Interview – Investing in Latin America
I recently spoke with Stephen Marks at Emmersion about investing in Latin America. With some minor edits, the text below captures our conversation.
Stephen Marks is a Managing Director at Emmersion, an investment management firm, and a Partner at Emmersion Capital, an investment fund focused on lower middle market and early stage investments in Latin America. Stephen is considered a leading voice on socio-economic and investment related issues between the Americas. He consults and converses daily with trade, business, investment and governmental leaders in Central and South America, while working with private equity, corporate and family office investors in the United States to help them scale abroad.
Why should private equity firms invest in Latin America?
Let’s start with the U.S. side where competition is massive. I spoke to a private equity investor last month who told me that on average, they are seeing 20 or more firms competing for the same deal. Searching for better deal opportunity, private equity firms have been moving down market. There is no doubt that has impacted valuations and probably has something to do with the $1.3T in private equity capital that is currently sitting on the sidelines.
In Latin America, you may be one of two firms in a deal and the odds are pretty high that you’ll be the only foreign firm competing against a family office or a local fund. U.S. investors provide strategic value, especially for international facing businesses like technology companies or service providers, where you have access to the U.S. market, U.S. companies, financial institutions and lower interest rates.
Valuations are also more normalized and with the current state of economics, where currencies like the Colombian Peso and the Brasilian Real are trading at historic lows against the dollar, and value opportunities can be found if you’re investing in USD.
Besides the ability to deploy capital, there are entire industry sectors that are waiting to be scaled or consolidated that could provide a higher rate of return compared to corresponding sectors in the United States. One example, which we are invested into, is the health and wellness sector. The industry is growing rapidly (15%+ CAGR) and consumer products are needed to meet the demand for a healthy lifestyle. It’s also an opportunity to make an impact and there’s a strong need for impact investment throughout the region.
How do you identify risk and solve for it?
Start by working with good local service providers who can help provide a soft landing. There are dozens who have experience working with U.S. investors and companies, who are bilingual and can help conduct local due diligence and can provide an assessment on the local market.
Second, hedge your political and economic risk by developing a multinational approach to your investment. There’s a reason why we offset Brazil with economies like Chile and Colombia. Brazil may provide more risk, but also a larger return, Chile is small and stable, and Colombia falls somewhere in the middle.
Finally, our biggest value add is our network and the education we provide for a soft landing. Get to know the people and make an effort to source local knowledge on the market. If you would like to meet Latin American companies, co-investors, family offices, institutions and investment bankers from the region, attend one of our Access Forum conferences, the next one is in Chicago, September 25 – 27.
Who is investing in Latin America?
In 2018, there was a 13% increase in foreign direct investment throughout the region (1), while that increase is mostly attributed to the energy sector, venture capital has figured out the opportunity well ahead of private equity. As evidence, look at Softbank’s $5B commitment to the region, Kazek’s $600M commitment or the fact that VC investment went from $200M USD in 2010 to $1.1B in 2017 (2).
However, we’ve seen some opportunistic U.S. middle market private equity firms increasing their exposure throughout the region for the aforementioned reasons. These are typically good lower middle market deals to add to an anchor or a standalone investment. As investors, we’re very bullish on lower middle market Latin America as the multinationals, larger local companies or global private equity firms could provide an exit once the business is scaled.
Founded in 2008, Emmersion facilitates opportunities in North, Central and South America by providing market strategy consulting services, regional business development and distribution, project brokerage and investment opportunities through M&A, LP, JV and P3.
About Access Forum
The Access Forum is Emmersion’s deal making, networking and educational conference focused on investment and business development between the U.S. and Latin America.