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 Sampson, 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 and A, the next hot company, this is the episode for you. We have Sebastian Gringarten 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 let off with the intro to the show, you're with Valeo Ventures, a partner with Valeo Ventures, a very important company when it comes to M and A acceleration, helping founders. But maybe you can share in your own words what you're doing with Valeo.

Great, Very excellent. Yeah. Well, at Valeo we help tech companies in mainly in 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, we've been doing this for many years in different ways and we decided to, to build a playbook at Value and shop do that for, 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 strategies 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 by their own, it's 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 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 near shore 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, 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 by in the sell side, usually Mexico, Colombia, Brazil, Argentina, ROI and Chile. But also there are companies from other countries that call us and ask us for help. And they're very interesting talent pools in, in other countries too. So we are very happy to help those companies.

What I'd love to to talk about is the trends because wow, has the world changed a lot just in the last five years? It's amazing what a worldwide pandemic could do to the labor market. And just as we come out of that now we have AI, right? So maybe you could kind of help us think through past, present, future in terms of M and 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, we are talking about pre. Pandemic is like prehistory, right? But in a way it's just around the corner. 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 a concept, right? Tools were not there like we have today. 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. 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 that day till today. And now I think we are adjusting certain things that 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 delays them, but the trends are already there.

Yeah. And I also wanted to get your take on. To me, there's kind of two types of tech companies, right, that come out of Latin America. There's the services and you see these all the time, whether it's offshore in India or nearshore. The globe ins, the bears, devs, 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 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, they, they were, they grew a lot during the pandemic because the, 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 four or five years that grew very, very, very well from Latin America. Right. And what mainly changed, I think for those companies that, like I mentioned before, certain barriers removed from them so they were able 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 open to that because 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 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 in the past they had a lot of barriers to find customers in other geographies. But what the pandemic did was to allow them to reach those customers through Internet 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 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 Mercado Libre. 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. I think these companies achieve their success by mixing both the use of the talent that was available in Latin America, but also the understanding of the culture. Sometimes Latin America is seen as, 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, the, the language, the, the main one, not, not in Brazil, but the rest were also 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, to conquer that environment. Yes, the Latin American market. So companies like Mercado Libre understood how to, to, to build operations in this country, how to hack their cultures, how to localize their strategy. I think that's part of the, their success and also, well, daring to do it. They were very proud, active, very aggressive and growing. I think that's, and, and I think it's very difficult in this market also because the, the access to, to, to investment is very difficult. Different than in Europe or in US that is much easier for companies to get, to get funds here. It's more difficult. So if not, I think the, the market, the, the, the ditch market will be much more big.

Yeah. Would you mind expanding on that a little bit more about, you know, 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 Americas is newer than in US and Europe. And the institutional funds, the 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, many funds 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 has slowed down that trend. 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, the companies that I, I help create, it's called Lasso that it's a company that is established in in US mainly in Miami and that company is helping startups establish in US structure themselves and takes care of all the back office and now has an AI product that helps them also look for funds. So I think that that bridge that it's between Miami and Latin America is a, it's very helpful for, for founders in the region to, to get access to, to fresh funds.

Yeah, yeah, we've actually had that company on our podcast as well. It was a great, yeah, really, really nice story. Bridging the gap of the borders. I wanted to hit on that investment capital for a second because it's an interesting thesis about the capital coming from the US looking for opportunities. Over the last few decades Latin America has been looked at as talent arbitrage. But I think more recently now it's investment arbitrage 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 a hundred million dollars 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 and talent. And if the engineering talent costs, you know, a fraction of that. I don't know. Do you, do you see it the same way that we just shared?

Yeah, yeah. I will split the answer maybe in the, in the two type of industries that I mentioned before, the service companies and the product company. Right. For service companies what we are getting is many calls from US and European companies that are looking to establish near source 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 establish an organic operation and acquiring companies that you get access to founders that are motivated to get their companies grow. Right. And so many companies are, are understand that. So they are looking to acquire mature operations in order to structure a global delivery model, having nearshore offshore operations for product companies. What, what investors are realizing is that they can find in Latin America the same type of talent that they're finding in, 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 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. Or.

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, why Latin America? Why Argentina especially? And you know, of course there's the usual reasons of time zone in 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, the subway metro is on strike for, 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, how to handle that. But I think in Argentina it's like, okay, this is, this is a Tuesday. It's just, 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 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. I was always early for the meetings and I realized that, well, if I don't have those, 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, when you know how to handle yourself in so tough situation. So I think that's, that's if you, if you live here, you see it as a, as a negative thing. But, but when you go out of the out to the world, you, you, you learn that you have an advantage.

You know, 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.

I also wanted to. We touched just a little bit on the political situation. We've got two brand new leaders 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 and A and the tech world overall?

Well, of course, when investors or companies are looking to acquire investment companies, they, they always look at the political economic situation and where the company is located. Right. In my experience, Dutch 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, you're 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 and working beyond borders. In the case of Argentina, I think the change that is being produced right now is, 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, of income for, for those countries and it's critical for the development. So I think it has an impact, of course, but it's, it's not, 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 they think 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 there we receive a lot of calls from investors that are trying to, to get into 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 two.

Yeah. I think in the news when people in the States, hear about Argentina, the first thing they think about is inflation. Tell us, what is someone in the US 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 many people in the war in the past years, like 10 years ago when you were, you were talking with someone in US and talking about inflation, they were very surprised and they didn't understand. I think now the world, the world understands a little bit more about inflation and their impact in business.

True.

We, we have to separate inflation in Argentina 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 US Dollars. Right. So for a long time there was a high inflation in local currency, but it came with the valuation of the currencies. So the cost 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 decreasing. And in Argentina too, in the case of Argentina, like I mentioned before, 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 and 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 and A versus US versus I'm, you know, even seeing India coming into Latin America trying to get a piece of the action as they see movement being pulled out of, out of Asia into Latin America. I'd love to get your take on that.

It's interesting. Well, we see a lot of different trends in terms of valuations. They, they, they have gone down in general in the past two 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 in their strategy. So we think that companies that are looking to have an exit 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 world in Eastern Europe, they started to accelerate their interest in Latin America as another option to have centers to serve the US customers. So we see interesting companies that have operations in those countries. U.S. companies have been acquiring businesses here also for a while and that haven'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, so they will need to have access to that type of talent and sometimes it's not easy to engage with third parties on that. So many companies will start acquiring companies for helping their portfolio on that.

Yeah, I think you were just about to touch on or you're going to come back to maybe the transaction preparation process and 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 much more focused on these two or three things.

Yeah, 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 are, have revenue, that's for, for what type of customers, if you are have a specific value for, 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 impacts 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, 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 to 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, growing, adding value to your customers, getting new customers. So sometimes founders tend to not invest so much money in, in back office, in finance, in structuring their companies in governance and all that that it's something that maybe you can avoid at the beginning, but then it gets more important to, to build and to have international standards in terms of, of governance and how you manage your company in tax planning and all that. So that's very important for. To have. Be. Be very. Preparing for a due diligence. Yeah. So what, what we try to, to what would 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 look for an organic strategy, you have the time to prepare yourself, to be proactive.

Yeah, I wanted to get your opinion on my opinion on valuation multiples today. You know, and maybe I look at services companies and tech companies and in 2021, when the world was crazy with, with cash tech companies maybe seven to 15 times revenue and services companies, you know, maybe four to eight 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 got done, have gone down. We are still seeing transactions for service companies between 1 and 3X revenue.

Okay, 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 50. Yeah. And in terms of tech companies, well, there's where you will see more, more volatility. It's very volatile and it depends on, on industry also. Specifically. There are of course, for instance, if you have AI today, your valuation of course is, is higher. And in some cases if you don't have AI, you don't have evaluation because investors are seeing that if you don't have AI, you're late to the game. So there are many other things that are impacting valuations in the tech companies.

Yeah, interesting.

Yeah.

Maybe at the minimum they should at least change their.com to AI on their.

Yeah, you know that there is many things that needs to mature in terms of AI. Everyone is talking 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 go to the market, the market will be already changed.

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 two or three things you'd recommend that they do? And also any favorite restaurants that you wanted to name.

Wow, interesting. Well, usually when you come to Argentina, Buenos Aires is the first place that you visit. You start from Buenos Aires, but the country is very wide and very interesting. So in the south we have Patagonia. Very, very interesting landscape with mountains, lakes, adventure travel than 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 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 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 1am and get dinner at that time. Yeah, of course the, the most famous food here is Sasado. Yes. And mixed with Malbec wines. That is Argentina is famous for that. And there are many, many, many good places to go. I can, I, I wouldn't be able to name one there. 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 to visit.

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

Can choose three. Maybe New York, Miami and San Francisco are my favorite.

Amazing. Well, Sebastian, this has been fantastic. I learned a lot about what's going on in the world of ma 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 value they can find in LinkedIn. We have a page there and my email address is esgreengarden. Like my last nameale.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.