By Jerry Haar
Venture capital is a driver of entrepreneurship in Latin America.
Venture capital (VC) is one of the most challenging yet promising arenas of finance in the Americas today. While much attention has centered on the U.S. venture capital market, in the wake of the 2008-2010 financial downturn in that country, Latin America is emerging as the next frontier for entrepreneurial funding.
Funding for Private Equity (PE) and VC deals in Latin America more than doubled from 2009 to 2010, topping $8.1 billion. As for the first half of 2011, LAVCA (Latin American Venture Capital Association) reports nearly $7.5 billion in fundraising and investments—impressive performance by any measure. Nonetheless, VC represents only a tiny portion of the PE/VC category in Latin America. Compared with the United States, VC comprises 25 percent of total VC/PE commitments; in Latin America, it is just 5 percent. In 2010, the average PE deal size in the region increased significantly. Deals valued at $100 million and over jumped 100 percent from the previous year. Clearly there is a lot of room for growth in mid-market deals.
The average deal size also increased to about $41 million last year from roughly $19 million in 2009. It can be that private equity investors are beginning to perceive the long-term benefits of investing in Latin America which makes prices go up; or it can also be that capital flows are inflating the local market.
The 2011 edition of the Scorecard on the Private Equity and Venture Capital Environment in Latin America reflects a stable regulatory environment in which the top ranking countries are Chile, Brazil, and Mexico. In the past, Latin American businesses traditionally have been starved for capital, with bank credit tight and shallow public markets. Access to debt financing was just beginning to expand when the credit crisis first hit in 2007. Today, despite macroeconomic turbulence in Europe and the anemic recovery in the U.S., global investors are expanding their presence in major Latin American economies, amidst an increasing awareness of the importance of private equity and venture capital in local markets. At the same time, fund managers have actively engaged regulators on industry-specific rules and regulations. A fundamental distinction between developed world private equity and those that are increasing in Latin America is the relative lack of leverage in Latin American deals.