Global Investor Interest in Latin America's M&A Surge and Economic Trends

Welcome everyone to another episode of the Nearshore Cafe podcast. I'm Brian Samson, your host, an entrepreneur who's been working in Latin America and nearshoring for decades. And I am very excited about the show we have today. If you're interested in economic trends, M&A, the next hot company, this is the episode for you. We have Sebastian Greengarten with us. And before I welcome Sebastian, I want to give a thanks to our sponsor, Plug Technologies, plugg.tech. Plug is a great way to connect growing US companies with all the talent in Latin America. Sebastian, so excited to have you on the show today.

Hi, Brian. Thanks for having me. Happy to be here. Excellent.

Well, Sebastian, as we, uh, led off with the intro to the show, you're with Valio Ventures, a partner with Valio Ventures, um, a very important company when it comes to M&A acceleration, helping founders. But maybe you can share in your own words, uh, what, what you're doing with Valio.

Great, very excellent. Yeah, well, at Valio, we help Dutch companies in mainly Latin America with their inorganic strategy, right? Whether it's selling their companies or fundraising or looking for a strategic partnership to help them grow the company. We've been doing this for many years in different ways, and we decided to build a playbook at Value and help do that for other companies.

Amazing. And could you maybe give— I'm sure we maybe, maybe even have some listeners that may call on Valeo later for support. Are there particular industries or stages that is like the perfect time for them to start working with you?

Yeah, sure, sure. Mainly there are established companies where they already have product-market fit already proven. They are profitable, they are growing. And inorganic strategy is a way for them to grow beyond what they have achieved at that moment. There are different scenarios where they look for that strategy. Some companies in Latin America, for instance, they work for Latin American customers and they want to expand to US or Europe. And they know that doing it by their own is difficult. Or maybe they have a plan, but they need investment. So that's where they call us and we help them think about the strategy first and then look for the right partner to do that. We work in tech sector, so all the verticals in tech sector, both for service companies and also for B2B platform companies. We also work for, for some buy-side companies in US and Europe that they are looking to acquire companies in Latin America. They're looking either to establish maybe a nearshore center for their operations, or they're looking to address the Latin American market. So we help them figure out which is the best company that fits their thesis, their criteria. Since we have a very large database and we spoke with many companies in the region, we do that very frequently. So we keep that database updated. So we help them find the right fit.

So with the databases, Sebastian, are you focused across all of Latin America? Are there specific countries like Argentina and Mexico that you're a little more focused on?

Yeah, well, we tend to focus in the big markets in Latin America when we work in the sell side, usually Mexico, Colombia, Brazil, Argentina, Uruguay, and Chile. But also there are companies from other countries that call us and ask us for help. There are very interesting talent pools in other countries too. So Uh, we are very happy to help those companies too.

What I love to, to talk about is the trends, because wow, has the world changed a lot just in the last 5 years. It's amazing what a worldwide pandemic could do to the labor market. And just as we come out of that, uh, now we have AI, right? So maybe you could, um, kind of help us think through past, present, future in terms of M&A trends in Latin America. So before we even address today and tomorrow, tell us about what this maybe even looked like in 2018, 2019, the M&A market, the tech sector in Latin America. How did that look and feel?

Yeah, it's a— it's— we are Talking about pre-pandemic is like prehistory, right? But in a way, it's just around the corner. Yeah. Yeah. But I think things have accelerated in a way, but the trends were always there. I founded my own company back in the year 2000, a software development company here in Argentina. We were working for companies in Europe, in US. So Nearshore, I don't recall if we already called nearshore by that time, but that was the concept, right? Tools were not there like we have today, right? The tools were not there. Agile was not yet the main concept around the globe. Many companies still worked at waterfall, but the trends were already there. So what happened in the last 25 years was that tools evolved and allowed the different teams in different cultures, in different time zones to work together despite of the distances, despite of the time zone. And what the pandemic did also was to remove certain preconcepts or cultural barriers, right? For instance, I recall that many customers at that time asked us that all the employees should be at the office. People were not allowed to work at home for many reasons, but some of them could be security and infrastructure at that time, but they were mainly cultural. And I think what pandemic did was to remove those barriers, to remove those. So I think in a way that's what changed from from that day till today. And now I think we are adjusting certain things that end up being positive. I think they remain things that need to be corrected. Companies are working to figure out how to deal with that. But there are certain trends that are long-term trends. There are certain context things that accelerate them or or delays them, but the trends are already there.

Yeah. And I also wanted to get your take on, um, you know, to me there's, there's kind of two types of tech companies, right, that come out of Latin America. There's the, uh, services, um, and you see these all the time, whether it's offshore in India or nearshore, the Globants, the Verasdevs, you know, the ones that are building software. There's even a term I've only heard in Argentina of software factory, right? And then there's like the real tech companies building the next generation of fintechs and health techs and so forth. And I'd love to get your take on, you know, what did that look like pre-pandemic and how has that changed to where we are today for those two types of companies?

So for service companies, I think the first type that you mentioned, service companies that are helping other companies either go through their digital transformation process or build digital products, right? So for those companies, I think it didn't change so much, right? They grew a lot during the pandemic because I think the interest rates going down allow many companies to invest a lot and talent was scarce around the globe. So many companies in Latin America grew because of the growth on the demand. Right. So there are many new companies that were funded in the past 4 or 5 years that grew very well from from Latin America, right? And, and the— what, what mainly changed, I think, for those companies, that's like, like I mentioned before, certain barriers removed. So they were able to, to hire not only employees in their city but also to hire talent as subcontractors around Latin America. Certain companies do not like that, but many were, were open to that because they were, they were not finding the talent. So they had to flexibilize that. So that allowed many companies to grow. Then for the other companies that are mainly, that are born mainly as startups, building digital products, trying to disrupt industries like you mentioned, vintage, health touch, I think they In Latin America, those companies find a lot of great talent, not only in terms of technology but also in terms of innovation, ideation. And the companies that are funding in Latin America, they, uh, in the past they had a lot of barriers to, to find customers, uh, in, in other geographies. But what the pandemic did was to allow them to reach those customers through internet, right? Email marketing, Zoom meetings. So they didn't have to deal with great investments in travel or opening offices in other countries. They were allowed to take their products, their innovation to other markets much easier. Now I think that's a change that it's here to stay in a way, but As companies are getting back to the office, the companies that are closer to their customers, they still have some advantage. Right. But in a way, I think the market was democratized in a way. So they are being able to compete with companies in other regions in the same way.

I think a company that has really made a big impact and put Latin America on the map was MercadoLibre. And I'd love to hear your perspective on that and maybe how that validated the market or validated the talent. What did you see with that?

Latin America has many unicorns, maybe coming from Brazil, Argentina, Colombia, Mexico. Uh, I think these companies achieve, uh, their, their success by mixing, uh, both the, the use of the talent that was available in, in Latin America, but also the understanding of the culture. Sometimes Latin America is seen as a as a whole market, but in reality it's a mix of very different countries.

Right.

We have a lot of similarities between Latin American countries, being the language the main one, not in Brazil, but the rest were all Spanish. So it's much easier to communicate. But all the countries had their own economy, their own regulations. So it's very difficult to conquer the Latin American market. So companies like MercadoLibre understood how to build operations in this country, how to hack their cultures, how to localize their strategy. I think that's part of their success. And also, well, they're daring to do it. They were very proactive, very aggressive in growing. I think that's— and I think it's very difficult in this market also because the access to to investment is very different than in Europe or in US. That is much easier for companies to get funds. Here it's more difficult. So if not, I think the market, the tech market will be much more big.

Yeah. Would you mind expanding on that a little bit more about access to capital and If you're a brand new tech startup in Buenos Aires, for example, where do you go to for your initial capital? Where do you go to when you have traction? How are they thinking about that today?

Well, the venture ecosystem, the venture investment ecosystem in Latin America is newer than in US and Europe. And the institutional funds, institutional infrastructure, it's too small yet. And the banks are not very comfortable to financing startups. So it's much more difficult, but it's developing, it's maturing. Many local funds are growing, accelerators are appearing and growing. And also, well, many funds in in US and Europe are starting looking at Latin America as a place where they can find interesting innovation at interesting valuations too. Unfortunately, the interest rates increase in the past years have slowed down that trend. Yeah, that was a growing trend. So many startups are struggling in the region to get funds. I think that will still be a difficulty next year, but they will get refreshed access to funds, I think, in 2026. In the meantime, Many startups are going to US. Miami, it's a hub where we see that many startups in Latin America are using to access not only funds but also the US market. One of the companies that I help create, it's called Lasso. That is a company that is established in US, mainly Miami, and that company is helping startups establish in US, structure themselves, takes care of all the back office, and now has an AI product that helps them also look for funds. So I think that bridge that is between Miami and Latin America is a it's very helpful for, for founders in the region to, uh, to get access to, to, uh, fresh funds.

Yeah, yeah. We've actually had, uh, uh, that company on our podcast as well. It was a great— oh yeah, yeah, really, really nice story bridging the gap of the borders. Um, I wanted to, uh, hit on that, uh, investment capital for a second because it's an interesting thesis about the capital coming from the US looking for opportunities, right? And, you know, over the last few decades, Latin America has been looked at as talent arbitrage. But I think more recently now it's investment arbitrage, right? For, say, $100 million, you could only invest in a couple different companies in the States and still need to have capital in reserve for follow-on rounds and so forth. With $100 million, you could invest in a lot more companies that have much greater upside. And where does most of that capital go? For tech companies, it's engineering talent. And if the engineering talent costs a fraction of that, I don't know, do you see it the same way that we just shared?

Yeah, I would split the answer maybe in the two type of industries that I mentioned before, the service companies and the product companies, right? For service companies, what we are getting is many calls from US and European companies that are looking to establish nearshore centers, get access to that talent. Some companies started hiring contractors and taking, like, tasting the market in a way, and now they want to establish operations. What is different from establishing an organic operation and acquiring companies, that you get access to founders that are motivated to get their companies grow, right? And so many, many companies understand that, so they are looking to acquire mature operations in order to structure a global delivery model, having nearshore offshore operations. Um, for product companies, uh, what, what investors are realizing is that they can find in Latin America the same type of talent that they're finding in US and Europe. Not only, like I mentioned before, not only in terms of technology, but also in terms of business and management maturity. As you know, Latin America is very volatile in terms of politics, economy, and all that. So I think in a way that helps you build certain abilities, you know, that are very valuable in the, in the business world. Yeah.

So I think that the, the valuations are very attractive for those companies because they are finding very good products and companies that can be expanded globally from Latin America to Yeah, I often, you know, as we shared in the pre-show, I've been a founder in Latin America and when people would often ask me, you know, why Latin America, why Argentina especially? And, you know, of course there's the usual reasons of time zone and English, but the biggest reason, and I think you were alluding to this, was kind of the grit and persistence that is just innate. You know, the very volatile inflation, the volatile political situation, you know, even, you know, the subway metro is on strike for a week at a time. And sometimes the queues for the lines are, you know, could take hours. Any one of those things, someone in the States wouldn't know how to handle that. But I think in Argentina it's like, okay, this is a Tuesday. It's just a regular day, right?

Regular day. Yeah. It was interesting. In 2003, I remember I traveled to Madrid for a while to open an office. Right. And when I had to go to a meeting, I usually get there much earlier because here you are used to that, to get delayed because of the subway that is broken or things like that. Right. So I was always early for the meetings and I realized, well, if I don't have those conflicts, those barriers, I could be much more productive. But In a way, I learned, of course, you can adapt very easily when you know how to handle yourself in so tough situations. So I think that's— if you live here, you see it as a negative thing. But when you go out to the world, you learn that you have an advantage in that.

Your ability to handle hard things just keeps, keeps us growing, right? And if we're afraid of hard things versus the people that have handled hard things their whole life, you see who, who's going to have the advantage later on.

Exactly. Exactly.

Yeah. Um, I also wanted to, um, we touched just a little bit on the political situation. We've got two brand new leaders, um, in very important nearshore countries, Mexico and Argentina. Tell us, what do you see? What do you think will happen, especially as it relates to M&A and the tech world overall?

Well, of course, when investors or other companies are looking to acquire or invest in companies, they always look at the political economic situation and where the company is located. Right. In my experience, tech industry is a little bit different from other industries, right? If you were going to acquire a manufacturing company, you have to look at many things. But in technology is different because you are a company that you work with talent. You're not working with goods that need to be transferred. You're working with the mind of the people, right? So usually, of course, these things impact positively or negatively, but tech companies are always looking beyond borders, right? And working beyond borders. In the case of Argentina, I think the change that is being produced right now will be very positive or have positive impact. The government is opening the economy and it's changing a lot of regulations in favor of companies, in favor of talent. But we already had, for instance, an incentive law that helped tech companies in Argentina, and it's been there for, I don't know, 15 years at least. There were different governments from different parties that had the presidency in Argentina, but these laws were already there and they all supported that. I think governments in all the countries understand that technology is a critical source of income for those countries and it's critical for their development. So I think it has an impact, of course, but it's not critical.

You see the same thing in Mexico as well?

Yeah, I think it's the same. Maybe they will stop for a while trying to figure out what will happen, but I think that things will continue to go well for Mexico too. There are things that, for instance, in Argentina now valuations are are still low, right? So, uh, there we receive a lot of calls from investors that are trying to, uh, to get into a market right now before the valuations start going up, for instance, right? But companies have been growing, are healthy, and have been healthy in the past too.

Yeah. Uh, I think in the news, when people in the States hear about Argentina, the first thing they think about is inflation. Um, tell us, what, what is that? What, what is someone in the U.S. who wants to do business in Latin America, especially Argentina, what do they need to know about inflation and how should they think about it?

Well, I think for, for many people in, in the world in the past years, uh, like 10 years ago when you, when you were talking with someone in U.S. and talking about inflation, they were very surprised and they didn't understand. I think now the words The world understands a little bit more about inflation and their impact in business.

True.

Uh, we have to separate inflation in Argentina, uh, from what you know around the world, because one thing is inflation in local currency and the other one, the, the other thing is inflation in, in US dollars, right? So for, for a long time there was a high inflation in in local currency, but it came with the valuation of the currencies. So the costs were still very low for customers in other countries to hire companies or to engage with companies in Latin America, in Argentina. So I think the war now, the inflation in the war is increasing and in Argentina too. In the case of Argentina, like I mentioned before, the economy, the government is changing a lot of rules in the economy and is reducing the inflation drastically, drastically. So we are confident that next year that problem will be minor.

Yeah, yeah. I hope so. I hope so too. And Just a few more M&A type questions. Can you talk about what you're seeing today and maybe what you'll see in the next few years just in terms of transactions and deals? You know, are there certain price points you're seeing more transactions at than less? Are you seeing more transactions from domestic M&A versus US versus— I'm, you know, even seeing India coming into Latin America trying to get a piece of the, the action as they see, uh, movement being pulled out of, out of Asia into Latin America. I'd love to get your take on that.

Yeah, it's interesting. Well, there we see a lot of different trends in terms of valuations. They, they, they have gone down in general in the past 2 years. We foresee the valuations going up again. Of course, it depends case by case because many, many acquisitions are strategic for the buyers. So in that case, the valuation will depend a lot on their strategy. So we think that companies that are looking to have an exit in, in the midterm The main thing for them is to be prepared. What we find a lot is that companies are not ready for that, and it's not easy to get ready in a few months when the opportunity appears. So it's something that companies need to be prepared, and I can go deeper on that later. The other thing, the other trend that we see, it's that European companies, given the situation of the war in Eastern Europe, they started to accelerate their interest in Latin America as another option to have centers to serve their US customers. So we see a lot of interest in companies that have operations in those countries. US companies have been acquiring businesses here also for a while, and that hasn't changed. Another trend that we see is that not only IT companies are acquiring operations, but also companies in different sectors are not getting the speed that they want in terms of the digital transformation strategy that they are carrying out. And a way to accelerate that is to acquire IT companies that have product design capabilities. So I think that trend will continue to grow in the, in the future years because all the companies will have to have software as part of their strategy, and not, not, not back office software, but yeah, software, software products by their own. So they will need to have access to, to that type of talent. And it's sometimes it's not easy to, to engage with third parties on that. So many companies will start acquiring company for, for helping their portfolio on that.

Yeah, I think you were just about to touch on, or you're going to come back to, um, the maybe the, the transaction preparation process. And, um, there's a whole lot to worry about with due diligence. Are there particular things that seem to be especially critical for sellers to consider? Because buyers are, are much more focused on these two or three things? Yeah.

On the one hand, there are many things that can affect the valuation at the beginning. So for instance, the quality of the revenue that you have, if you have revenue that's for what type of customers, if you have a specific value for an industry, if your customers are only in your country in Latin America, or you have customers in more mature markets like US or Europe, if you have client concentration or you have a diverse portfolio. There are many, many things that impact your valuation on that front. Also, so in our playbook, we have a complete set of KPIs that we analyze and we help companies improve, to improve their valuations, their founding team potential, if they have revenue coming from R&D, for instance, the quality of the revenues in terms of revenue per FTE, many, many, many KPIs that show how you're managing your business, how you're growing organic growth. So that's part of our playbook. We analyze that with the company, we help them develop a strategy on how to achieve better valuations. In terms of due diligence, something that happens is that when you build your company, you only want to focus on growing, adding value to your customers, getting new customers. So sometimes, uh, founders tend to not invest so much money in, in back office, in finance, in structure in their companies, in governance and all that. That is something that maybe you can avoid at the beginning, but then it gets more important to build and to have international standards in terms of governance and how you manage your company, in tax planning and all that. So that's very important to be very prepared for due diligence. Yeah, um, so what, what we try to, to— what we'd say to our customers and all the companies that we talk to is it's, it's important that you're always prepared. Either you're looking to an exit in the near term or not, but there's very interesting opportunities that can knock at your door, and if you're not prepared, you will, you will miss them. So you have to be prepared all the time, and then when you decide to to look for an organic strategy, you have the time to prepare yourself to be proactive.

Yeah, um, I wanted to get your opinion, um, on my opinion on, uh, valuation multiples today, you know. And maybe I look at services companies and tech companies, um, and, uh, in 2021 when the world was crazy with, with cash tech companies maybe 7 to 15 times revenue and services companies, you know, maybe 4 to 8 times on their EBITDA. Did you see that then? And then what are you, what are you maybe seeing right now in June 2024?

It's interesting. The valuations have gone down, have gone down. We are still seeing transactions for service companies between 1 and 3x revenue. Okay.

So they're actually using revenue still, not EBITDA.

For service companies, you have both. You have both. EBITDA usually for service companies around 20%. So you are getting EBITDA multiples between 5 and 50x. And in terms of tech companies, well, there's where you will see more volatility. It's very volatile and it depends on industry also specifically. There are, of course, for instance, if you have AI today, your valuation, of course, is higher. And in some cases, if you don't have AI, you don't have a valuation because investors are are seeing that if you don't have AI, you're late to the game. Yeah, yeah, yeah. So there are many, many other things that are impacting valuations in, in, in the tech companies.

Yeah, yeah. Interesting. Yeah, maybe at the minimum they should at least change their.com to.ai on there.

Yeah, uh, yeah, you know that there is many things that needs to mature in terms of, uh, of AI, everyone is talking. It's for sure, it's something that it's coming much faster than anyone was expecting, was already there for a while, but it's coming much faster. So it's very important that you have that and other trends in mind when you are building your product. If not, when you when you go to the market, the market will be already changed.

Yeah. Yeah. This has been an amazing show, Sebastian. I just have a few fun questions to close it out. For those that maybe are visiting Argentina for the first time, what are your maybe top 2 or 3 things you'd recommend that they do? And also any favorite restaurants that you wanted to name?

Wow, interesting. Um, well, usually when you come to Argentina, Buenos Aires is the first place that you visit. Uh, you, you start from Buenos Aires, but the country is very wide and very interesting. So in the south we have Patagonia. It's very, very interesting landscape with mountains, lakes, adventure travel that you do— can you do there. In the north we have waterfalls. Very, very different landscape. In the west, we have vineyards, mountains, rivers. It's very varied. The, the weather is very nice across the country. So I recommend to come with time to be able to travel these different cities and provinces in, in Argentina. And in Buenos Aires in particular, what many people find different is that the city, it's open 24 hours in a way. So you can find a restaurant open at 1:00 AM and get dinner at that time. Of course, the most famous food here is asado and mixed with Malbec wines. Argentina is famous for that. And there are many, many, many good places to go. I wouldn't be able to name one. There are many, many. If anyone is coming to Argentina, do not hesitate to send me an email. I will do a lot of recommendations on that. And it's very lively. It's very lively culture, music everywhere. So it's very interesting too. Amazing.

And then when you travel to the States, do you have a favorite city that you like?

I can choose 3, maybe New York, Miami, and San Francisco are my favorites.

Yeah.

Amazing.

Well, Sebastian, this has been fantastic. I learned a lot about what's going on in the world of M&A, and I know our audience did too. Thank you so much for being a guest today.

Thank you, Brian. Happy to be here with your audience and open to any question that they will have.

And Sebastian, tell us one more time where people can find you online and where they can find Valeo.

They can find me on LinkedIn. We have a page there and my email address is sgreengarten, like my last name, @valeo.com.

Amazing. You've been listening to the Nearshore Cafe podcast. Sponsored by Plug Technologies, plugg.tech. That's Plug Technologies. Thanks again for listening to the Nearshore Cafe podcast. We'll see you soon.