growing exits create a pool of experienced founders and industry experts who know how to grow a business venture to unicorn status.
As a result, more companies receive large injections of venture capital and reach unicorn status.
|
Company name
|
Country
|
2021 valuation (US$ billion)
|
Last disclosed round (US$ million)
|
Industry
|
|
Ualá
|
Argentina
|
2.45
|
350
|
Fintech
|
|
Tiendanube/Nuvemshop
|
Argentina
|
3.1
|
500
|
E-commerce
|
|
unico
|
Brazil
|
1
|
125
|
Cybersecurity
|
|
Movile
|
Brazil
|
-
|
194
|
E-commerce
|
|
MURAL
|
Argentina
|
2
|
50
|
Enterprise solution
|
|
Mercado Bitcoin
|
Brazil
|
2.1
|
200
|
Crypto
|
|
NotCo
|
Chile
|
1.5
|
235
|
Foodtech
|
|
Clip
|
Mexico
|
2
|
250
|
Fintech
|
|
Bitso
|
Mexico
|
2.2
|
250
|
Crypto
|
|
Kavak
|
Mexico
|
4
|
485
|
Online marketplace
|
|
MadeiraMadeira
|
Brazil
|
1
|
190
|
E-commerce
|
|
Wildlife Studios
|
Brazil
|
1.3
|
60
|
Gaming
|
|
Autho
|
Argentina
|
1
|
103
|
Enterprise solution
|
|
Rappi
|
Colombia
|
5.25
|
500
|
Logistics and distribution
|
|
Loggi
|
Brazil
|
2
|
205
|
Logistics and distribution
|
|
Gympass
|
Brazil
|
2.2
|
220
|
Online marketplace
|
|
Nubank
|
Brazil
|
30
|
750
|
Fintech
|
|
QuintoAndar
|
Brazil
|
1
|
300
|
Proptech
|
|
Loft
|
Brazil
|
2.9
|
425
|
Proptech
|
|
Creditas
|
Brazil
|
1.75
|
255
|
Fintech
|
|
EBANX
|
Brazil
|
1
|
-
|
Fintech
|
|
iFood
|
Brazil
|
-
|
500
|
Logistics and distribution
|
Current VC-backed unicorns in Latin America. Data: LAVCA.
This dynamic did not exist in Latin America ten years ago. As a result, much of the region’s business potential was left untapped.
That has since changed, and today employees of successful TMT companies often go on to found high-growth ventures. Two of the best examples are Groupon Latin America and Mexico’s Linio. Employees of Groupon Latin America have founded companies like Babytuto, Admetricks, Pulpomatic, Kosleeping, and Cornershop. Linio was founded in 2012. Since then, its employees have gone on to launch a whopping 66 start-ups.
Another contributing factor is that founders no longer focus on developing “X for LatAm”, aiming to create local versions of existing services and solutions. While a high-growth approach in the short run, it leaves little room for growing beyond national borders.
Today, Latin American TMT companies and founders are pursuing more ambitious projects and solutions, often including long-term strategies for international expansion.
“Latin Americans have an entrepreneurial spirit. New technologies are making it easier and cheaper to turn a good idea into a thriving business. Therefore, I foresee continued growth in the region’s start-up ecosystem,” Luis Vila Rojas, Lead Venture and Audit Partner at BDO Chile, says.
3: Culture and talent
A growth driver for Latin American start-ups and scaleups is the availability of talent and a culture that encourages people with an entrepreneurial mindset.
According to a study from IDB Lab, the birth rate of tech-enabled start-ups in Latin America is triple what it was four years ago. The region’s start-up ecosystem could reach $2 trillion in value by 2030. One reason is the vast untapped potential in the region’s deep tech (technology based on disruptive engineering innovation or scientific advances and discoveries) start-ups.
Simultaneously, there are signs of diversification and inclusion in the region’s TMT space. For example, women in some Latin American TMT sectors see more substantial backing than their peers elsewhere. To mention one, Latin America has five times as many female-founded fintech companies as the global average.
One of the reasons for the growth is available talent in the region. Something that has not gone unnoticed by overseas companies. Studies point to countries throughout Latin America becoming popular technology hubs for outsourcing, innovation, and production.
Latin American team members can easily work during US business hours given the time zone similarities, and English proficiency in the region is high. Cultural similarities and lower living costs also make the region an attractive place to hire tech talent.
Hiring remains a challenge in some locations. As a result, several countries, including Mexico and Colombia, both popular destinations for tech companies, have seen a surge in HR tech to help match qualified workers with companies seeking specific skills.
4: Springboard opportunities
Latin America is a vast region. The linguistic closeness and similar market conditions can ease entry into new markets. This springboard dynamic is not limited to Latin America but can extend to growing your business presence in the North American market.
“The future of work is digital. This means that physical location matters less, although being in similar time zones helps. Those facts increase the value proposition of Latin America as a base of operations,” Bernardo Soto Peñafiel, Partner at BDO Mexico, explains.
This has led to overseas TMT companies engaging in M&A to establish themselves in the region. For example, German company intive and American Okta have both made acquisitions in Argentina to build out their presence in Latin America.
Two kinds of M&A plays dominate. The first is bolt-on acquisitions of companies that offer services and solutions that complement the existing portfolio of the acquiring company. The second is market and talent plays.
In both situations, companies must be aware that while similarities and overlaps between Latin American countries can ease market moves, it is also a diverse region that requires a strong understanding of national differences.
Areas that investors must be sure to address ahead of an expansion into Latin America, or when pursuing expansion within the region, include tax details, financial regulations, and data protection. There can be massive differences from country to country. To mention just one example, Brazil is a huge market and holds great promise for innovative TMT companies – once you successfully navigate its unique, often-labyrinthine tax laws.
It should be noted that several countries in the region have worked diligently with mitigating such issues and are looking to actively ease TMT companies’ pathway to setting up business.
5: Reaching the underserved
Decentralisation, democratisation and digitisation are three of the biggest trends affecting TMT services and solutions throughout Latin America.
Digitalisation and upgrades to business processes to strengthen and fortify operations against continued COVID-related disruption is happening throughout South America. The pandemic has made it abundantly clear for companies across industries that they must upgrade current setups to stay competitive.
Said digitisation focuses on cloud, IoT, SaaS, and a host of other services that all leverage decentralised approaches.
The moves also increase the opportunities to democratise services and reach parts of Latin America’s population underserved by traditional solutions and institutions. Examples of this include:
- Financial services: Challenger banks, insurtech, online payments and cryptocurrencies all give the unbanked better access to capital and credit.
- Consumer internet: Direct-to-consumer offerings are growing in all consumer categories, including new financing and delivery options.
- Healthcare: Care, financial coverage (insurance) and delivery (telemedicine) expand access to better healthcare services.
- Education: Online classes and education services offer better education access across Latin America.
These factors all contribute to the vast investment potential in Latin America.
Meeting central challenges
Investors and companies should keep in mind that making business ventures in Latin America successful requires understanding its nuances. The region is a chequerboard of countries with different economies, potential and risk factors.
“Navigating the region’s diverse sets of regulations and tax laws requires in-depth knowledge, a steady hand – and patience. Therefore, locally embedded assistance is essential when investing in Latin America,” Rodrigo Cifuentes Paris, Corporate Finance Partner at BDO Columbia, says.
One example of this is regulation around data protection and security. Ongoing developments make it pivotal to stay on top of current and upcoming legislation - a tricky challenge for even large-scale enterprises. Here, partnering with local financial advisors will stand companies in good stead.
Therefore, BDO’s unique insights and local expertise throughout 160 countries will be highly valuable when considering investments in the region. We are present in 23 countries throughout Latin America, with more than 60 offices and over 5,000 dedicated professionals standing by to assist you.