Something big is happening in Latin America. Regional entrepreneurs are demonstrating an impressive ability to fill market gaps, deploy new business models at scale, and flex the grit required to launch a successful venture in the region. These visionaries are transforming millions of lives for the better, transitioning an entire region from analogue to digital, generating jobs at scale, and delivering massive value for their shareholders. During the past decade startup value multiplied by 32 times going from an estimated $7 billion in 2010 to $221 billion in 2020(i). Most of the growth took place in the past four years. Foreign institutional investors lured by lower entry points and potential for attractive risk-adjusted returns are now investing alongside regional experts during these early innings of this transformation. Ten-fold growth across tech-enabled industries is possible providing Integra investors with the opportunity to access differentiated return streams, exceptional entry points and portfolio diversification as Latin America plays catch-up with the United States and Asian gig economies.

In 2020, Latin America’s burgeoning tech industry struck a record number of venture capital deals as some of the region’s most-valuable startups saw their businesses blossom despite — and in some cases due to — the pandemic. Investors inked 488 deals with entrepreneurs, topping the previous mark set in 2018, according to the Latin American Private Equity & Venture Capital Association (LAVCA). The startup revolution had legs well before digital solutions became essential however the closures and lockdowns of COVID-19 accelerated the early stages of this evolution.

Source: LAVCA Industry Data, Bloomberg

Throughout Latin America leading tech enabled startups, sometimes referred to as “tecnolatinas”, share their attractiveness for venture capital investors as well as a distinct potential for impact. This is mainly a result of their potential scalability and capacity to ignite and consolidate entrepreneurial innovation ecosystems across the region(ii). The movement while relatively nascent has a solid foundation backed by exceptionally talented entrepreneurs. These disruptors are rapidly transforming Latin America often doing so with purpose creating more sustainable and resilient opportunities for people across the region.

Source: LAVCA Industry Data

Source: Surfing Tsunamis, LAVCA, IMF, World Bank, KPMG, IVC

It is not only the tech enabled “tecnolatinas” but also the privately held middle market companies, or “zebras”, that exemplified agility throughout the pandemic. We want to identify these resilient firms that flexed “founder/entrepreneurial” might during COVID-19 digging deeply to pivot, reinvent and exceed client expectations. These are companies with resilient, future-ready business models positioned to ride secular trends and pull away from industry peers. They also tend to be firmly anchored in their communities. We believe these zebras, established companies familiar with the grit, endurance, innovation and resilience necessary to thrive in Latin America, remain well worth investor’s attention as well. Zebras demonstrate that founders are not only behind successful startups but also the successful middle-market companies that will play a vital role in igniting the middle market throughout Latin America. This is especially important as these Zebras become tech-enabled unlocking synergies between established and disruptive firms

Tipping point for the digital economy

In Latin America 40 million people were banked for the first time during the five months after the pandemic(iii). Before COVID approximately 45% of Latin Americas made an online transaction. After the pandemic, that figure almost double to 83%.

Before and especially as a result of the pandemic the ability of fast-growth companies to power through — and profit — remains somewhat undiminished. Latin America is home to over 650M people, twice the population of the United States, with a younger demographic than most developed economies and a highly profitable, rapidly growing yet antiquated financial system dominated by a handful of local players.

When it comes to the venture ecosystem, the region has a five-year private capital penetration rate of only 0.18% compared to 1.86% in the United States. In a region where access to bank lending is scarce, private capital has a vital role to play in providing businesses with long-term financing to address local consumer and industrial demand. This is also reflected in terms of technology as percentage of GDP when compared to other geographies. Despite technology sector market cap as % of GDP growing at an average YoY rate of 65% since 2003 it still totals just over 2% versus 39% in the United States and 27% in China according to 2019 statistics(iv).

After enduring dark times Latin America and the world are ready for a comeback. The pandemic has intensified existing trends and as citizens feel safer and inoculations continue consumers should return stimulating pent-up economic activity.

Technology companies are displacing incumbents

Globally, particularly in the US and China, innovative technology companies are creating more value and taking leadership positions in terms of broad market rankings versus legacy businesses.

In Latin America, we are just now seeing technology heavyweights displace large state-owned and commodity linked enterprises as the largest regional firms by market cap. To put this in more tangible terms, imagine investing $1,000 in Mercado Libre stocks in October 2010. Today, it would be worth $25,323 meaning a profit of nearly 2,532%. For Latin America the story is just beginning as this “great rotation” continues.

Companies are becoming more valuable more quickly

This new “golden-era” of digital transformation in Latin America has led to the creation of 28 unicorns as of March 2021 up from 17 in December 2020(v). According to research from the IDB, the time to achieve a $1 billion valuation has been steadily decreasing with the help of digital technologies and solutions, such as mobile and cloud computing, and more mature ecosystems. The latest unicorns (such as C6, Loft, Ualá) achieved that status less than three years after they were founded.

 

While unicorns get a lot of attention, and rightfully so, the other startups with valuations in the millions should not be overlooked. At the conclusion of 2020 there were 1,005 technology companies born in the region that raised over $1 million. These companies are collectively worth $221 billion, raised $28 billion, include 28 companies worth more than $1 billion, and have over 245,000 employees.

From local to global attention

The “Softbank Effect”, deploying the largest-ever technology fund focused exclusively on the fast-growing region marked an enormous change in how institutional investors view venture potential. Venture capital investments in the region have nearly doubled annually for the last three years according to the Latin American Venture Capital Association (LAVCA). Last year funding hit a record $4.6 billion after doubling the year prior. In 2020 a record number of deals, 488, we completed during the pandemic.

Increasing options for exits are also gaining attention. The record number of IPOs, strategic acquisitions and investments by multinationals further quantifies the value to be unlocked by investors.

How can Integra Groupe help you gain exposure?

Integra is deeply rooted in Latin America’s booming venture capital scene. As locals, we are investing in visionary entrepreneurs, providing resources to scale big dreams and solving hard problems. We accomplish this by challenging the traditional way of doing things bringing together ideas, people and possibilities to accelerate value creation. We are constantly looking beyond GDP by investing in founders that are redefining entire industries and creating new economic opportunities for millions of people.

By providing solutions beyond sectors Integra embraces the convergence of multiple industries and their potential to accelerate the circular economy. By looking at the investment universe through an outcomes-based lens we are able to approach the venture ecosystem in a manner which optimizes the opportunity set. The current stage and overall size of the regional VC ecosystem encourages such a generalist approach guided by impactful outcomes.

Our team is creating better outcomes with an investment philosophy deeply rooted in traditional financial analysis with an outcome focus: for inclusion, equality, development and transformation. For Integra, these investment outcomes drive our stakeholder stewardship and reinforce our vision for bringing dynamism and building a more resilient Latin America.

(i)TecnoLatinas, The LAC startup ecosystem comes of age, IDB LAB 2021, Ignacio Pena

(ii)TecnoLatinas, Latin America Riding the Technology Tsunami, IDB and NXTP Labs, 2017

(iii)Https://www.mastercard.com/news/latin-america/en/perspectives/blog-posts/blog-en/2020/november/life-post-covid-19-and-the-future-of-payments-in-latin-america-and-the-caribbean-are-we-reaching-the-end-of-cash/

(iv)Capital IQ for market cap data (“tech companies” definition used excludes telecom), World Bank Open Data 2019 for GDP, Atlantico analysis Gartner, April 2021 World IoT forecast

(v)TecnoLatinas, The LAC startup ecosystem comes of age, IDB LAB 2021, Ignacio Pena

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