SOURCE: MARSH

Talking about Investment Opportunities in Latin America? As a region, Latin America always presents some difficult challenges. For starters, Latin America is made up of several countries with different economic, political and cultural conditions. In addition, the information in most of these countries is not always easy to find and may even be contaminated or incorrect. However, there is at least one characteristic that seems to be abundant in all the countries of that region: talent.

The business wave has hit Latin America hard and seems to be gaining momentum. A new generation of millennials and post-millennials, led by a group of young entrepreneurs between 30 and 50 years old, believes that it can improve lives by creating new and better solutions for everyday problems.

The phenomenon is manifested everywhere, not only in the cities of Latin America. I have had the opportunity to visit several cities in this region, as well as Asia, Africa and Europe that are not considered as business centres or generators of innovation, but that has now clearly captured a business fever that is being promoted at all levels of the society, government, industry and academia.

However, Latin America seems to be in a fundamental stage. Let’s start with demographics: the median age in the region of 27 years, and in most countries, more than 50% (or very close to this percentage) of the population is less than 30 years old. This contrasts strongly with the more developed countries with fewer young people. However, the demographic advantage will not last forever; It is estimated that by the year 2050, the average age in the region will increase to 41.

Education in Latin America is another crucial factor to consider. Enrollment in higher education in the region has increased from 21% of the population to over 45% in the last 15 years. Even the poorest 50% of the population receives a higher education, and enrollment increased from 16% to 25% between 2000 and 2013. This means that not only is there a large population of young people, but many of these young people of working age are well educated.

Another key factor is the number of hours that Latin Americans are used to working. According to the latest statistics from the OECD, Mexico, Costa Rica and Colombia are the three main countries that monitor with more annual work hours, followed closely by Peru, Argentina and Chile. This also means that efficiency is a problem, of course, but it is also an educational opportunity; I think that anyone would prefer to teach someone to be efficient than to work more hours. And salaries are very low, which means you can get better talent for less in the region. In fact, of all the countries that the OECD monitors, the last eight in terms of salary are Latin American, led by Venezuela with the lowest average annual salary and followed closely by Peru, Cuba, Colombia, Brazil, Mexico, Argentina and Costa Rica.

Finally, I would put creativity as one of the main reasons why innovation in Latin America should be easier to achieve. The people of the region have always had to solve their problems independently because their institutions are not reliable. I see this as one of the greatest educational opportunities in the region.

In addition, young people in Latin America occupy the highest positions in the world both in the entrepreneurial spirit driven by necessity and in entrepreneurial perception and intention. Society has changed, as have students who graduate from university. Twenty years ago, most students sought to join large companies and move slowly in the ranks; now, at least half (if not more) are willing to create businesses and run the risk of failing, a cultural change that needs to be nurtured.

The last piece of the puzzle is the funding available to these potential entrepreneurs. According to the latest LAVCA report, the number of physical education and VC businesses in Latin America has increased dramatically in the last decade, growing from approximately 170 agreements in 2010 to more than 420 in 2017. In fact, only in Mexico (probably the largest player in the region today), the number of seed and VC funds has increased from three, in 2008, to more than 60 today. Having local partners is also beginning to attract American, European and Asian players to the region.

Where are the opportunities?

If you follow the trends, the main opportunities will end up in specific problem areas that technological advances can quickly address, which will help reduce the digital divide between the developed world and the countries of the region. These include:

  • Fintech: Help those who do not have support, increasing access to capital to a larger part of society.
  • Blockchain: Decentralization of institutional monopolies in contracts, remittances, ownership and voting, among others.
  • Automation and robotics: Industry automation and increased access to better-paid jobs with higher added value.
  • Internet of things and Big Data: make the data accessible to everyone.
  • Mobile applications: in response to the majority of Latin Americans who access the Internet through their mobile devices.
  • Cleantech and mobility: solve pollution and traffic problems that have saturated the main cities.
  • Social impact: attempt to close the gap between socioeconomic classes; renewing education.

Main challenges

Despite these advantages and opportunities, there are also great obstacles for everything to happen. Some cultural and some systemic.
Culturally, Latin Americans are very risk-averse, and most only invest in “safe” companies such as real estate. The lack of financial education is a key factor that does not allow potential entrepreneurs to prosper.
On the systemic side, corruption, lack of institutional trust and impunity are probably the biggest obstacles to overcome in the coming years. Companies need to think globally and compete against global competitors; they cannot cheat or take shortcuts. To attract foreign investment, governments will need to create a new system that is more meritocratic and accessible to all.
At present, the regulatory environment suffers from a lack of confidence. Although the legal framework seems to exist, the lack of transparency and the unequal application of the law makes it very difficult for companies to compete in an equitable field.
Another big obstacle is the lack of success stories in the region. With some exceptions, the new companies in Latin America do not seem to have the expectation of growth of their counterparts in Asia, the United States or Europe. Making IPOs in Latin America is almost impossible, mainly because the stock markets are monopolized in these countries and act more as guardians than promoters, regulating admission to the IPO club instead of encouraging companies to reach a final stage of growth by becoming public.
In Mexico, for example, although the regulation requires a mere USD $ 3.5 million in market capital to be quoted, no intermediary will make it public with less than USD $ 500 million in stock market capitalization, and the typical public company averages USD $ 2 billion in capitalization stock market. Fortunately, countries like Brazil and Mexico are taking steps to open new stock exchanges to change this: in Brazil, ATS will be BOVESPA’s first competitor, and in Mexico, BIVA will compete with the BMV.
In addition, the activity of mergers and acquisitions for new companies in the region is remarkably low. This is mainly due to the relative youth of the ecosystems at the beginning of the region. Companies simply have not reached a commercial-stage large enough to become interesting acquisition targets. Exit strategies are the key to continue promoting investment in startups, and success stories are the fuel to continue generating entrepreneurs.
Finally, this is an election year in many countries. Venezuela, in an obviously fraudulent election, re-elected the elected successor of the late former president Hugo Chávez, Nicolás Maduro. In Colombia, a second electoral round decided the winner of the presidential race. In Mexico, a leftist politician came to power for the first time, while Brazil will decide its course in October. Left-wing populism seems to be the new norm in the region, and that can challenge any sustained focus on innovation and entrepreneurship.
Whoever rises to power in these Latin American giants must understand the importance of entrepreneurship and innovation as sources of competitiveness, job creation and economic growth. They should continue to foment them accordingly, taking advantage of the historic economic opportunity that is presented today.

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