Venture capital investments in Latin America have skyrocketed in recent years to unprecedented levels, rising from US $ 4.3 billion in 2019 to US $ 11.5 billion in 2021, including third quarter estimates in the most recent report published by the Association for Private Capital Investment in Latin America (LAVCA).
Atlantico’s most recent and comprehensive 200-page report on Latin America estimates that a total of US $ 18.6 billion will be poured into the region by the end of 2021, a staggering increase of 250% of investments compared to the 5.3 billion US dollars deployed in 2020.
Latin America has seen a boom in tech companies, with the number and value of unicorns doubling almost every year. Startups such as Nubank, Ebanx and Unico in Brazil, Kavak and Bitso in Mexico, Mercado Libre in Argentina and Rappi in Colombia are among the more than 20 unicorns in Latin America in the third quarter of 2021, some of them reaching the decacorne status.
Brazil and Mexico account for almost 50% of Latin America’s GDP and it’s no surprise that these two countries are ranked among the top priorities for venture capitalists.
Looking at GDP relative to market capitalization, technology companies in the region represent 3.4% of the industry’s total global market capitalization. As such, Latin American tech companies have enormous potential for growth in areas such as financial services, e-commerce, mobility, logistics, and healthcare.
Agriculture and financial services are historical pillars of the Latin American economy which are transformed by technology.
Brazilian agriculture is today the leading supplier of goods to the world and represents 21% of the country’s GDP. Technology helps to increase the efficiency of the sector. Precision farming technology enables farmers to produce more with less.
With the deregulation of banking restrictions in many countries, fintechs accounted for 40% of all capital investment in the region in 2020. The Fintech boom shows no signs of slowing down.
These are some of the reasons why the world’s leading investment funds have allocated a huge chunk of their liquidity to the region. After disbursing US $ 5.0 billion in Latin America through mid-2021, Japanese investment conglomerate Softbank announced that it would add an additional US $ 3.0 billion to be deployed through its second fund for the ‘Latin America. Other global and local VCs will certainly follow. But liquidity and growth projections do not mean a positive outcome.
There are inherited political, economic and legal considerations in determining whether to invest or allocate more funds to the region. Many Latin American countries like Chile have experienced some sort of political turmoil in recent years. Argentina sank into a new economic crisis forcing the government to impose restrictions on capital outflows. Brazil is witnessing the return of generalized inflation, which will lead its Central Bank to raise interest rates to pre-2017 levels.
While political and economic analysis of the region is fundamental to making an investment decision, the pitfalls of Latin American jurisdictions must be carefully weighed.
It is not uncommon for transactional documents to be ignored by local courts disrupting the will of the parties in favor of national policy or for hasty legislative changes to impact investments that are not carefully covered.
Properly structuring a transaction in Latin America requires knowledge of the market and the countries involved, practical experience of transactions in these jurisdictions and expertise in setting up alternatives to create the safest legal environment (present and future). possible for the investor and the invested company.
Latin America is unquestionably the next frontier for investment in most sectors of the economy, provided it is carefully planned and properly protected.