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Venture Capital in Latin America

Page history last edited by Brian D Butler 11 years, 2 months ago

Contributors: Hernan PisanoPisano, Hernan , Brian D. Butler

if you are interested in contributing see here

 

VC and PE firms in Latin America:

 

LAVCA, the Latin American Venture Capital Association, and am most impressed with their command of the private equity and venture capital sector in the region

 

  • Latin American Enterprise Fund Management
  • DLJ South American Partners
  • AIG Capital Partners
  • Nexxus Capital
  • Acon Investments
  • Aureos Capital
  • Conduit Capital
  • Enfoca SAFI
  • Pátria Investimentos
  • Draper Fisher Jurvetson
  • Vision Brazil
  • CRP
  • WAMEX
  • Denham Capital
  • Alta Growth Capital
  • Tribeca Capital

For more information on the event or the Latin American Venture Capital Association, please contact Emma Epstein at eepstein@lavca.org or visit www.lavca.org.

 

 


 

 

Venture Capital in Latin America

Latin America has significant barriers to the development of a healthy entrepreneurial and Venture Capital Industry, and how that impacts South Florida’s ability to function as a hub for this activity.

 

For long, South Florida has been considered the U.S. capital of Latin America. The significant  inflow of Latin American expatriates first from Cuba during the 60”and 70’ and later from other troubled Latin American countries (Colombians fleeing from the guerrillas, Argentineans fleeing from the economic crisis, Venezuelans fleeing Chavez, etc) have created a mosaic of seemingly homogeneous culture with deep roots and contacts in the region. 

 

South Florida in general and Miami in particular, seems to be ideally located to play a pivotal role where the big American Venture Capital meets Latin American entrepreneurs. This hasn’t happen. Why? 

 

Wasted Human Capital:

Latin America countries are extremely stratified. It is not surprising to learn how the same “selected few” have shared powerful positions in economic, political and legislative positions for generations. One big family name has senators, judges, and board members sparkled across several generations in several of the most prominent institutions. Social mobility has been scarce, and sociologist might argue that it is rooted in the Spaniard resignation heritage. There is not a “Latin American dream” as the American Dream. There is not a history of son of peasants that become president of the nation.  This stratification generates a huge entry barrier to entrepreneurship, as most of the human capital of these countries don’t belong to the selected classes, don’t access to education for the most part, and therefore, are unable to participate in a entrepreneurial ecosystem with their knowledge. Social mobility is a pre-requisite of a healthy entrepreneurial environment. It allows people from all walks of life, from all backgrounds, from all knowledge arenas access to the commodity capital is. 

 

Sub optimal Capital allocation:

This brings me to the second point: social mobility is ALSO the prerequisite of optimal capital allocation. In an environment where the best ideas never come to light because people don’t have a chance, investors look for returns elsewhere exporting capital in the form of foreign accounts, offshore private banking and the like. Mid to big enterprises attract most of the capital locally, leaving nothing for high risk-high return endeavors and the positive economic externalities innovation brings. This sub optimal financial structure prevents higher growth rates fueled by innovation. For investors to get optimal returns, the economic ecosystem must allow the brightest of the brightest to arise from the shame of inequality. 

 

High social cost of failure.

Another cultural barrier to entrepreneurship in Latin America relates with the high cost of failure. Unlike American –and Anglo-Saxon culture- were entrepreneurship is praised, and where the example of a founding father being broke several times before it “struck it rich” is well known, Latin American entrepreneurs pay a high price fro their failure, being ostracized from their social circles in a strongly segmented society. Not good.

 

The Basic Sciences dilemma:

A third deterrent to innovation and Venture Capital in Latin America is the lack of basic sciences research and funding. Basic sciences provide the backdrop where MANY new innovations came from, and in order for the later to exist, a significant effort must be put in basic sciences. The problem is that basic sciences do not relate directly to any cash flow producing business and therefore is extremely difficult to justify. This difficulty is even more pressing for cash strapped countries with “hot” social needs. This is the policy dilemma: on the one hand basic sciences investments are necessary to produce wealth and “enlarge the pie”, on the other hand those same resources are needed to fight current pressing problems as starvation and the like.  << add data on basic sciences funding ad % of the GDP>>> 

 

Economies of scale (1):

Venture Capital is a financing industry that has rough statistics (out of the financed companies, 6 to 7 will fail, 2 will generate positive moderate returns and 2-1 will be the next Google, multiplying the investments by 10x, 20x.) In order for the Venture Capital industry to exist, a multi billion dollar market must be readily available to be tapped on by a billion dollar company. How many multi billion markets are in Latin America: few. How many billion dollar companies have reached that status in the VC’s velocity requirements of less than 5 years? I cannot think of more than 5. In short, in Latin America we face a scale problem. The only way we can scale is using  multinational Pan American approach, witch has its own share of challenges  

 

Economies of scale (2):

A pan American strategy to reach economies of scales have its challenges in itself: Brazil and Mexico have a different languages providing natural barrier of entry to the retail operators.  Legal barriers arise in most of the sectors. Thinking Pan-American financial services is difficult, and other regulation sensitive sectors are unattractive fro business requiring to scale to the billion  level (energy, << add other sectors>>>)  

 

Supply Chain challenges:

incumbent companies that might have the right innovation and funding face then problem of tight control of the supply chain by major players. It is not unlikely that few organizations have monopoly, duopolies or cartel powers. Horror stories have been circulating about small innovators being explicitly forced to sell their “diamonds” at a discount based on treats of being put out of business by their only customer: a big corporation. 

 

The cluster issue in South Florida: 

Following professor M. Porter ideas, there is a need for at least three elements to arise simultaneously in order to generate a real Venture Capital cluster: there must be a critical mass of interconnected competing business, financing must be available, and academia must be present providing basic sciences innovation and professionals. These elements are absent in South Florida. The lack of deals deter VC’s of having a real presence in Miami, and at the same time, the University do not have a strong output of professionals that might be feeding the nascent companies. The cluster is not here.

 

 

 

 

More research (outside links)

 

Erik Peterson of Aureos on investment opportunities in Latin America

26/03/2008. Aureos, a private equity fund manager that specialises in emerging markets, is in the process of launching a Latin America Fund that will be exclusively focused on investment in small and medium-sized companies in the region. In this article, Erik Peterson, head of the Aureos Latin America Fund, talks about investment opportunities in Latin America.

 

Private investment continues rising in Latin America

25/04/2007. Private equity money continues to increase its hold on corporate deals in Latin America where the investment community has increased its focus on Mexico, rather than Brazil, as a primary destination for their transaction spending, say fund managers and other stakeholders in the region in an annual poll by KPMG.

 

Emerging Markets Private Equity Association Quarterly Review Q4 2006

24/01/2007. Emerging markets benchmark returns have been solidly ahead of US and Europe on both a mean and top quartile basis for the last 3 years says the EMPEA. Additional data on fund-raising and exits further confirmed that the asset class had a strong showing across emerging markets regions in 2006.

 

Manufacturing in Argentina, Brazil and Chile: challenges and opportunities

28/06/2006. Over the last few decades South America has been a focus of enormous hopes and great disappointments for private equity investors. Yet to the surprise of many forecasters and analysts, Argentina, Brazil and Chile have emerged rapidly from the recent period of economic stress. Overall growth has regained momentum, and trade in particular has revived sharply. Foreign direct investment has increased dramatically, and the resurgence is most evident in manufacturing businesses.

 

The Mae is dead! Long live the Mae!

13/06/2003. Prospects have improved considerably for Brazil's energy sector since the government replaced the self-regulating Mercado Atacadista de Energia (MAE) with a new government- controlled entity last year, according to Matthew Fowler of Coudert Brothers. Governmental reorganisation of the company and the market conditions that govern it have created a fertile energy sector but it remains to be seen if the reforms will translate into a sustainable regulatory framework for Brazil's wholesale energy market.

 

Slow progress towards power sector reform in Mexico

04/03/2003. The energy sector is one that is drawing an increasing amount of attention among investors. And in Mexico the government has recently indicated its willingness to permit privatization of electricity supply, providing new opportunities for those prepared to take the risk. Monica Restrepo of Coudert Brothers gives an overview of the reforms.

 

Brazil Venture News Issue 19

14/02/2003. The figures for venture capital and private equity activity in Brazil for 2002 confirm the lacklustre year for the country in this arena. Private equity firms invested $164m in 34 deals last year, which represents a reduction of 76 per cent in dollars invested and 50 per cent in number of deals compared to 2001. This poor performance could be attributed to a delay in implementing investment plans by private equity firms and portfolio companies and the high volatility of foreign exchange rates, according to Stratus Investimentos.

 

Brazil Venture News Issue 18

21/01/2003. The Brazilian government, elected in October 2002, has already shown its support for the country's venture capital community by expressing a need for greater development of capital markets. Such support is not expected to cause an immediate surge in venture capital activity but it does have positive implications for the future, says Stratus Investimentos.

 

A prescription for building a venture capital industry in Brazil

11/12/2002. Brazil has slowly been opening its doors to venture capital since the mid 1990s. In the intervening years, the industry has become increasingly professional. Robert Binder of the Brazilian Venture Capital Association charts the rise of the industry in Brazil but argues that more must be done to ensure its future success.

 

As buy-out funds decline, SME funds attract greater attention

23/10/2002. The development of private equity in Latin America during the 90s was driven largely by US buy-out firms eager to take advantage of the region's mid-market. But the maturing of the market over recent years has led to the gradual increase in significance of venture capital funds, argues Venture Equity Latin America.

 

Brazil venture news

27/09/2002. The first half of 2002 showed a marked decline in the Brazilian venture capital industry when compared with the previous year. But there are some positive signs with a natural selection process now occurring in the country, according to Stratus Investimentos. There are fewer funds, more experienced and committed teams, and possibly more deals.

 

Brazil venture news

27/09/2002. There has been a continued global decrease in investments in the private equity industry in recent months. Stratus Investimentos highlights the most interesting figures and places Brazil within this context.

 

Legal challenges confronting private capital investors in Mexico

27/08/2002. The Mexican economy is going through a process of deregulation. It's a process that could create a good environment for private equity investing. There are, however, still a number of legal stumbling blocks that private equity investors should be aware of, say Samuel García-Cuéllar and Jean Michel Enriquez of Creel García-Cuéllar y Müggenburg.

 

Brazil venture news

13/08/2002. Fundraising in Brazil took a dramatic downturn in 2001. The positive aspects, such as the removal of important restrictions for local institutional investors, were far outweighed by the negatives. The crisis in Argentina, the international macro-economic uncertainties, the performance of existing venture capital funds and the extended regulatory transition of the local pension funds industry all helped to accelerate the decline, according to Stratus Investimentos.

 

Impact of recent legislative developments on private equity investments in Brazil

12/08/2002. Venture capital investment relies strongly on the quality of rights of minority shareholders of the target company and the quality of corporate governance standards as a whole. The easier the enforceability of shareholders' rights, the more transparent the management of the company will be and the friendlier the environment for private equity investments. Augusto Cesar Barbosa de Souza of Vieira, Rezende, Barbosa e Guerreiro examine how far Brazil has developed laws to encourage foreign investment.

 

Private equity investment in Mexico

15/07/2002. For Mexican companies, private equity investment often represents an attractive source of capital. Mayer Brown Rowe & Maw provides an overview of the Mexican market for investors looking to commit outside the more traditional US and European markets.

 

Micro lessons for Argentina

06/06/2002. Macroeconomic reform in Latin America has failed to promote sustained economic growth- a failure that has led to one financial crisis after another in Mexico, Brazil, and now, Argentina. Why? McKinsey's analysis of the Argentine economy reveals that barriers at the micro level are distorting competition, protecting outdated business practices, and holding back labour productivity and economic growth

 

Brazil Venture News Q1 2002

28/05/2002. Almost half of investment firms in Brazil are currently managed by international players. However, macroeconomic uncertainties and the September 11th attacks have slowed foreign activity in this region. This is according to the Stratus monthly newsletter.

 

Private equity in Mexico

16/04/2002. The Mexican private equity industry is still in its infancy. As a result, its funds are largely foreign - and the majority are, predictably, from the US. Frank Schneider and Luis Videgaray, of Harvard University and Protego respectively, discuss the characteristics of the asset class in Mexico.

 

Given Latin America's difficulties, why would anyone risk investing in a private equity fund in the region today?

10/04/2002. A: Richard H Frank, Darby Overseas Investments. This is a difficult time for emerging markets in general and certainly one of considerable hardship for some of the prominent economies of Latin America, such as Argentina and Venezuela. But, this is also an outstanding time for prudent medium-term private equity investors.

 

Brazil Venture News

07/03/2002. Investment activity in venture capital remained steady in Brazil throughout 2001, according to Stratus. However, the outlook for 2002 is still uncertain with investment activity probably being influenced by an uncertain political situation and macro-economic developments.

 

All in the familia

12/12/2001. Family-owned businesses are the backbone of the economies of Latin America and of most other emerging markets. But many such businesses are finding it hard to compete with the global scale, focused strategies, cutting-edge management practices, and deep pockets of multinational companies. McKinsey Quarterly reports

 

Investing in Latin America and other hazardous journeys

11/09/2001. Though the Latin American market has improved a lot in the past five years, it's still a market for ‘risk-taking pioneers'. Martha Lagace from HBS Working Knowledge speaks to banker Ana Patricia Botin.

 

Private Equity Investment in Latin America

24/08/2001. For Latin American companies, private equity investment represents an attractive source of capital. There are a number of important considerations that require careful review and negotiation by the parties in relation to any private equity investment. In this paper Mayer, Brown & Platt highlight certain issues to which Latin Americans need to be sensitive when considering private equity as a source of funding. The paper provides key insights with an understanding of some of the legal issues involved in Latin American private equity deals.

 

 

 

Links to GloboTrends pages 

 

Latin American countries

 

VC pages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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